For July, Wide World of Options is continuing to feature recent conversations with some of the industry’s biggest names. In this episode, Meaghan Dugan of the NYSE, Kevin McCarthy of Clear Street and Steve Sosnick of IBKR offer their take on what has propelled record trading volume, how the markets can be made more accessible to a wider range of investors, and recent industry trends.
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Now here's your host, Mark Benzoquin.
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Hello everyone and welcome to OIC's Wide World of Options.
I'm your host, Mark Benzoquin, and as we continue with our special summer sessions on Wide World
of Options, we'll listen in on recent conversations that we had with three of the industry's biggest
names, those being Megan Dugan of the NYSE, Kevin McCarthy of Clear Street and Steve Sizenik
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of Interactive Brokers.
For those interested in our webinar program and what OIC has in store for July, we're
continuing our summer of selling by first taking a look at credit spreads, followed up
with a deep dive into iron condors and iron butterflies.
To register, please visit our optionseducation.org website and click on the events tab.
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For our Wide World of Options podcast, however, we're excited to bring you more of our extended
tales from the road as we've been traveling, meeting new friends and having great conversations
all about options.
You should note that as our guests are not directly affiliated with OIC or OCC, the opinions
expressed are their own and not necessarily those of OCC, nor do we endorse, warrant or
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guarantee the products, services or information discussed by our guests.
And with that out of the way, let's go ahead and get started by listening into a conversation
that we recently had with Megan Dugan, head of options at the New York Stock Exchange.
I had the good fortune to meet Megan when we caught up with her at the recent OIC options
industry conference in Asheville, North Carolina, where we discussed a variety of topics, including
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recent record volume levels, market accessibility and 24 hour trading.
Let's go ahead and listen in now.
Thank you again, everyone, for joining us.
Sitting down with me now is Megan Dugan of the NYSE New York Stock Exchange, where she
is the head of options.
Megan began in the business as a market maker, well, began as a clerk in 1999 on the trading
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floor, moved to a market maker in 2000, transitioned to executive level positions with Morgan Stanley
and Merrill shortly thereafter.
In 2019, she took a director's position with the Intercontinental Exchange and now heads
up the NYSE as head of options.
Megan, let me ask you, you've been in the business for a long time.
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Only when you and I got back in the business, options volume was nowhere near where it is
now.
So more and more investors are turning to options to meet their various objectives,
various forecasts, etc.
What do you attribute that increase?
In other words, why do people choose options over maybe a different product?
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Yeah, thanks, Mark.
Thank you so much for having me here today.
I really appreciate it.
You know, there's a number of drivers that have really increased the awareness and understanding
of using US equity options across the market.
You know, thinking back to 1999 and 2000, we were trading in fractions, right?
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Things were single listed on one exchange.
So I was on the ARCA floor.
So if you want to trade Microsoft, you could come see us.
Right.
But you couldn't trade that everywhere, right?
At the time I was in San Francisco, where they had all the dot com stocks.
Yes, exactly.
So as we continue to see our markets continuing to evolve, so decimalization occurred, being
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able to trade every underlying across multiple listed exchanges were shortly thereafter.
That was in 2000-ish timeframe as well.
So mutualization was a bit of a driver in that space.
So then therefore you could trade Microsoft on CFO or Philly or Amex, the other three
exchanges there at the time.
So you know, as the markets continue to evolve, ISE came out in 2000 as a real driver of electronic
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market making capabilities in a spot that was heavily weighted to the floors.
The floors are busy.
At least in the ARCA floor, there was at least 500 plus people and it was teeming.
One of the areas that really drew a lot of the growth was this concept of can we have
electronic order books?
Can we have electronic complex order books?
Can we do more of these things electronically?
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And the market reacted with yes, absolutely.
The market makers can submit electronic quotes.
The spreads tightened based off of the decimalization, moving from fractions to decimals.
Right down from six and a quarter to a penny wide.
Yes, exactly.
In some series.
But also what was happening was other exchanges came onto the market at that roughly over
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those between 2000 and 2010.
We had a couple of additional exchanges come on board.
The market models were slightly different.
The original market models for US options was Prorada, customer friendly, size based
quoting to be able to receive a higher allocation.
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ARCA came out with the first price time exchange.
From that standpoint, that was an area where people had multiple types of capabilities
to trade.
What we've seen over time is that these additional features, these additional exchanges, additional
tradable instruments all provided opportunity for market makers to provide two sided quotes
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in an efficient mechanism.
Fast forward until where we are now in the pre-COVID levels to now from a market standpoint,
what's driving that growth was retail interest really took hold.
Options are unique as a derivative instrument from equity.
OIC does a great job with education across the investor base.
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Also the exchanges do as well, but also the broker dealers do a really good job educating
the general public.
What's driving that is people are getting more comfortable that they're aware that they
actually, options are now not necessarily a, "Oh, I don't want to talk about that over
there because it's something unknown to me and something somewhat complicated."
People are much more open and the conversations are being had to be able to say, "How do I
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add value in and trade and have options as part of a, say an ETF to find outcome component
and strategy?"
That also is helping drive growth in our markets.
Each turn of time, as we know, time continues to move on and change is always out there.
We're very dynamic, which is why I love this business is that it's every day is a very
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different day.
Each shift in the market structure has proven a lot of experience and a lot of things we've
learned.
We've learned about our market participants.
We've learned about how much they want to be able to be engaging with us on the markets.
You can see that in the market maker quotes, the number of market makers in the business,
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the number of retail providers, the scope and the breadth of what they're providing.
That has grown significantly and the awareness in general across the media of trading options
in your portfolio is much more comfortable now.
You can see that in the growth in the market.
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IPO market has been very, very strong back in the COVID time, 2020 and 2021.
We saw roughly 1200 new companies come to market.
What does that mean for us?
Obviously we had call it 700,000 individual series that you could make markets on.
Now on any given day on Amex or Arca, we have roughly 1.2, 1.1 million people instruments,
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over 240, 100 underlines.
We have considerable amount more and that's coming from new listings coming to market.
We only are seeing that actually continue to grow this year especially.
The general macro environment is proven to be a strong spot for IPOs coming in 2024 and
definitely into 2025.
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That underlying basis of what we can trade instruments, options, series trading instruments
on continues to grow.
That provides variability for our market makers to provide quotes to our market.
The greater availability of product and a lot of times these products are, boy, I wish
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I can think of the word I was looking for, but a lot of these products are specific maybe
to a certain objective or a situation or a forecast.
We've got a lot of these reversed ETFs, leveraged ETFs.
Basically the industry, the exchanges are creating these new products to attract investor
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dollars.
The investor is a greater selection of where to put their eggs in a number of different
baskets.
You think that's a partial driver to this explosive volume that we've seen?
I guess a most recent example is on Rubrik IPO last Friday at the NYSE.
We were able to list options three days past that from our fast track IPO because it met
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the large size requirements as per our exchange listing standards.
We were able to start trading options on that within three days of an IPO, which is an amazing
thing.
Usually it's five days.
Exactly.
Thankfully, I met the criteria set that we could list them earlier.
That is available broadly speaking in the market for investors to invest in.
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That continues to grow and evolve as we have more IPOs.
Like I said, the awareness and the education really made options more mainstream and more
comfortable.
It's driven a lot of single stock growth back in COVID time from the retail side of the
house.
That's shifted to more ETF based strength more recently with more of the short dated
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options coming to market.
But we see both market makers and customers trading those ETFs that have short dated options.
There's really a variety of reasons why we see the US options market becoming so strong.
But it's really recognized globally now.
We're having a lot more conversations across Europe, across Latin, across Asia of people,
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investors from those geographies wanting to trade the US options market because of the
growth and the transparency that we provide.
But doesn't that provide an issue?
This was something that I had a conversation earlier, provides an issue just from time
zone standpoint and the introduction or the potential introduction of 24 hour trading.
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Yes, that's a great point.
The other part is that they have to be a US broker dealer to be a member of the exchange
to send us any kind of order flow.
They can choose to partner with the current US broker and have them be the gateway into
the US options markets.
But you're right, they're predominantly trading the US market already today.
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Their staffing levels are shifting to their own local standards to be available for the
US options markets.
But there has been a lot of talk, a lot of requests from a couple of the retail houses
to be able to support a longer trading day for US options.
The equity side is a bit further along because they do have pre and post extended trading
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sessions and there is a lot of dialogue right now in the equity space.
Options are a little bit harder to do because of the market makers providing liquidity in
those series and they really need to have the, not only the quoting and the technology
to be able to do so, but also the balance sheet to be able to support that from a clearing
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standpoint.
I remember on the trading floor a decade plus ago when they were first talking about extended
trading hours.
So I was in Chicago and the market there was open from 8.30 to 3.15 PM and all of us are
like, wait a minute, you want us to stay here until five?
What are you, crazy?
Right, so now to think around the clock trading, yeah, that's something that I'm glad I no
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longer have to wrap my head around.
Operationally it has a lot of moving parts to identify and to lay out so that it is a
successful part of the next part of the market if we were to go that way.
But it's not just operational, it's balance sheet, it's clearing, it's OCC clearing capabilities.
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So all of it is a cycle that we have to be very cognizant of and I'm actually extremely
proud, being in this business now for 25 years, that we've all evolved this very strong space.
We always say that if one of us were to stumble, it would deter any kind of comfort in knowing
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that our market is that strong.
So we've all evolved really well in these last 20, 25 years to see the market go from
four exchanges to 17 from, what was it, maybe a couple million contracts a day to 42 million
on a multi-list volume a day.
And we're trading at such peak capacity.
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Another thing we look at at the exchange side and we talk a lot about is message traffic.
So I was just looking through our numbers.
The general message traffic that we saw in March of 2019 was roughly 12 billion messages
a day.
Now, what do you mean by messages?
That's all the quotes that are happening on the market maker side, updating orders coming
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into the market, everything that's published to the tape across all exchanges.
So across the universe of the US options market, there are that many messages being transversed
across the networks.
Now in March of this year, on average per day, it's 102 billion.
I mean, how do you even wrap your head around that?
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Yes.
It's been five years.
And we haven't increased that same standpoint in volume, of course.
We're at roughly 17 million contracts, ADV of multi-list volume back in 2019, like I
said with that same equivalent of message traffic.
But here we are at like 42-ish million contracts ADV and we're 102 billion messages a day.
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So it's a really interesting world.
We're living in technology heavy for sure, but we have to make sure that we're continuing
a very stable and resilient transparent marketplace.
Well, and let's stick with that technology, transparency, et cetera, from an exchange
standpoint, what initiatives does the NYSE take to improve transparency, price discovery,
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basically improving the accessibility to the markets?
Right.
We've completed a transition to our pillar trading system.
Our internal platform is called Pillar and we completed Amex last October.
So we brought Arco over in 2022 and Amex over in 2023.
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That completes all of our NYSE exchanges across our five equity exchanges and our two options
exchanges on the same technology.
That provides us a single code base of engagement, which is beneficial not only for scale and
resiliency on the exchange operating side from my perspective, but also from our members.
When a market maker comes in across equities or options, it's the same formats.
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It's the same engagements that they're connecting to us in the same liquidity code indicators.
We're trying to make sure that our reporting is all very equally weighted across both so
that we have on a per transaction level, liquidity indicators that you know what happened on
your trade.
We have transparency in what happened and we provide that across our entire set of markets
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on equities and options.
So that was our first step is to come to the same platform so we can really truly scale.
And when we build out new product, for instance, Day ISO orders is something we reintroduced
earlier this year on Arca.
We were able to put them back on Arca options, but we also rolled them out in our equity
platform a month later.
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So we can actually take things that make sense to do on both markets and provide access to
it because it's the same technology.
So from our perspective, it's not a hard lift for us to bring things to market across equities
or options across asset class.
So that's an area where it's important.
And with this increase of quote traffic and overall volume, optimizing latency is an ongoing
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task for any exchange.
So actually this month we're focused on handling an optimization and how we handle complex
series within our trading infrastructure.
And then it's going to help us reduce our latency during traffic periods.
So those very high volume, high volume, high capacity days, we're going to be able to reduce
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our latency in the tails significantly.
And we're also improving how market makers can come out and into our markets from being
more deterministic on how they see their bulk cancels coming out.
So later this month, we're going to be supporting a new sort of a fast path of how we're handling
our bulk cancels for market maker quotes on our exchanges collectively.
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Interesting.
I really appreciate this.
Thank you so much for sitting with us.
This was great.
Thank you very much, Mark.
I really appreciate it.
Thanks for having me.
Yeah, you're very welcome.
And we'll talk to you again soon.
Sounds great.
Thanks.
Take care.
And we're back.
I'm Megan Dugan of the NYSE for taking the time to sit down with us and for such a great
conversation.
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Next up, we've got Kevin McCarthy of Clear Street with whom we had an interesting talk
about liquidity providers, industry trends, and the influx of new exchanges.
Let's go ahead and give a listen.
Thank you, ladies and gentlemen.
Welcome back to our show.
I am very, very fortunate to be sitting with Kevin McCarthy of Clear Street.
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Kevin started on the floor of the Philadelphia exchange, the PhilX, recruited by Merrill
and worked his way up as a managing director over the course of 26 years.
He was also a managing director at Bank of America for over a decade, recently began
with Clear Street in 2023, where he is the chief administrative officer and head of clearing.
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Kevin, thank you so much for joining me.
Really appreciate it.
Thanks for having me, Mark.
So Kevin, let me ask you.
All of the panels that I've seen here at conference, very, very interesting information.
Some of them kind of, well, leads to some questions that I wanted to ask you.
Liquidity providers, we've got new exchanges, we've got new products.
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There's always, there's innovation in the market, new innovation on the exchange level,
on the clearing level, every side of the coin you can imagine.
Where does that go?
Where, you know, we've got all these things new, all these new things coming in, but what
do we do with them?
Yeah, I think it's a great question.
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We have seen that innovation.
I mean, look at what OCC has been doing around there.
Innovation on the buy side, there's always been a constant innovation in building out
trading technologies.
But what we really haven't seen is a new entrant from a clearing side perspective.
And that's where we've come in matching innovation with technology into a space that has been
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pretty locked up for a very long time.
And in doing so, we're actually providing a new entrance into the space that allows
clients to have another option they haven't had for some time.
So especially for option market makers, where they really need to be fast and nimble, as
you mentioned, a number of exchanges.
How do you get to those exchanges?
How do you consume that market data?
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How do you make sure that your trades are matched and settled correctly and you can finance
them?
So having a provider that has new technology that can give you optimization on funding,
optimization on trades, and the ability to be in the marketplace in a really fast and
easy way, when there are new products, right?
Look at crypto, look at Bitcoin, look at other things that are coming in.
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A clearing firm hasn't always historically been able to provide technology that matches
with the speed of innovation.
And now we're able to do that.
And I think that's what's been really important.
And the feedback from the community, both on, I would say from the exchanges, they want
to see us, OCC, other CCPs, as well as the market participants themselves say, we need
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other options.
If we're going to expand, we need to have places to have expansion joints, right?
So the market's pushing out product, it's pushing out venues.
Where does it go?
And that's how you provide an opportunity to consume that for them.
Gotcha.
Okay.
So exchanges, back to that question.
When I started and when you as well, I know there were four exchanges, right?
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Now there are 18, 17.
18 is slated for later this year, knock on wood.
Is 18 enough?
Is 18 too many?
Is 18 too few?
What do you think?
And I don't want to get you in trouble with the exchanges, nor do I want to get in trouble
myself.
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But what does all of this additional avenues, what does all this do to the market?
What does it do to the market maker?
What does it do to clearing providers?
How has that helped the market grow, do you think?
Well, I mean, look at the volume, right?
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If you look at the options volume, you heard Henry this week where you talk about that.
Yeah, it's terrific.
Well, and if you noticed in his slides, some of the slides represented the market share
by each exchange.
It showed that they are actually driving some of the volume, right?
So it does show that the information that's coming through says that, well, these are
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relevant in some way.
Now maybe the market share has been slimmed down by each, but across of these 17 exchanges,
everyone is generating some flow.
So I think the pros and cons of that is it's an opportunity for trading firms to have different
opportunities around the way they execute their transactions and reach that market.
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But on the other side of it, I'm sure it's very expensive to collect a lot of market data.
Use that, you have to constantly be up on your technology.
You have to quote on many different exchanges at the same time, possibly.
So I think that could be a bit of a reach from a clearing firm perspective.
Where I'm sitting today with the innovation that we have, that's not a challenge.
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The number of venues isn't really a consideration.
And I think in the future, as new products come out with those exchanges, we'll be able
to consume that in a faster and easier way as well.
So I think that we can provide that back to clients and give them access.
So look, I think that it's good.
It gives a lot of different opportunities to trading firms and maybe provide liquidity
(25:42):
in different ways and execution styles.
But at the same time, it does create other innovation, or I should say technology requirements
and consumption of data, which is, you know, can be quite expensive.
Right.
And significantly so.
Absolutely.
What about industry trends?
What do you see on the horizon in the next, let's say, five years?
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Where are we going to be?
And let me ask you this.
I just had a couple of conversations earlier.
And we certainly heard from panelists.
What do you think about the role of AI?
Where's that going to lead us?
Yeah, I was listening to that today.
It's very interesting.
I think AI, if you peel back some of the layers that they were talking about today, on the
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service side, not on the trading side, I think it has real application that's kind of safe.
Right.
And we're doing some of that as well.
So to the extent that we can consume information from a client and readily get that to the
right destination, respond in a fast and easy way, and match that with client needs, it's
great.
I can't speak to it from a trading perspective, but I could see where that could be a concern.
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So I think AI is as it becomes sharper and more precise and better managed, you can see
applications happening in many different ways.
So I do think that it is here to stay.
I think that everyone is using it in their day to day and maybe they don't even realize
it.
Right.
So I think the question is how available is that AI and are you seeing it in an actionable
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way?
I think we are from service side so far.
And I could see that happening from, especially from clearing from perspective, how we match
and settle trades, how we interact maybe with other exchanges or OCC and others, I could
see that helping us in that regard.
And I agree.
It was interesting at the panel when one of the panelists was saying that, look, we've
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been using AI for years on the backend and infrastructure wise, so to speak, administration
aspects.
But trading wise, the gentleman that I just spoke with a few minutes ago, we were talking
about will bots eventually give us trade, not even trade ideas, but trade for us.
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And it's an interesting question.
We'll kind of see what happens down the road.
But I completely agree with you that from a clearing standpoint, from a backend standpoint
in the industry, yeah, it seems like it's already in use.
And I certainly expect that to grow down the road.
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So what other innovations, what other trends do you see coming up?
I think from a trend perspective, what we really see is how does that technology enable
you to get into the products and services faster?
But I also think that there's a pent up demand for increased exposure in the US listed options
space.
I've seen this outside of the US inbound, and I've seen it within typically equity only
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shops that may have technology, may have capital, they have the wherewithal.
They're not necessarily driven by, let's say, personal or people traders, but more algo shops.
They want to get into that option space.
And I think this kind of gets back to the AI point or innovation point as well.
They want to know how do you get into the market?
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How can I expand my strategy into options?
Look at the growth, look at the opportunity, ETFs.
Right?
Right.
Again, back to Henry's presentation, that was some eye opening information for me.
Exactly.
And so if you're trading ETFs, you're trading options.
If you're trading index, you're trading options and futures.
So I think that what's happening is there's this demand to get in.
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And then if you get back to the point of AI, what does it do and what happened on the panel
and how it ties into this, people say it's a great education tool.
And most people, what I'm hearing or clients, potential clients are saying, how do we help?
How do we get into this space?
What can we do?
How do we structure it?
What should we know?
Who do we talk to?
So if you think the education points from an AI perspective or even just the contacts we
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have both within our firm as well as the exchanges can bring those new entrants in where the
market really has been pretty dominated by the same players.
So I think the industry has all this growth volume, but it hasn't had a lot of new entrants
that it really does need.
We saw again, and I hate to keep referring back to Henry's presentation because it really
(30:23):
was so excellent, but the information, yeah, the same players in terms of the top stocks,
those don't change, most active option securities, trading symbols, those aren't really changed.
And then also the exchange market share, brokerage firm, their market share, the same players
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that we see day in and day out.
So I like your comment that with these liquidity providers, where does everything go and that
we need new entrants.
And I don't mean new entrants to the market like Joe and Vester, we need firms.
We need professional traders.
And I think that they can provide that additional liquidity.
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So the risk has become a bit concentrated.
And I think we need to disperse that a bit.
I think there's more than enough to go around.
This isn't a competitive issue.
I think that this is really more about if the industry wants to constantly innovate and
expand and some of that is driven by the retail demand.
Some of the product that's been coming into the market has been driven by retail investors
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saying I want this, I want that, maybe smaller size.
But I think that the liquidity providers, the professional traders, the market makers
that need to be there stand ready for this.
You need more opportunities for them to come into the market.
Right.
Interesting.
Well, thank you for that.
Kevin, this was great.
I really appreciate it.
Thank you so much.
(31:48):
Really appreciate the time.
Yeah, I really appreciate you sitting down.
Thanks so much.
I really hope you enjoy the rest of the conference.
Thanks so much, Mark.
Thank you, Kevin, for that terrific discussion.
And now to close things out, we're going to visit with Steve Sosnick, chief strategist
of interactive brokers.
Steve and I had a candid discussion about his opinion on record trading volume, lessons
(32:09):
learned over a nearly 40-year career, and his beloved New York Jets.
Let's go ahead and see what Steve had to say.
All right, ladies and gentlemen, welcome back.
I am very, very excited to welcome Steve Sosnick from Interactive Brokers, their chief strategist.
Let's start with a bit of background.
Steve began in the industry straight out of Wharton back in 1986.
(32:32):
Wore various hats with Solomon Brothers, Lehman Brothers, and Morgan Stanley before landing
at Timber Hill, which is the precursor to Interactive Brokers back in 1995, where he
is now their chief strategist.
Steve is also a frequent guest and contributor to Bloomberg, CNBC, Barron's, The Street, many,
many more.
(32:53):
In truth, really, Steve, with a pedigree like this, I'm really honored that you found the
time to sit down with us to talk options.
So welcome.
Thank you so much, Mark.
It's my pleasure, and I'm so glad to have this opportunity.
Well, excellent.
Thank you.
Let me ask you this.
So Interactive Brokers, very well-known trading platform.
There's a new demographic in options, I think, a younger investing demographic.
(33:20):
Being as you've been in the business as long as you have, is there something that you know
now that you wish you knew when you were just kind of getting started?
I think when I was getting started, I approached options like many people did, which is, you
know, basically you focus on the delta and not so much on the other Greeks.
(33:40):
Once I started making markets for Timber Hill in a very disciplined way, as opposed to having
traded them in other capacities around the street, I realized we needed to take care
of all the various Greeks, I'm just going to call it, but variables.
And you really have to pay attention to your decay, and you really have to pay attention
not just to the delta, but to the gamma because the delta changes.
(34:02):
There were so many more nuances.
I was brought on board.
We were a fairly large market making firm at the time, but nowhere what we became.
What happened was, you know, Thomas Petterfly began on the Amex floor, expanded.
By the time I joined, the firm had expanded into equity options trading in a big way,
(34:22):
but didn't really have anybody upstairs who had experience managing risk from the equity
side, or specific equities risk.
That's where I was brought in.
But I had a bit of a learning curve about the options, all the other nuances involving
options because I had a pretty good sense of what might go up, what might go down, what
could blow you up, which is a very important thing to me.
(34:44):
But I wish I had a greater appreciation.
There was a little bit of a learning curve for some of that.
And with these new investors, and this is something that you and I spoke about just
before we started recording, these new investors really came out of the woodwork, if you will,
over the last several years.
(35:06):
We had talked about during COVID, for example.
How do you think that all of that is affecting options today, affecting the industry?
Well, over the years, we've seen this inexorable growth in volume.
And I think that's a great thing.
As someone who's been in the business for as long as I have.
(35:28):
So I think that the explosion volume is a very welcome thing.
But definitely during COVID, it took another leap higher.
And there's a few reasons for that.
What I attributed to is, there's a few things.
People got money in their pockets.
And I think people are more likely to do speculative things with found money than they are with
(35:49):
money that's more hard money.
Earned money.
If you were to work 40 to 60 hours a week for that money, you think of it a bit differently
than if someone just sends you a check for $1,000.
Correct.
Right.
But there's a difference between investing and trading.
Absolutely.
And I think that got lost.
But again, because I think you were dealing with crazy markets, essentially money, money
(36:13):
coming to millions of people from out of the blue, I think that got lost on them.
And I think that they went for the speculation.
And to a certain extent, they were rewarded for that because the markets kept going up.
And you had stocks just keep going up.
And you saw crazy things, crazy valuations that to a longer term investor, to someone
(36:38):
who's more steep than fundamentals, you're like, this--
Right.
These meme stocks that came on the horizon that logically the valuation wasn't there.
And yet, the stock is going parabolic.
And it wasn't even the meme stocks, though.
But for those who kept pyramiding on those parabolic rises, sure, that kept working out
(37:00):
for them, too.
So the meme stocks are-- that's sort of their own animal.
But we also just saw it in a wide range of speculative type of stocks.
Right.
So let me ask you this.
So now we've got this new influx of trader, this new demographic, younger trader at interactive.
I know education is a big point for you.
(37:21):
So are there-- how do you approach education for these new people?
So these new people looking at trading versus investing, which obviously, as we know, are
two different animals, how do you approach this investor to make sure that they understand
what it is they're getting themselves into?
Well, we go out of our way to keep adding educational resources to our platform.
(37:43):
We have a whole platform called IBKR Campus, which is the umbrella.
That includes the stuff that I write, which is under the umbrella of the smaller umbrella
traders insight, which I try to make-- it's a lot of strategy pieces, but I try to be
educational in that as well.
But we have a whole team.
And so we go out of our way to do it.
(38:05):
The problem is the nature of our firm being sort of hands off.
And we want our customers to engage with us, but we can't make them engage with us.
And so we really-- but we go out of our way to try our best to get them to engage with
all this content that we create.
Gotcha.
Excellent.
(38:25):
Let me revisit something.
Again, before we began recording, we were talking about the difference between investing
and gambling.
And you had made an interesting point about the Jets, for example.
And you had said that you can get 100 people together to bet on the Jets, for example.
(38:48):
And that might move the betting line, but that's not going to have any impact as to
whether or not the Jets actually win.
As a Jet fan, I know for sure it takes a lot to win.
But with options, that you could have a group of people on the same side and move that market.
Well, that's the case because with gambling-- let me back it up because I did allude to the
(39:12):
sports gambling before.
So the big similarities that I think took a lot of gamblers into the options realm is
if I buy a call on a given stock or I put a certain amount of money on the Jets-- obviously,
one has a much better likelihood of paying off than the other.
(39:32):
But in both cases, I've put a fixed outlay of cash for the hope of a leveraged return.
Now in the case of the sports bet, that return is defined in advance.
It's going to pay off at two to one, three to one, five to one, 10 to one, whatever.
And again, if people climb onto one side of the bet or the other, the way the bookies
(39:57):
balance it out is the line moves.
But it's still up to the players on the field.
In the case of the options market, if everybody starts buying calls, somebody's got to hedge
that.
And so if there's enough weight of money coming in, it actually does change-- it does change
(40:19):
the line, so to speak.
But it also changes the likelihood of success.
But in options, there's another thing to consider.
Sports bets don't decay.
If I put a bet on Monday before a Sunday game or put the bet on Saturday before a Sunday
game, it doesn't really change-- that money's not decaying.
(40:44):
The $100 is still $100.
Whereas with options, they're perishable.
That's literally what they are.
It's a decaying asset.
It's a decaying asset.
So the timing is much more critical.
The football game, you know exactly what time it's going to start.
You could probably tell you within 15 minutes of when it's going to end.
(41:04):
On the other hand, I may think-- and this is something that's happened to me when I've
speculated plenty of times-- what I think might happen happens like two days after the
options expire.
And that's, I think, something that gets lost.
And this is why I want to make sure we-- in my educational efforts and part of what I
(41:24):
wanted to express to the listeners is options didn't arise as a tool for speculation.
They arose as a tool for risk transfer, which means that there are speculators and there
are hedgers.
And I think we lose sight of the value of the hedgers, especially when you have rip
roaring markets.
Well, why hedge, right?
But there is the advantage to it.
(41:45):
We are actually seeing a lot of-- we are seeing more and more interest in writing from time
to time, people understanding the decay.
But I think it's important, especially with the very short-dated options that have come
out, the so-called zero-dated options, people have to-- people really need to keep in mind
that they're not-- it's tempting to think of options as a tool for speculation.
(42:08):
They're really not strictly-- they're not intended as such purely.
And there's definitely a lot of hurdles to doing it.
Right.
And I should certainly make clear that we are not equating options trading to gambling.
No, absolutely not.
For my compliance people as well, if you're listening in, that is not what I am saying
(42:30):
here.
I'm just saying that too many-- too often people conflate that.
But that is not a position of current interactive brokers.
Correct.
No, thank you for clarifying that.
I appreciate that.
Speaking of interactive brokers, you guys are known as being very innovative when it
comes to your trading platforms, the technology that you offer, et cetera.
(42:55):
How has the evolution of your systems impacted market participants, do you think?
I think it's helped a lot.
The original versions of interactive brokers were really just sort of-- again, we were
a market-making firm.
So it was basically taking the technology and the thought processes that we applied
(43:17):
to making markets in hundreds or thousands of options at any given time and making those
tools as accessible to our customers as possible.
And while we no longer do much proprietary trading, we don't do any options market-making
in North America or Europe anymore, we still have that DNA.
(43:38):
It's still people who grew up on the market-making side.
And so we try to continually add tools to enable our customers to think strategically
about options, not just what's the delta, not necessarily what's the implied volatility.
And I think we're sort of unique in the fact that you can express implied volatility in
(43:58):
daily or annual terms, which is one of my-- Interesting.
The rule of 16.
Rule of 16, yeah.
But I think, for example, especially as we see-- for example, we're taping this ahead
of Amazon and Apple earnings over the next couple of days.
I have no idea where they're going to be.
(44:18):
But if I look at Apple's implied volatility on a weekly option that expires on Friday,
I don't know what the number is offhand.
But let's say it's 24.
What does that mean to me?
If I've got this option that's going to have an event in three days or in the next day,
(44:39):
it's kind of meaningless.
So using the rule of 16, just for those of you who are not familiar with it, to go from
daily to annualized volatility and back and forth, if you have an annualized volatility,
you divide by the square root of business days in a year.
Fortunately for us in the industry, there are roughly 256 trading days in a year.
256 is 16 squared.
(45:00):
So you basically divide by 16.
Tells you that would be a 1 and 1/2% daily move.
And our platform I know allows you to do that conversion.
We'll do it for you.
So I want to look at it as, what is Apple going-- on a shorter term option, what's it
going to do in the course of this potential week?
What is being priced in?
(45:22):
In the case, if I'm trading an option that's further out, particularly if I'm writing,
how much volatility am I incorporating?
And that's where the annualized volatility comes in.
But we're continually adding tools.
And we're responsive to our customers' requests of things they want.
And we're continually also trying to simplify.
(45:43):
Because one of the things we did do was get-- we got so information heavy.
There's so much on there.
We're actually now-- Trying to condense it.
Streamline it a bit.
And we've done some-- we've had some new releases that make it a lot easier to deal with.
That's terrific.
I'm looking forward to seeing that.
Steve, thank you so much.
I really appreciate you taking the time to sit down.
My pleasure, Mark.
(46:03):
This was a real joy.
I really enjoyed it.
Excellent.
Thank you.
Take care.
And that's going to do it for today's episode of Wide World of Options.
Special thanks to our guests, Megan Dugan of the NYSE, Kevin McCarthy of Clear Street,
and Steve Sosnick of Interactive Brokers.
Thanks to all for sitting down with us while on the road.
Be sure to visit the event section of optionseducation.org to register for our continuation of Summer
(46:28):
of Selling webinars.
And thanks again to all of our listeners and supporters out there.
As always, please feel free to send us your questions via email at options@theocc.com
or live chat with us on our website as we love hearing from our listeners.
Take care, everyone, and we'll be talking with you again very soon.
(46:49):
You've been listening to the Options Industry Council's Wide World of Options.
If you have questions about anything you've heard on today's show, email options@theocc.com
or visit www.optionseducation.org and chat with OIC's Infestor Education team.
Interested in connecting with OIC on social media?
(47:11):
Subscribe to the OIC YouTube channel, like them on Facebook, follow them on Twitter at
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Thanks for listening, and be sure to tune in to the next episode of Wide World of Options.
You're listening to the Options Insider Radio Network, the home of the Options Podcast.
(47:34):
For more quality options programs, visit theoptionsinsider.com or search for Options Insider
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Listeners can also access all of our programming through our mobile app available on the iTunes
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Most programs are also available via livestream at mixler.com/options-insider.
(47:59):
That's mixlr.com/options-insider.
Don't forget to follow along with your favorite programs and submit your own questions for
the hosts at twitter.com/options, stocktwits.com/options, facebook.com/theoptionsinsider, or via questions
(48:20):
at theoptionsinsider.com.
You're listening to the Options Insider Radio Network, the home of the Options Podcast.
For more quality options programs, visit theoptionsinsider.com or search for Options Insider Radio Network
in your podcast provider of choice.
Listeners can also access all of our programming through our mobile app available on the iTunes
(00:22):
and Google Play stores.
Most programs are also available via livestream at mixler.com/options-insider.
That's mixlr.com/options-insider.
Don't forget to follow along with your favorite programs and submit your own questions for
the hosts at twitter.com/options, stocktwits.com/options, facebook.com/theoptionsinsider, or via questions
(00:52):
at theoptionsinsider.com.
This is the Options Industry Council's Wide World of Options.
Before we start today's show, listeners should know that options involve risk and are not
suitable for all investors.
(01:14):
Individuals should not enter into an options transaction until they have read and understood
the disclosure document, characteristics and risks of standardized options, available by
visiting theocc.com or by contacting your broker, any exchange on which options are traded,
or the Options Clearing Corporation at 125 South Franklin Street, No. 1200, Chicago,
(01:34):
Illinois 60606.
The Options Industry Council is an industry resource provided by the Options Clearing
Corporation, collectively OCC.
These strategies discussed are strictly for illustrative and educational purposes only,
and are not to be construed as an endorsement or solicitation to buy or sell securities.
Commissions, fees, margins, interest and taxes have not been included in any of the examples
(01:58):
used in this show.
These costs impact the outcome of all stock and options transactions.
Consult your tax advisor about any potential consequences.
OIC was created in 1992 to educate investors and their financial advisors about the benefits
and risks of exchange traded equity options, and the Wide World of Options radio show is
(02:18):
one of several resources investors can utilize to learn more about options.
Other resources OIC offers include webinars, articles and self-guided options related coursework.
For more information, check out www.optionseducation.org.
Now here's your host, Mark Benzoquin.
(02:43):
Hello everyone and welcome to OIC's Wide World of Options.
I'm your host, Mark Benzoquin, and as we continue with our special summer sessions on Wide World
of Options, we'll listen in on recent conversations that we had with three of the industry's biggest
names, those being Megan Dugan of the NYSE, Kevin McCarthy of Clear Street and Steve Sizenik
(03:04):
of Interactive Brokers.
For those interested in our webinar program and what OIC has in store for July, we're
continuing our summer of selling by first taking a look at credit spreads, followed up
with a deep dive into iron condors and iron butterflies.
To register, please visit our optionseducation.org website and click on the events tab.
(03:28):
For our Wide World of Options podcast, however, we're excited to bring you more of our extended
tales from the road as we've been traveling, meeting new friends and having great conversations
all about options.
You should note that as our guests are not directly affiliated with OIC or OCC, the opinions
expressed are their own and not necessarily those of OCC, nor do we endorse, warrant or
(03:51):
guarantee the products, services or information discussed by our guests.
And with that out of the way, let's go ahead and get started by listening into a conversation
that we recently had with Megan Dugan, head of options at the New York Stock Exchange.
I had the good fortune to meet Megan when we caught up with her at the recent OIC options
industry conference in Asheville, North Carolina, where we discussed a variety of topics, including
(04:17):
recent record volume levels, market accessibility and 24 hour trading.
Let's go ahead and listen in now.
Thank you again, everyone, for joining us.
Sitting down with me now is Megan Dugan of the NYSE New York Stock Exchange, where she
is the head of options.
Megan began in the business as a market maker, well, began as a clerk in 1999 on the trading
(04:41):
floor, moved to a market maker in 2000, transitioned to executive level positions with Morgan Stanley
and Merrill shortly thereafter.
In 2019, she took a director's position with the Intercontinental Exchange and now heads
up the NYSE as head of options.
Megan, let me ask you, you've been in the business for a long time.
(05:02):
Only when you and I got back in the business, options volume was nowhere near where it is
now.
So more and more investors are turning to options to meet their various objectives,
various forecasts, etc.
What do you attribute that increase?
In other words, why do people choose options over maybe a different product?
(05:23):
Yeah, thanks, Mark.
Thank you so much for having me here today.
I really appreciate it.
You know, there's a number of drivers that have really increased the awareness and understanding
of using US equity options across the market.
You know, thinking back to 1999 and 2000, we were trading in fractions, right?
(05:43):
Things were single listed on one exchange.
So I was on the ARCA floor.
So if you want to trade Microsoft, you could come see us.
Right.
But you couldn't trade that everywhere, right?
At the time I was in San Francisco, where they had all the dot com stocks.
Yes, exactly.
So as we continue to see our markets continuing to evolve, so decimalization occurred, being
(06:06):
able to trade every underlying across multiple listed exchanges were shortly thereafter.
That was in 2000-ish timeframe as well.
So mutualization was a bit of a driver in that space.
So then therefore you could trade Microsoft on CFO or Philly or Amex, the other three
exchanges there at the time.
So you know, as the markets continue to evolve, ISE came out in 2000 as a real driver of electronic
(06:37):
market making capabilities in a spot that was heavily weighted to the floors.
The floors are busy.
At least in the ARCA floor, there was at least 500 plus people and it was teeming.
One of the areas that really drew a lot of the growth was this concept of can we have
electronic order books?
Can we have electronic complex order books?
Can we do more of these things electronically?
(06:59):
And the market reacted with yes, absolutely.
The market makers can submit electronic quotes.
The spreads tightened based off of the decimalization, moving from fractions to decimals.
Right down from six and a quarter to a penny wide.
Yes, exactly.
In some series.
But also what was happening was other exchanges came onto the market at that roughly over
(07:20):
those between 2000 and 2010.
We had a couple of additional exchanges come on board.
The market models were slightly different.
The original market models for US options was Prorada, customer friendly, size based
quoting to be able to receive a higher allocation.
(07:40):
ARCA came out with the first price time exchange.
From that standpoint, that was an area where people had multiple types of capabilities
to trade.
What we've seen over time is that these additional features, these additional exchanges, additional
tradable instruments all provided opportunity for market makers to provide two sided quotes
(08:03):
in an efficient mechanism.
Fast forward until where we are now in the pre-COVID levels to now from a market standpoint,
what's driving that growth was retail interest really took hold.
Options are unique as a derivative instrument from equity.
OIC does a great job with education across the investor base.
(08:28):
Also the exchanges do as well, but also the broker dealers do a really good job educating
the general public.
What's driving that is people are getting more comfortable that they're aware that they
actually, options are now not necessarily a, "Oh, I don't want to talk about that over
there because it's something unknown to me and something somewhat complicated."
People are much more open and the conversations are being had to be able to say, "How do I
(08:53):
add value in and trade and have options as part of a, say an ETF to find outcome component
and strategy?"
That also is helping drive growth in our markets.
Each turn of time, as we know, time continues to move on and change is always out there.
We're very dynamic, which is why I love this business is that it's every day is a very
(09:16):
different day.
Each shift in the market structure has proven a lot of experience and a lot of things we've
learned.
We've learned about our market participants.
We've learned about how much they want to be able to be engaging with us on the markets.
You can see that in the market maker quotes, the number of market makers in the business,
(09:36):
the number of retail providers, the scope and the breadth of what they're providing.
That has grown significantly and the awareness in general across the media of trading options
in your portfolio is much more comfortable now.
You can see that in the growth in the market.
(09:56):
IPO market has been very, very strong back in the COVID time, 2020 and 2021.
We saw roughly 1200 new companies come to market.
What does that mean for us?
Obviously we had call it 700,000 individual series that you could make markets on.
Now on any given day on Amex or Arca, we have roughly 1.2, 1.1 million people instruments,
(10:19):
over 240, 100 underlines.
We have considerable amount more and that's coming from new listings coming to market.
We only are seeing that actually continue to grow this year especially.
The general macro environment is proven to be a strong spot for IPOs coming in 2024 and
definitely into 2025.
(10:42):
That underlying basis of what we can trade instruments, options, series trading instruments
on continues to grow.
That provides variability for our market makers to provide quotes to our market.
The greater availability of product and a lot of times these products are, boy, I wish
(11:03):
I can think of the word I was looking for, but a lot of these products are specific maybe
to a certain objective or a situation or a forecast.
We've got a lot of these reversed ETFs, leveraged ETFs.
Basically the industry, the exchanges are creating these new products to attract investor
(11:27):
dollars.
The investor is a greater selection of where to put their eggs in a number of different
baskets.
You think that's a partial driver to this explosive volume that we've seen?
I guess a most recent example is on Rubrik IPO last Friday at the NYSE.
We were able to list options three days past that from our fast track IPO because it met
(11:52):
the large size requirements as per our exchange listing standards.
We were able to start trading options on that within three days of an IPO, which is an amazing
thing.
Usually it's five days.
Exactly.
Thankfully, I met the criteria set that we could list them earlier.
That is available broadly speaking in the market for investors to invest in.
(12:16):
That continues to grow and evolve as we have more IPOs.
Like I said, the awareness and the education really made options more mainstream and more
comfortable.
It's driven a lot of single stock growth back in COVID time from the retail side of the
house.
That's shifted to more ETF based strength more recently with more of the short dated
(12:40):
options coming to market.
But we see both market makers and customers trading those ETFs that have short dated options.
There's really a variety of reasons why we see the US options market becoming so strong.
But it's really recognized globally now.
We're having a lot more conversations across Europe, across Latin, across Asia of people,
(13:02):
investors from those geographies wanting to trade the US options market because of the
growth and the transparency that we provide.
But doesn't that provide an issue?
This was something that I had a conversation earlier, provides an issue just from time
zone standpoint and the introduction or the potential introduction of 24 hour trading.
(13:25):
Yes, that's a great point.
The other part is that they have to be a US broker dealer to be a member of the exchange
to send us any kind of order flow.
They can choose to partner with the current US broker and have them be the gateway into
the US options markets.
But you're right, they're predominantly trading the US market already today.
(13:48):
Their staffing levels are shifting to their own local standards to be available for the
US options markets.
But there has been a lot of talk, a lot of requests from a couple of the retail houses
to be able to support a longer trading day for US options.
The equity side is a bit further along because they do have pre and post extended trading
(14:09):
sessions and there is a lot of dialogue right now in the equity space.
Options are a little bit harder to do because of the market makers providing liquidity in
those series and they really need to have the, not only the quoting and the technology
to be able to do so, but also the balance sheet to be able to support that from a clearing
(14:30):
standpoint.
I remember on the trading floor a decade plus ago when they were first talking about extended
trading hours.
So I was in Chicago and the market there was open from 8.30 to 3.15 PM and all of us are
like, wait a minute, you want us to stay here until five?
What are you, crazy?
Right, so now to think around the clock trading, yeah, that's something that I'm glad I no
(14:55):
longer have to wrap my head around.
Operationally it has a lot of moving parts to identify and to lay out so that it is a
successful part of the next part of the market if we were to go that way.
But it's not just operational, it's balance sheet, it's clearing, it's OCC clearing capabilities.
(15:15):
So all of it is a cycle that we have to be very cognizant of and I'm actually extremely
proud, being in this business now for 25 years, that we've all evolved this very strong space.
We always say that if one of us were to stumble, it would deter any kind of comfort in knowing
(15:35):
that our market is that strong.
So we've all evolved really well in these last 20, 25 years to see the market go from
four exchanges to 17 from, what was it, maybe a couple million contracts a day to 42 million
on a multi-list volume a day.
And we're trading at such peak capacity.
(15:59):
Another thing we look at at the exchange side and we talk a lot about is message traffic.
So I was just looking through our numbers.
The general message traffic that we saw in March of 2019 was roughly 12 billion messages
a day.
Now, what do you mean by messages?
That's all the quotes that are happening on the market maker side, updating orders coming
(16:21):
into the market, everything that's published to the tape across all exchanges.
So across the universe of the US options market, there are that many messages being transversed
across the networks.
Now in March of this year, on average per day, it's 102 billion.
I mean, how do you even wrap your head around that?
(16:42):
Yes.
It's been five years.
And we haven't increased that same standpoint in volume, of course.
We're at roughly 17 million contracts, ADV of multi-list volume back in 2019, like I
said with that same equivalent of message traffic.
But here we are at like 42-ish million contracts ADV and we're 102 billion messages a day.
(17:05):
So it's a really interesting world.
We're living in technology heavy for sure, but we have to make sure that we're continuing
a very stable and resilient transparent marketplace.
Well, and let's stick with that technology, transparency, et cetera, from an exchange
standpoint, what initiatives does the NYSE take to improve transparency, price discovery,
(17:30):
basically improving the accessibility to the markets?
Right.
We've completed a transition to our pillar trading system.
Our internal platform is called Pillar and we completed Amex last October.
So we brought Arco over in 2022 and Amex over in 2023.
(17:53):
That completes all of our NYSE exchanges across our five equity exchanges and our two options
exchanges on the same technology.
That provides us a single code base of engagement, which is beneficial not only for scale and
resiliency on the exchange operating side from my perspective, but also from our members.
When a market maker comes in across equities or options, it's the same formats.
(18:14):
It's the same engagements that they're connecting to us in the same liquidity code indicators.
We're trying to make sure that our reporting is all very equally weighted across both so
that we have on a per transaction level, liquidity indicators that you know what happened on
your trade.
We have transparency in what happened and we provide that across our entire set of markets
(18:37):
on equities and options.
So that was our first step is to come to the same platform so we can really truly scale.
And when we build out new product, for instance, Day ISO orders is something we reintroduced
earlier this year on Arca.
We were able to put them back on Arca options, but we also rolled them out in our equity
platform a month later.
(18:58):
So we can actually take things that make sense to do on both markets and provide access to
it because it's the same technology.
So from our perspective, it's not a hard lift for us to bring things to market across equities
or options across asset class.
So that's an area where it's important.
And with this increase of quote traffic and overall volume, optimizing latency is an ongoing
(19:20):
task for any exchange.
So actually this month we're focused on handling an optimization and how we handle complex
series within our trading infrastructure.
And then it's going to help us reduce our latency during traffic periods.
So those very high volume, high volume, high capacity days, we're going to be able to reduce
(19:40):
our latency in the tails significantly.
And we're also improving how market makers can come out and into our markets from being
more deterministic on how they see their bulk cancels coming out.
So later this month, we're going to be supporting a new sort of a fast path of how we're handling
our bulk cancels for market maker quotes on our exchanges collectively.
(20:02):
Interesting.
I really appreciate this.
Thank you so much for sitting with us.
This was great.
Thank you very much, Mark.
I really appreciate it.
Thanks for having me.
Yeah, you're very welcome.
And we'll talk to you again soon.
Sounds great.
Thanks.
Take care.
And we're back.
I'm Megan Dugan of the NYSE for taking the time to sit down with us and for such a great
conversation.
(20:23):
Next up, we've got Kevin McCarthy of Clear Street with whom we had an interesting talk
about liquidity providers, industry trends, and the influx of new exchanges.
Let's go ahead and give a listen.
Thank you, ladies and gentlemen.
Welcome back to our show.
I am very, very fortunate to be sitting with Kevin McCarthy of Clear Street.
(20:44):
Kevin started on the floor of the Philadelphia exchange, the PhilX, recruited by Merrill
and worked his way up as a managing director over the course of 26 years.
He was also a managing director at Bank of America for over a decade, recently began
with Clear Street in 2023, where he is the chief administrative officer and head of clearing.
(21:07):
Kevin, thank you so much for joining me.
Really appreciate it.
Thanks for having me, Mark.
So Kevin, let me ask you.
All of the panels that I've seen here at conference, very, very interesting information.
Some of them kind of, well, leads to some questions that I wanted to ask you.
Liquidity providers, we've got new exchanges, we've got new products.
(21:29):
There's always, there's innovation in the market, new innovation on the exchange level,
on the clearing level, every side of the coin you can imagine.
Where does that go?
Where, you know, we've got all these things new, all these new things coming in, but what
do we do with them?
Yeah, I think it's a great question.
(21:50):
We have seen that innovation.
I mean, look at what OCC has been doing around there.
Innovation on the buy side, there's always been a constant innovation in building out
trading technologies.
But what we really haven't seen is a new entrant from a clearing side perspective.
And that's where we've come in matching innovation with technology into a space that has been
(22:10):
pretty locked up for a very long time.
And in doing so, we're actually providing a new entrance into the space that allows
clients to have another option they haven't had for some time.
So especially for option market makers, where they really need to be fast and nimble, as
you mentioned, a number of exchanges.
How do you get to those exchanges?
How do you consume that market data?
(22:32):
How do you make sure that your trades are matched and settled correctly and you can finance
them?
So having a provider that has new technology that can give you optimization on funding,
optimization on trades, and the ability to be in the marketplace in a really fast and
easy way, when there are new products, right?
Look at crypto, look at Bitcoin, look at other things that are coming in.
(22:52):
A clearing firm hasn't always historically been able to provide technology that matches
with the speed of innovation.
And now we're able to do that.
And I think that's what's been really important.
And the feedback from the community, both on, I would say from the exchanges, they want
to see us, OCC, other CCPs, as well as the market participants themselves say, we need
(23:13):
other options.
If we're going to expand, we need to have places to have expansion joints, right?
So the market's pushing out product, it's pushing out venues.
Where does it go?
And that's how you provide an opportunity to consume that for them.
Gotcha.
Okay.
So exchanges, back to that question.
When I started and when you as well, I know there were four exchanges, right?
(23:36):
Now there are 18, 17.
18 is slated for later this year, knock on wood.
Is 18 enough?
Is 18 too many?
Is 18 too few?
What do you think?
And I don't want to get you in trouble with the exchanges, nor do I want to get in trouble
myself.
(23:56):
But what does all of this additional avenues, what does all this do to the market?
What does it do to the market maker?
What does it do to clearing providers?
How has that helped the market grow, do you think?
Well, I mean, look at the volume, right?
(24:17):
If you look at the options volume, you heard Henry this week where you talk about that.
Yeah, it's terrific.
Well, and if you noticed in his slides, some of the slides represented the market share
by each exchange.
It showed that they are actually driving some of the volume, right?
So it does show that the information that's coming through says that, well, these are
(24:39):
relevant in some way.
Now maybe the market share has been slimmed down by each, but across of these 17 exchanges,
everyone is generating some flow.
So I think the pros and cons of that is it's an opportunity for trading firms to have different
opportunities around the way they execute their transactions and reach that market.
(25:01):
But on the other side of it, I'm sure it's very expensive to collect a lot of market data.
Use that, you have to constantly be up on your technology.
You have to quote on many different exchanges at the same time, possibly.
So I think that could be a bit of a reach from a clearing firm perspective.
Where I'm sitting today with the innovation that we have, that's not a challenge.
(25:21):
The number of venues isn't really a consideration.
And I think in the future, as new products come out with those exchanges, we'll be able
to consume that in a faster and easier way as well.
So I think that we can provide that back to clients and give them access.
So look, I think that it's good.
It gives a lot of different opportunities to trading firms and maybe provide liquidity
(25:42):
in different ways and execution styles.
But at the same time, it does create other innovation, or I should say technology requirements
and consumption of data, which is, you know, can be quite expensive.
Right.
And significantly so.
Absolutely.
What about industry trends?
What do you see on the horizon in the next, let's say, five years?
(26:05):
Where are we going to be?
And let me ask you this.
I just had a couple of conversations earlier.
And we certainly heard from panelists.
What do you think about the role of AI?
Where's that going to lead us?
Yeah, I was listening to that today.
It's very interesting.
I think AI, if you peel back some of the layers that they were talking about today, on the
(26:25):
service side, not on the trading side, I think it has real application that's kind of safe.
Right.
And we're doing some of that as well.
So to the extent that we can consume information from a client and readily get that to the
right destination, respond in a fast and easy way, and match that with client needs, it's
great.
I can't speak to it from a trading perspective, but I could see where that could be a concern.
(26:49):
So I think AI is as it becomes sharper and more precise and better managed, you can see
applications happening in many different ways.
So I do think that it is here to stay.
I think that everyone is using it in their day to day and maybe they don't even realize
it.
Right.
So I think the question is how available is that AI and are you seeing it in an actionable
(27:12):
way?
I think we are from service side so far.
And I could see that happening from, especially from clearing from perspective, how we match
and settle trades, how we interact maybe with other exchanges or OCC and others, I could
see that helping us in that regard.
And I agree.
It was interesting at the panel when one of the panelists was saying that, look, we've
(27:33):
been using AI for years on the backend and infrastructure wise, so to speak, administration
aspects.
But trading wise, the gentleman that I just spoke with a few minutes ago, we were talking
about will bots eventually give us trade, not even trade ideas, but trade for us.
(28:02):
And it's an interesting question.
We'll kind of see what happens down the road.
But I completely agree with you that from a clearing standpoint, from a backend standpoint
in the industry, yeah, it seems like it's already in use.
And I certainly expect that to grow down the road.
(28:23):
So what other innovations, what other trends do you see coming up?
I think from a trend perspective, what we really see is how does that technology enable
you to get into the products and services faster?
But I also think that there's a pent up demand for increased exposure in the US listed options
space.
I've seen this outside of the US inbound, and I've seen it within typically equity only
(28:49):
shops that may have technology, may have capital, they have the wherewithal.
They're not necessarily driven by, let's say, personal or people traders, but more algo shops.
They want to get into that option space.
And I think this kind of gets back to the AI point or innovation point as well.
They want to know how do you get into the market?
(29:11):
How can I expand my strategy into options?
Look at the growth, look at the opportunity, ETFs.
Right?
Right.
Again, back to Henry's presentation, that was some eye opening information for me.
Exactly.
And so if you're trading ETFs, you're trading options.
If you're trading index, you're trading options and futures.
So I think that what's happening is there's this demand to get in.
(29:34):
And then if you get back to the point of AI, what does it do and what happened on the panel
and how it ties into this, people say it's a great education tool.
And most people, what I'm hearing or clients, potential clients are saying, how do we help?
How do we get into this space?
What can we do?
How do we structure it?
What should we know?
Who do we talk to?
So if you think the education points from an AI perspective or even just the contacts we
(29:59):
have both within our firm as well as the exchanges can bring those new entrants in where the
market really has been pretty dominated by the same players.
So I think the industry has all this growth volume, but it hasn't had a lot of new entrants
that it really does need.
We saw again, and I hate to keep referring back to Henry's presentation because it really
(30:23):
was so excellent, but the information, yeah, the same players in terms of the top stocks,
those don't change, most active option securities, trading symbols, those aren't really changed.
And then also the exchange market share, brokerage firm, their market share, the same players
(30:45):
that we see day in and day out.
So I like your comment that with these liquidity providers, where does everything go and that
we need new entrants.
And I don't mean new entrants to the market like Joe and Vester, we need firms.
We need professional traders.
And I think that they can provide that additional liquidity.
(31:07):
So the risk has become a bit concentrated.
And I think we need to disperse that a bit.
I think there's more than enough to go around.
This isn't a competitive issue.
I think that this is really more about if the industry wants to constantly innovate and
expand and some of that is driven by the retail demand.
Some of the product that's been coming into the market has been driven by retail investors
(31:27):
saying I want this, I want that, maybe smaller size.
But I think that the liquidity providers, the professional traders, the market makers
that need to be there stand ready for this.
You need more opportunities for them to come into the market.
Right.
Interesting.
Well, thank you for that.
Kevin, this was great.
I really appreciate it.
Thank you so much.
(31:48):
Really appreciate the time.
Yeah, I really appreciate you sitting down.
Thanks so much.
I really hope you enjoy the rest of the conference.
Thanks so much, Mark.
Thank you, Kevin, for that terrific discussion.
And now to close things out, we're going to visit with Steve Sosnick, chief strategist
of interactive brokers.
Steve and I had a candid discussion about his opinion on record trading volume, lessons
(32:09):
learned over a nearly 40-year career, and his beloved New York Jets.
Let's go ahead and see what Steve had to say.
All right, ladies and gentlemen, welcome back.
I am very, very excited to welcome Steve Sosnick from Interactive Brokers, their chief strategist.
Let's start with a bit of background.
Steve began in the industry straight out of Wharton back in 1986.
(32:32):
Wore various hats with Solomon Brothers, Lehman Brothers, and Morgan Stanley before landing
at Timber Hill, which is the precursor to Interactive Brokers back in 1995, where he
is now their chief strategist.
Steve is also a frequent guest and contributor to Bloomberg, CNBC, Barron's, The Street, many,
many more.
(32:53):
In truth, really, Steve, with a pedigree like this, I'm really honored that you found the
time to sit down with us to talk options.
So welcome.
Thank you so much, Mark.
It's my pleasure, and I'm so glad to have this opportunity.
Well, excellent.
Thank you.
Let me ask you this.
So Interactive Brokers, very well-known trading platform.
There's a new demographic in options, I think, a younger investing demographic.
(33:20):
Being as you've been in the business as long as you have, is there something that you know
now that you wish you knew when you were just kind of getting started?
I think when I was getting started, I approached options like many people did, which is, you
know, basically you focus on the delta and not so much on the other Greeks.
(33:40):
Once I started making markets for Timber Hill in a very disciplined way, as opposed to having
traded them in other capacities around the street, I realized we needed to take care
of all the various Greeks, I'm just going to call it, but variables.
And you really have to pay attention to your decay, and you really have to pay attention
not just to the delta, but to the gamma because the delta changes.
(34:02):
There were so many more nuances.
I was brought on board.
We were a fairly large market making firm at the time, but nowhere what we became.
What happened was, you know, Thomas Petterfly began on the Amex floor, expanded.
By the time I joined, the firm had expanded into equity options trading in a big way,
(34:22):
but didn't really have anybody upstairs who had experience managing risk from the equity
side, or specific equities risk.
That's where I was brought in.
But I had a bit of a learning curve about the options, all the other nuances involving
options because I had a pretty good sense of what might go up, what might go down, what
could blow you up, which is a very important thing to me.
(34:44):
But I wish I had a greater appreciation.
There was a little bit of a learning curve for some of that.
And with these new investors, and this is something that you and I spoke about just
before we started recording, these new investors really came out of the woodwork, if you will,
over the last several years.
(35:06):
We had talked about during COVID, for example.
How do you think that all of that is affecting options today, affecting the industry?
Well, over the years, we've seen this inexorable growth in volume.
And I think that's a great thing.
As someone who's been in the business for as long as I have.
(35:28):
So I think that the explosion volume is a very welcome thing.
But definitely during COVID, it took another leap higher.
And there's a few reasons for that.
What I attributed to is, there's a few things.
People got money in their pockets.
And I think people are more likely to do speculative things with found money than they are with
(35:49):
money that's more hard money.
Earned money.
If you were to work 40 to 60 hours a week for that money, you think of it a bit differently
than if someone just sends you a check for $1,000.
Correct.
Right.
But there's a difference between investing and trading.
Absolutely.
And I think that got lost.
But again, because I think you were dealing with crazy markets, essentially money, money
(36:13):
coming to millions of people from out of the blue, I think that got lost on them.
And I think that they went for the speculation.
And to a certain extent, they were rewarded for that because the markets kept going up.
And you had stocks just keep going up.
And you saw crazy things, crazy valuations that to a longer term investor, to someone
(36:38):
who's more steep than fundamentals, you're like, this--
Right.
These meme stocks that came on the horizon that logically the valuation wasn't there.
And yet, the stock is going parabolic.
And it wasn't even the meme stocks, though.
But for those who kept pyramiding on those parabolic rises, sure, that kept working out
(37:00):
for them, too.
So the meme stocks are-- that's sort of their own animal.
But we also just saw it in a wide range of speculative type of stocks.
Right.
So let me ask you this.
So now we've got this new influx of trader, this new demographic, younger trader at interactive.
I know education is a big point for you.
(37:21):
So are there-- how do you approach education for these new people?
So these new people looking at trading versus investing, which obviously, as we know, are
two different animals, how do you approach this investor to make sure that they understand
what it is they're getting themselves into?
Well, we go out of our way to keep adding educational resources to our platform.
(37:43):
We have a whole platform called IBKR Campus, which is the umbrella.
That includes the stuff that I write, which is under the umbrella of the smaller umbrella
traders insight, which I try to make-- it's a lot of strategy pieces, but I try to be
educational in that as well.
But we have a whole team.
And so we go out of our way to do it.
(38:05):
The problem is the nature of our firm being sort of hands off.
And we want our customers to engage with us, but we can't make them engage with us.
And so we really-- but we go out of our way to try our best to get them to engage with
all this content that we create.
Gotcha.
Excellent.
(38:25):
Let me revisit something.
Again, before we began recording, we were talking about the difference between investing
and gambling.
And you had made an interesting point about the Jets, for example.
And you had said that you can get 100 people together to bet on the Jets, for example.
(38:48):
And that might move the betting line, but that's not going to have any impact as to
whether or not the Jets actually win.
As a Jet fan, I know for sure it takes a lot to win.
But with options, that you could have a group of people on the same side and move that market.
Well, that's the case because with gambling-- let me back it up because I did allude to the
(39:12):
sports gambling before.
So the big similarities that I think took a lot of gamblers into the options realm is
if I buy a call on a given stock or I put a certain amount of money on the Jets-- obviously,
one has a much better likelihood of paying off than the other.
(39:32):
But in both cases, I've put a fixed outlay of cash for the hope of a leveraged return.
Now in the case of the sports bet, that return is defined in advance.
It's going to pay off at two to one, three to one, five to one, 10 to one, whatever.
And again, if people climb onto one side of the bet or the other, the way the bookies
(39:57):
balance it out is the line moves.
But it's still up to the players on the field.
In the case of the options market, if everybody starts buying calls, somebody's got to hedge
that.
And so if there's enough weight of money coming in, it actually does change-- it does change
(40:19):
the line, so to speak.
But it also changes the likelihood of success.
But in options, there's another thing to consider.
Sports bets don't decay.
If I put a bet on Monday before a Sunday game or put the bet on Saturday before a Sunday
game, it doesn't really change-- that money's not decaying.
(40:44):
The $100 is still $100.
Whereas with options, they're perishable.
That's literally what they are.
It's a decaying asset.
It's a decaying asset.
So the timing is much more critical.
The football game, you know exactly what time it's going to start.
You could probably tell you within 15 minutes of when it's going to end.
(41:04):
On the other hand, I may think-- and this is something that's happened to me when I've
speculated plenty of times-- what I think might happen happens like two days after the
options expire.
And that's, I think, something that gets lost.
And this is why I want to make sure we-- in my educational efforts and part of what I
(41:24):
wanted to express to the listeners is options didn't arise as a tool for speculation.
They arose as a tool for risk transfer, which means that there are speculators and there
are hedgers.
And I think we lose sight of the value of the hedgers, especially when you have rip
roaring markets.
Well, why hedge, right?
But there is the advantage to it.
(41:45):
We are actually seeing a lot of-- we are seeing more and more interest in writing from time
to time, people understanding the decay.
But I think it's important, especially with the very short-dated options that have come
out, the so-called zero-dated options, people have to-- people really need to keep in mind
that they're not-- it's tempting to think of options as a tool for speculation.
(42:08):
They're really not strictly-- they're not intended as such purely.
And there's definitely a lot of hurdles to doing it.
Right.
And I should certainly make clear that we are not equating options trading to gambling.
No, absolutely not.
For my compliance people as well, if you're listening in, that is not what I am saying
(42:30):
here.
I'm just saying that too many-- too often people conflate that.
But that is not a position of current interactive brokers.
Correct.
No, thank you for clarifying that.
I appreciate that.
Speaking of interactive brokers, you guys are known as being very innovative when it
comes to your trading platforms, the technology that you offer, et cetera.
(42:55):
How has the evolution of your systems impacted market participants, do you think?
I think it's helped a lot.
The original versions of interactive brokers were really just sort of-- again, we were
a market-making firm.
So it was basically taking the technology and the thought processes that we applied
(43:17):
to making markets in hundreds or thousands of options at any given time and making those
tools as accessible to our customers as possible.
And while we no longer do much proprietary trading, we don't do any options market-making
in North America or Europe anymore, we still have that DNA.
(43:38):
It's still people who grew up on the market-making side.
And so we try to continually add tools to enable our customers to think strategically
about options, not just what's the delta, not necessarily what's the implied volatility.
And I think we're sort of unique in the fact that you can express implied volatility in
(43:58):
daily or annual terms, which is one of my-- Interesting.
The rule of 16.
Rule of 16, yeah.
But I think, for example, especially as we see-- for example, we're taping this ahead
of Amazon and Apple earnings over the next couple of days.
I have no idea where they're going to be.
(44:18):
But if I look at Apple's implied volatility on a weekly option that expires on Friday,
I don't know what the number is offhand.
But let's say it's 24.
What does that mean to me?
If I've got this option that's going to have an event in three days or in the next day,
(44:39):
it's kind of meaningless.
So using the rule of 16, just for those of you who are not familiar with it, to go from
daily to annualized volatility and back and forth, if you have an annualized volatility,
you divide by the square root of business days in a year.
Fortunately for us in the industry, there are roughly 256 trading days in a year.
256 is 16 squared.
(45:00):
So you basically divide by 16.
Tells you that would be a 1 and 1/2% daily move.
And our platform I know allows you to do that conversion.
We'll do it for you.
So I want to look at it as, what is Apple going-- on a shorter term option, what's it
going to do in the course of this potential week?
What is being priced in?
(45:22):
In the case, if I'm trading an option that's further out, particularly if I'm writing,
how much volatility am I incorporating?
And that's where the annualized volatility comes in.
But we're continually adding tools.
And we're responsive to our customers' requests of things they want.
And we're continually also trying to simplify.
(45:43):
Because one of the things we did do was get-- we got so information heavy.
There's so much on there.
We're actually now-- Trying to condense it.
Streamline it a bit.
And we've done some-- we've had some new releases that make it a lot easier to deal with.
That's terrific.
I'm looking forward to seeing that.
Steve, thank you so much.
I really appreciate you taking the time to sit down.
My pleasure, Mark.
(46:03):
This was a real joy.
I really enjoyed it.
Excellent.
Thank you.
Take care.
And that's going to do it for today's episode of Wide World of Options.
Special thanks to our guests, Megan Dugan of the NYSE, Kevin McCarthy of Clear Street,
and Steve Sosnick of Interactive Brokers.
Thanks to all for sitting down with us while on the road.
Be sure to visit the event section of optionseducation.org to register for our continuation of Summer
(46:28):
of Selling webinars.
And thanks again to all of our listeners and supporters out there.
As always, please feel free to send us your questions via email at options@theocc.com
or live chat with us on our website as we love hearing from our listeners.
Take care, everyone, and we'll be talking with you again very soon.
(46:49):
You've been listening to the Options Industry Council's Wide World of Options.
If you have questions about anything you've heard on today's show, email options@theocc.com
or visit www.optionseducation.org and chat with OIC's Infestor Education team.
Interested in connecting with OIC on social media?
(47:11):
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Thanks for listening, and be sure to tune in to the next episode of Wide World of Options.
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(47:34):
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(47:59):
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(48:20):
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