Lightning strikes: Options boom threatens data overload

More than 11 billion options were traded on US exchanges in 2023, up from about four billion a decade ago. But unprecedented interest in these securities—and the profits they have generated—hasn’t come without a price.

Some US options market participants are calling for a re-evaluation of the number of strikes listed by exchanges. The strategy, often called strike or quote mitigation, has received renewed attention amid capacity concerns surrounding the Options Price Reporting Authority (Opra) public pricing feed and worries over the amount of capital that must be held with the Options Clearing Corporation to cover each position taken by market participants.

A strike price is the price a trader will pay for the underlying security if they trade before the contract expires. Multiple strike prices can be listed for options belonging to the same security and expiration—say, Tesla options expiring May 31. If the price of the stock moves significantly, strikes that were near the old price will continue to be listed the following week, despite attracting few trades.

“The entire industry would benefit from coordinating more sensical listings of strikes that take into account their breadth and density, especially in short-dated options,” says Shelly Brown, EVP of strategic planning and business development at Miax.

Given the uniquely competitive and transparent nature of the market, if one exchange lists a strike, the other exchanges will do the same. While more granular strike prices allow investors more freedom to customize their options contracts, there is growing alarm in the industry that the ballooning number of strikes could place an unsustainable burden on US options infrastructure.

According to a source at a competing exchange, despite widespread industry appetite to rein in the number of strikes, exchanges will not risk sacrificing options business until a regulator sets out rules or guidance on strike issuance and removal. Further, after the US Department of Justice and the Securities and Exchange Commission brought an antitrust suit against the US options exchanges in 2000, some exchange sources worry that discussions of strike solutions could be flagged by regulators as collusion.

Typically, a market-maker will contact an exchange to request that a strike be listed on behalf of a client in order to execute a strategy. Other exchanges can then file to list the same strike, making it unappealing for any one venue to independently opt out of that revenue potential.

“Exchanges are not in the business of saying no. They’re in the business of ‘yes’ to their customers,” says Steve Sosnick, chief strategist at Interactive Brokers, a retail brokerage firm. “It’s much easier for the number of strikes to grow than it is for the number of strikes to shrink.”

Much of the new volume has been generated by short-dated options, or contracts that are close to their expiration—the day by which an investor must decide to trade—when created, such as weeklies, which expire each week, and zero-day-to-expiry options, which expire on the day they are traded. Exchanges have responded by listing more shorter-dated expirations to meet demand.

Given the capacity problems within the options infrastructure, a source at a trade body says: “We may need to think about strike mitigation before we move ahead with all of these new listings.”

Some exchanges have already taken measures to lessen the strike burden, particularly in proprietary index options, which are exclusive to the exchange on which they’re traded. WatersTechnology reported recently that Nasdaq has developed a predictive AI tool to determine which strikes are likely to see demand and is now exploring the idea of selling the tool to its peers.

Back in 2021, Nasdaq proposed a rule change limiting strike intervals for outer weeklies, or options with 21 to 49 days until expiry, but the source at the trade body says that since then, the need to rein in the data has become even greater: “The problem is that we’ve had new exchanges continue to come on board. With that, every exchange is now going to list as many strikes as they want. And then you’ve also seen an expansion in daily expirations. If somebody calls an exchange and the exchange rules permit it, they’re going to go ahead and list that strike as an accommodation. And then there’s a good chance all the other exchanges will list it as well. It’s a good time to be asking the question: is this a problem today?” 

Bad night at the Opra

This has been particularly acute amid concerns over capacity and bandwidth at Opra, the public data feed widely used to gauge the national best bid and offer. Last year, for example, Opra experienced several notable outages before doubling its capacity in a long-delayed February upgrade.

Many in the industry say the attention on system resiliency has brought the idea of strike mitigation back into the fold, particularly in light of a boom in retail and the renewed popularity of meme stock investing. During the Opra outages last year, retail trading sites lost access to their interfaces, and investors were forced to rely on bad data.

As one source at a market-maker explained, this was a problem for everyone, even firms that don’t consume the Opra data feed.

“We don’t take Opra. We’re a prop firm. We take all the direct feeds, so we don’t really run into it. But we’re painfully aware of the retail firms that had the problem,” they said during a conversation with WatersTechnology earlier this year. They noted it’s damaging when the screen of the retail end-user, whose trades are typically routed from e-trading platforms to market-makers in an agreement known as payment-for-order-flow, goes out.

“I look at that as our advertising. And when your advertising goes out, that’s probably a bad look,” the market-maker source said.