“Unprecedented” is an apt descriptor for our Options business in the first quarter. The period continued a record-breaking volume trend over the last two years, and here we review factors that defined the magnitude of Q1.
Over the last two years the options industry has experienced its highest recorded volume. This growth continued and accelerated in 2020, with record volume set in January despite a muted volatility environment. As volatility returned in late February and March, fresh records were set, including the two most active days for multiply-listed options with 40.3 million contracts traded on February 27 and 42.8 million contracts traded on February 28.
Social distancing measures in response to COVID-19 forced options trading floors to temporarily suspend operations. CBOE closed their options trading floor on March 16, followed by PHLX on March 17, and NYSE American, NYSE ARCA, and BOX on March 23.
|March 1-15||March 20||March 31|
In March, the market experienced the most rapid bear market in history, triggering substantial volatility in both the options market and the underlying cash market. Historically, the speed at which volatility changes—the “volatility of volatility”—tends to have the largest effect on options market quality.
While it is somewhat surprising that average posted notional size remained relatively stable while quoted contract size declined, this trend serves as a reminder that, when analyzing these averages over time, the moneyness and maturity of options traded should be considered in addition to implied volatility.
Q1 2020 saw extraordinary options market volume and the unprecedented temporary closure of options trading floors. Beyond the volume and volatility numbers, there were several market microstructure shifts that could impact execution performance. Importantly, market participants should monitor trends such as the quoted size in notional terms and the moneyness and term maturity of options traded.
Following the record-setting 40.1 million average daily volume (ADV) in the 1st quarter of this year, Q2 2021 options volume was the 2nd highest of all-time with 37.6 million contracts traded per day. Robust volume was driven in part by market anticipation of a potential earlier rise in interest rates and Fed tapering, as well as increased volume in options on new issues and continued activity in retail-focused stocks.
After-hours trading has been a larger piece of the total trading volume since the onset of the pandemic, with retail presence growing stronger and earnings announcements becoming less of a factor. In this post, we examine the impact of these shifting dynamics on after-hours price discovery and order behavior.
The surge in market volatility and trading volumes since the onset of the pandemic in March 2020 has impacted numerous aspects of equity market trading. One less-studied area has been after-hours trading. After-hours has also seen changes in order flow trends and influences, and here we examine trends and shifts occurring in these sessions.