September Options Volume Was Strong, But The Real Story Lurked Beneath The Numbers
SEC Short-Sale Rule Stifling Options Trade
by
Doris Frankel
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CHICAGO (Reuters) – The U.S. clampdown on short selling has made it difficult for option market makers to maintain orderly trading and raised the cost of protecting investments at a time when options are most needed to weather the maelstrom on Wall Street.
The Securities and Exchange Commission-directed ban on making bets that financial stocks will fall was part of the government’s coordinated effort to stabilize the U.S. financial sector. It came after several U.S. bank failures and fears of economic recession.
The ban on the short selling of more than 950 financial stocks, which will be lifted on Wednesday night, has already hindered the growth in the U.S. options market because it raised transaction costs for customers, placed a burden on option market makers and reduced volume.
Investors have found the cost of protection has shot up as bid/ask option spreads become wider in many financial stocks…
…Option players also note on September 29, when U.S. stocks had their worst day since just after the October 1987 crash and the Chicago Board Options Exchange Volatility Index .VIX, known as Wall Street’s fear gauge, set an historic closing high, option volume surprisingly did not reach record levels.
In fact, U.S.-listed option turnover on that day only met the average of 17.8 million contracts, OCC data show.
“Given the explosion in the VIX, overall option volume should have been much higher,” said Mark Longo, a founder of TheOptionsInsider.com, an options information Web site in Chicago.
“This was the type of day that should have seen close to record-breaking volume — if not at least be one of the top days.”
But on Monday, option volume was about 25 million contracts, significantly higher than last week, as the VIX hit another record closing high with a reading just above 52.
“The end of the SEC ban this Wednesday night has breathed new life into the options market, making investors far more willing to trade options,” Longo said. “Today’s volume increased nearly 40 percent from September 29, revealing the impact of the impending end of the short-selling ban.”