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.
TRANSCRIPT
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Now, here’s your host, Mark Benziquin.
Hello everyone, and welcome to OIC’s Wide World of Options.
I’m your host, Mark Benziquin, 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 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.
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.
We 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 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 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 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.
Certainly 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?
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.
Thinking back to 1999 and 2000, we were trading in fractions.
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.
But you couldn’t trade that everywhere, right?
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 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 as the markets continue to evolve, ISE came out in 2000 as a real driver of electronic 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?
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 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.
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 in an efficient mechanism.
So fast forward until sort of where we are now and like the pre-COVID levels to now from a market standpoint, what’s driving that growth was retail interest really took hold.
So options are unique as a derivative instrument from equity.
OIC does a great job with education across the investor base.
But also the exchanges do as well, but also the broker dealers do a really good job educating the general public.
So 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 sort of 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 add value in and trade and have options as part of a, say, an ETF-defined outcome component and strategy?”
That also is helping drive growth in our markets.
So each turn of time, as we know, time continues to move on and change is always out there.
And we’re very dynamic, which is why I love this business is that it’s every day is a very different day.
And each shift in the market structure has proven a lot of experience and a lot of things we’ve learned.
So 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, the number of retail providers, the scope and the breadth of what they’re providing.
So that has grown significantly and the awareness in general across the media of trading options in your portfolio is much more comfortable now.
And you can see that in the growth in the market.
IPO market has been very, very strong back in the COVID time, 2020, 2021.
We saw roughly 1200 new companies come to market.
And what does that mean for us?
So previously 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 over a few, 240, 100 underlines.
So we have considerable amount more.
And that’s coming from new listings coming to market.
And 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.
So that underlying basis of what we can trade instruments, options, series trading instruments on continues to grow.
And that provides variability for our market makers to provide quotes to our market.
So the greater availability of product and a lot of times these products are, boy, I wish 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.
So basically the industry, the exchanges are creating these new products to attract investor dollars.
And so that’s a great way to get investors 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?
Right.
And I guess a most recent example is on Rubrik IPO last Friday at the NYSE.
And we were able to list options three days past that from our fast track IPO because of large size requirements as per our exchange listing standards.
So 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.
But thankfully I met the criteria set that we could list them earlier.
And so that is available, broadly speaking, in the market for investors to invest in.
So now that continues to grow and evolve as we have more IPOs.
But like I said, the awareness and the education really made options more mainstream and more comfortable.
And that’s driven a lot of single stock growth back in COVID time from the retail side of the house.
That’s sort of shifted to more ETF based strength more recently with more of the short dated options coming to market.
But we see both market makers and customers trading those ETFs that have short dated options.
So 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 LATAM, across Asia of people, investors from those geographies wanting to trade the US options market because of the growth and the transparency that we provide.
Right.
But doesn’t that provide an issue?
Pardon me.
And 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.
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.
Correct.
So 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.
I mean, they’re predominantly trading the US market already today.
And so 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 and 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 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 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 till five.
What are you crazy?
Yes.
Right.
So now to think around the clock trading, yeah, that’s something that I’m glad I no 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 abilities.
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 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 40, 42 million on a multi-list volume a day.
And we’re trading at such peak capacity.
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’ve 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 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 message messages being transverse 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?
Yes.
And that’s 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.
And here we are at like 42-ish million contracts ADV and we’re 102 billion messages a day.
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, basically improving the accessibility to the markets?
Right.
So we just 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.
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.
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.
So you have transparency in what happened and we provide that across our entire set of markets 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.
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 task for any exchange.
So actually this month we’re focused on handling and 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 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.
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.
Thank you 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.
Thank you to Megan Dugan of the NYSE for taking the time to sit down with us and for such a great conversation.
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.
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.
Kevin, thank you so much for joining me.
Really appreciate it.
Thanks for having me, Mark.
So, Kevin, let me ask you, several 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.
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.
We have seen that innovation.
I mean, look at what OCC has been doing around their 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 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, you know, 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?
How do you make sure that your trades are matched and settled correctly and you can finance them?
Well, 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.
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, you know, I would say from the exchanges, they want to see us, OCC, other CCPs, as well as the market participants themselves say, we need 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.
So exchanges, back to that question.
When I started and when you as well, I know there were four exchanges, right?
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.
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?
If you look at the options volume, you heard Henry this week where you talk about that.
Yeah, it’s terrific.
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 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, right?
And reach that markets.
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.
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 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?
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 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.
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.
So I think the question is how available is that AI and are you seeing it in an actionable 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 been using AI for years on the back end 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 ideas, not even trade ideas, but trade for us.
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 back end standpoint in the industry, yeah, it seems like it’s already in use.
And I certainly expect that to grow down the road.
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 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?
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.
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 potential clients are saying, 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 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.
Yeah.
We saw again, and I hate to keep referring back to Henry’s presentation because it really 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, it’s the same players 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.
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 saying I want this, I want that, maybe smaller size.
And 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.
Okay.
Well, thank you for that.
Kevin, this was great.
I really appreciate it.
Thank you so much.
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.
You’re welcome.
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 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, 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.
And Steve is also a frequent guest and contributor to Bloomberg, CNBC, Barron’s, The Street, many, many more.
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.
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 basically you focus on the delta and not so much on the other Greeks.
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.
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.
All these, 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 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, 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.
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.
I wish I had a greater appreciation.
There was a little bit of a learning curve for some of that.
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.
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.
I think that’s a great thing as someone who’s been in the business for as long as I have.
I think that the explosion volume is a very welcome thing.
Definitely during COVID, it took another leap higher.
There’s a few reasons for that.
What I attributed to is there’s a few things.
People got money in their pockets.
I think people are more likely to do speculative things with found money than they are with money that’s more hard earned.
If you had 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.
I think that got lost.
But again, because I think you were dealing with crazy markets, essentially money coming to millions of people from out of the blue, I think that got lost on them.
I think that they went for the speculation.
To a certain extent, they were rewarded for that because the markets kept going up and you had stocks just keep going up.
You saw crazy things, crazy valuations that to a longer term investor, to someone who’s more steeped in fundamentals, you’re like this– These meme stocks that came on the horizon that logically the valuation wasn’t there, and yet the stock is going parabolic.
It wasn’t even the meme stocks though.
But for those who kept permitting on those parabolic rises, sure, that kept working out for them too.
But 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.
So 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.
We have a whole platform called IBKR Campus, which is the umbrella.
That includes the stuff that I write, which is under the umbrella, 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.
The problem is the nature of our firm being sort of hands off.
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.
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 know, you could have, you can get a hundred people together to bet on the jets, for example, 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 get them 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 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.
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 balance it out is the line moves, but it’s still up to the players on the field.
But 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 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 Sunday game or put the bet on Saturday before Sunday game, it doesn’t really change the– that money’s not decaying.
The $100 is still $100.
Whereas with options, they’re perishable.
That’s literally what they are.
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.
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 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, you know, why hedge, right?
But there is the advantage to it.
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.
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 here.
There’s too many– too often people conflate that.
But that is not a position of 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.
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 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.
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 daily or annual terms, which is one of my– Interesting.
The rule of 16.
The 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.
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?
Right.
Or in the next day?
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.
So you basically divide by 16.
So that 24 that I gave you tells you that would be a 1.5% 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?
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.
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.
Condensed 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.
This was a real joy.
I really enjoyed it.
Excellent.
Thank you.
Take care.
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 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.
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