How Network Connectivity is Revolutionizing Options Trading

The options market has been on a growth streak for decades, and today there are more portfolio strategies than ever. More product choices compel brokerage firms to find new ways to fine-tune their trading disciplines and leverage competitive advantage.

Enhancing cross-market hedging and maximizing incremental earnings demand advanced options trading ecosystems with faster connections, robust processing capabilities, and sophisticated systems to support it.

In this expanding ecosystem, options traders should look to network connectivity providers that can establish connections with global exchanges directly from their colocation facilities, leveraging the lowest latency connectivity available. Through these connections, a network connectivity partner can provide raw market data access to approved recipients and help them seamlessly reach the entire options market through a single vendor.

Rising Interest in Options Trading

Options trading got its start in the US on the Chicago Board Options Exchange a half-century ago. Spurred by the pandemic, the spike in day trading pushed the derivatives, futures, commodities, and options specialties into mainstream retail and institutional investing. In 2021, options trading overtook futures volumes. During this time, and despite the bear market in 2022, US options volume reached over 10 billion contracts. Growth is up almost 500% compared to a 142% increase in futures transactions according to the Futures Industry Association.

Many traditional firms are now seeing options as less speculative than before. Organizations are more inclined to include derivative products in client portfolios to limit losses in volatile trading environments.

Rising interest in options has also accelerated the creation of new marketplaces that are driving demand for robust network connections that can access more lucrative venues. A few recent developments include:

Miami International Holdings (MIAX) has filed a Form 1 application with the Securities and Exchange Commission (SEC) and is expanding its network with a new options exchange. MIAX Sapphire will operate both an electronic market and a physical trading floor for US options planned for the second half of 2024.

One of the new exchanges on the financial industry’s radar is the Members Exchange (MEMX) that launched MEMX Options in September, making it the 17th options exchange now operating in the US. Backed by some of Wall Street’s biggest players, MEMX entered the options trading market as interest in the asset class surged to all-time highs.

Cboe Global Markets recently introduced two new channels for trading options (IBHY and IBIG) on the Cboe Futures Exchange (CFE), extended trading hours, and enhanced Cboe offerings. Extending trading to global hours for IBHY and IBIG will help investors in the US and abroad more efficiently manage positions around the clock.

As these new equity options exchanges come online, options traders should seek out a network connectivity provider that can provide access, capacity, and support for trading from day one.

Demand for Connectivity

Though perceived as less specialized than before the pandemic, options trading remains extremely complex in volume and frequency. Exchanges around the world launch options that expire and settle daily, and now almost half the S&P 500 Index’s contract volume is concentrated in zero-day-to-expiry options.

Different instruments suit options with varying terms to maturity, puts, calls, expiries, strikes, etc. This has evolved the market to offer options ranging from over two years (monthly and quarterlies) to two weeks (so-called “dailies”). For the most liquid portfolio options, investor demand has led to the establishment of weekly options that expire on each (and every other) day of the week. Analysts and traders are now hedging and betting on every piece of information and market data that hit the newswires.

Clearly, accessing equity options requires extremely high bandwidth. Transactions and feeds need to be fast, reliable, seamless, and uninterrupted. Record-breaking volumes are reverberating across the industry and driving significant capital investment by the technology providers that facilitate this caliber of trading.

Managed infrastructure services are rising to the challenge across a rapidly expanding ultra-low latency network and accelerating the speed of transferring market data from the standard 40 gigabits per second to a staggering 100 gbps (the equivalent of 1,000 megabits per second).

Low latency is fundamental to algorithmic trading. As it is with many high-transaction-based industries, reducing latency is crucial for options traders who need to respond quickly to changing market conditions and breaking news.

Options Execution

As 2024 is in full swing, the new era of hyperscale options trading begins with the right technology, capital investments, and infrastructure behind it.

As more trading organizations realize the benefits options can provide and choose to add them to their portfolios, it’s no surprise that options markets have seen consistent, persistent growth. As the industry accelerates, exchange managers are planning around the next-level bandwidth and speeds they need to keep their customers’ financial performance on the competitive edge.

Jeff Mezger is Vice President of Product Management at Transaction Network Services (TNS) with responsibility for its managed services for the financial industry. He oversees product development and strategy for market data, online, and data center services. For more information visit tnsi.com.

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