Additional Tracking of the SPX and VIX Contracts

The emergence of the global pandemic COVID-19 in the first quarter of 2020 caused severe economic and capital markets shocks. This turmoil was evidenced by heightened volatility and spikes in volumes in U.S. listed options markets, which closed the first quarter with their worst performance since the financial crisis. In light of the health crisis, many exchanges temporarily closed their physical trading floors.

Floor based trading continues to have a presence in U.S. listed options trading, which is not 100% electronic today. Three of the five exchange parent groups run a hybrid (electronic + human) model on at least one of their exchange licenses. The exchange landscape includes:

• Cboe, 4 exchanges, 1 hybrid model (Cboe floor temporarily closed March 16)
• Nasdaq, 6 exchanges, 1 hybrid model (PHLX floor temporarily closed March 17)
• NYSE, 2 hybrid exchanges (owned by Intercontinental Exchange; floors temporarily closed March 20, Arca reopened May 4, American scheduled to partially reopen May 26)
• MIAX, 3 all-electronic exchanges
• BOX, 1 all-electronic exchange (open outcry trading floor temporarily closed March 20, reopened May 4)

While markets have remained opened, market participants have wondered what impact the floor closings has had on order execution, particularly for more complex orders. We analyze this question inside this note.

In general, options volumes increased with the turmoil. Total options volumes ADV peaked at 47.3 million contracts on February 28, +119% from the start of the year. Options ADV remains slightly elevated at 25.3 million contracts (April 30), +17% from the start of the year. Yet, the increases in volumes were not equal across asset classes:

• Equity options peaked in March at 26.4M contracts, +41.5% versus last year’s peak. Volumes came down in April to 24.2M, -8% M/M but are still elevated versus the 2019 average of 17.2
• Index options peaked in March at 3.2M contracts, +43.2% versus last year’s peak. Volumes dropped significantly in April to 1.6M contracts, -52% M/M and below the 2019 average of 1.8
• The index trend continues down, averaging 1.2M (as of May 7), -34% to 2019 average. Conversely, the equity May trend (22.4M) is up 30% to 2019 average

As such, we have seen movements in the breakout of the equity and index segments as a percent of total volumes

• In 2019, equity options represented 90.4% of total volumes versus index at 9.6%, on average
• 2020 has seen growth in equity, now 91.4% of the total and a peak of 93.9%. The trend is continuing in May (as of May 7), equity 94.5% of total
• While peaking at 11.0% of total volumes in March, index volumes fell to 6.1% of total in April, continuing to fall in May to 5.1%.

What has happened to index volumes? Index options volumes have come down. In this note we debate whether the closing of trading floors has negatively impacted index options or the extreme market volatility. The valuation and volatility, as well as trading complex multi leg strategies, become more complicated in times of market turmoil. You need to make a call on the future value of a whole index, essentially a whole economy, versus that for a single stock. This complexity is where the manual handling of orders benefits traders/investors, which is not available under the floor closings. On the other side of the debate, violent market moves are not conducive to executing some complex trading strategies. If the objective is to settle on a price for a product with twenty legs – and the market is moving hundreds of points – you cannot get these trades completed, and customers disappear.

This development is further displayed by trends in two popular index options contracts, the SPX (enables investors to gain broad exposure to the U.S. equities markets) and the VIX (enables investors to manage volatility and hedge portfolio volatility risk). These are proprietary products only offered to trade on the Cboe exchange, thereby impacted by the floor closure. Historically, both SPX and VIX options represented ~5% of total options volumes (equity and index): SPX averaged 5.2% in 2019, VIX 4.9%. This percentage has fallen this year:

• SPX 2020 avg 5.0% through the end of April; peak 7.9%, trough 2.7%, end April 3.3% (-1.9 pps to 2019 avg SPX 2018 to April 2020 ADV 568 thousand contracts, versus 2020 ADV 690 thousand contracts and April 2020 ADV 520 thousand contracts (April 2020: -8.5% 2018 to April 2020 ADV, -24.7% 2020 ADV
• VIX 2020 avg 4.5% through end of April; peak 10.2%, trough 1.7%, end April 2.3% (-2.6 pps to 2019 avg
• VIX 2018 to April 2020 ADV 582 thousand contracts, versus 2020 ADV 637 thousand contracts and April 2020 ADV 309 thousand contracts (April 2020: -47.0% 2018 to April 2020 ADV, -51.5% 2020 ADV)
• The drop in the VIX is greater than that of the SPX, as these strategies are even more complicated to be executed all electronically
• Conversely, SPY options volumes continue to grow: 2019 ADV 5.6 million contracts, versus 2020 ADV 9.8 million contracts and April 2020 ADV 10.2 million contracts (April 2020: +183% 2019 ADV, +104% 2020 ADV). Market participants surmise people are switching to SPY from SPX in light of the floor closings.

This report also includes a comprehensive market share assessment by exchanges for total market volumes and within their own exchange complex: (please see greater details in the report and appendix)

• Total volumes (equity + index): For 1Q20: Cboe held the highest market share, 38.3%; followed by Nasdaq 32.9%, NYSE 16.5%, MIAX 10.0% and BOX 2.4%. At April 30: Cboe market share was +1.4 pps versus the start of the year, with NDAQ -1.0 pps, NYSE -2.0 pps, MIAX +1.8 pps and BOX -0.3 pps
• Index volumes only: For 1Q20: Cboe held the highest market share at 99.224%; followed by Nasdaq 0.610%, MIAX 0.163% and NYSE 0.004% (0% at BOX). At April 30: Cboe market share was +0.1 pps, with NDAQ -0.1 pps and both MIAX and NYSE flat
• SPY volumes: For 1Q20, Cboe held the highest market share at 34.3%; followed closely by Nasdaq 30.4% and then NYSE 19.1%, MIAX 14.9% and BOX 1.3%. At April 30: Cboe market share was +0.9 pps, with NDAQ -2.5 pps, NYSE -4.3 pps, MIAX +5.3 pps and BOX +0.5 pps

Download the full report for Market Volumes & Volatility, SPX & VIX Contract Volumes, The Index Volume Decline Debate, and Exchange Market Shares for Total Options Volumes, Index Options Volumes, SPY Options Volumes as well as an appendix of Market Share Movements Overview.

 

 

Author

SIFMA Insights
Katie Kolchin, CFA
Director of Research

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