16 Jan 2019 U.S. Option Market Makers Cite Exchange Risk Protections as Critical Industry Improvement – Burton-Taylor Report

  • Liquidity fragmentation and exchange auction protocols are biggest challenges

Market makers believe the U.S. listed options industry has seen significant structural enhancements in recent years, as exchange efforts to improve risk protection capabilities have helped market makers more efficiently deploy capital across the fragmented exchange network, according to a Burton-Taylor International Consulting (part of TP ICAP’s Data & Analytics division) report published today.

The new report — Market Makers and Their Perceptions of U.S. Listed Options Markets — analyzes the challenges facing market makers operating in the U.S. listed options market.  The report is based on interviews with leading market making firms and examines how firms are adapting business models to adjust to the shifting market structure.  The report also examines the criteria market makers evaluate when choosing to participate on an exchange, as well as the role of technology in their business activities.

Market makers identified the proliferation of options exchanges and inherent fragmentation of liquidity as the biggest market structure issue facing the industry, followed by the current treatment of capital by regulators.  Market makers also identified technology investment as a critical requirement, as managing risk exposure across the fragmented liquidity landscape is essential.  Market makers continue to work closely with exchanges to identify and implement technology solutions to manage their quote and execution activities.

Other key findings in the report include:

  • Return on investment continues to be a struggle for market makers as increased regulation, technology requirements and intense competition are raising costs and impacting returns.
  • Large market makers have a considerable advantage over smaller competitors as tiered exchange pricing protocols lower costs for high volume trading firms.
  • Market makers have shifted execution models toward more opportunistic liquidity seeking strategies, as exchange auction protocols limit the appeal of aggressive quoting strategies.
  • Market making firms are subject to significant regulatory burdens as auditing practices of FINRA and exchange Self-Regulatory Organizations (SRO) are raising costs and impacting the profitability of operations.

“Although the US options market making industry has seen significant contraction in the past decade, leading firms have adapted to the operating environment by becoming more efficient and leveraging technology to support activities,” says Andy Nybo, Director at Burton-Taylor.  “Market makers are working with exchanges to develop trading protocols that more closely align with the trading environment, ensuring that risk exposure is more efficiently managed through the use of technology, in this fragmented trading landscape.”

You may download a copy of the Table of Contents, or purchase the report, by clicking here or by contacting orders@burton-taylor.com, +1 646 201-4152.

About Burton-Taylor International Consulting
Burton-Taylor International Consulting, part of TP ICAP group, is the recognized leader in information industry market research, strategy and business consulting.  Burton-Taylor Exchange, Credit, Risk, Compliance, Media Intelligence, PR and Market Data share figures are seen as industry benchmark standard globally. For further information see www.burton-taylor.com.

TP ICAP brings together buyers and sellers in global financial, energy and commodities markets. It is the world’s largest wholesale market intermediary, with a portfolio of businesses that provide broking services, data & analytics and market intelligence, trusted by clients around the world. We operate from offices in 31 countries, supporting award-winning brokers with market-leading technology. For further information see www.tpicap.com.