US Options Market Outlook 2017: Emerging Catalysts on the Horizon

The past few years have seen few positive signs of growth in US options markets, as volumes have flat-lined and the docile trading environment has proved to offer little attraction to high-volume accounts that look to volatility as a trigger to trade. And even though there were numerous volatility catalysts in 2016, their impact on trading volume was short tenured, with volumes enjoying only brief surges in the days surrounding the turmoil. Total volume reached 4.06 billion contracts in 2016, a 1.9% decline from 2015’s 4.14 billion contract total.

The outlook for volume growth in 2017 is muted at best. There are a broad range of potential catalysts that will support volume, however, the market requires a period of sustained volatility to return to rapid growth. And although the election of Donald Trump may signal political volatility ahead, the impact on securities markets may be benign—especially given the new administration’s proclivity for economic stimulus and regulatory relaxation.

The new administration’s regulatory approach is still unclear but given the rumors, innuendoes, and assorted Twitter comments disseminated by President Trump it is clear that the current regulatory approach will shift dramatically. Tax reform is certainly on the table as is, perhaps, the reversal of numerous regulatory initiatives layered on in the aftermath of 2008.

And as always, volatility remains a wild card for 2017. TABB expects volatility to increase marginally throughout the year as the geopolitical environment remains in flux. The surge in populist candidates in the US and abroad promises to create more legislative and regulatory uncertainty, as new parties come into power around the world. There is also the potential for even greater volatility, especially given the complacency that seems to be a fixture in US markets.

Changes in regulation, rising investor demand, falling correlation and a resurging banking industry all bode well for the options industry. Volumes will remain robust, especially as regulatory capital mandates are relaxed and trading becomes back in vogue. A little more volatility will be well received by the industry, adding volume on to what remains a very vibrant market place.

This TABB Group focus note examines factors that will influence options trading activity, identifying key factors that the industry should monitor as catalysts to support trading activity in 2017 and beyond. It examines investor demand, the regulatory landscape and provides context on how volatility will support industry growth.