US Options Market Making 2013: Scale, Scope and Survival

Options market making is a cutthroat business. Volumes are on the decline. Volatility is stagnant. Spreads are compressing. The number of exchanges has grown to 11 and more are on the way. Market makers are exiting the business, transitioning operations into hedge funds and advisory services or simply heading to the warm beaches of the south.

Higher technology expenses, as well as increased regulatory and compliance costs are forcing many firms to exit the business. These rising costs of doing business are occurring in an era of declining profitability with attrition becoming rampant. Small, specialized market making firms have become a dying breed with the few that remain fighting for survival.

Options market making firms are also seeing increased competition from new entrants seeking to leverage technology and low latency capabilities, especially in more liquid options series. The competition is being met with open arms however, as market makers believe these firms play a valuable role in providing liquidity to the options market.

Structural shifts are creating an environment where the ability to scale and operate across the fragmented exchange landscape is the key to success. Large firms are poised to increase their dominance as they attack the market with a combination of technology, relationships and staff expertise to create market presence across the trading landscape.

Although technology plays a key role in the ultimate success of a firm, the ability to successfully navigate the nuances of the fragmented landscape is critical. Access to order flow remains paramount to success and firms neglecting to focus on relationship aspects of the business face limited opportunities for growth. Ultimately, success depends on managing the combination of technology, market structure, and order flow to create a profitable business.

US Options Market Making 2013: Scale, Scope and the Will to Survive

This report is based on conversations with 26 listed equity options market making firms active on one or more of the 11 US options exchanges. The firms we interviewed included a mix of large and small firms, with the firms as a group accounting for roughly 45% of total volume. Our interviews covered a broad range of topics including the current and future business environment, the uncertain regulatory framework, the critical role of technology and the most promising growth opportunities.