The below chart made me want to pen a piece on options - the options market is now bigger than the stock market:pic.twitter.com/4pskcraUxc
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This week's issue of Front Month is live - I take a look at 2020's rise of the options market and the impact to both stocks and exchanges:https://frontmonth.substack.com/p/options-are-eating-the-world …
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Options have a deep history, but on the fringes of mainstream finance. Their role in infamous crashes (like Tulip Mania) made them hated by the public and even banned in parts of the world.pic.twitter.com/f550svrqmA
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In the US, options came into popular use via bucket shops - a place where you could wager on stocks without owning the underlying. Bucket shops became huge in the late 1800s but were banned after exchanges lobbied them out of existence.https://twitter.com/HideNotSlide/status/1335683668078194689 …
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paper on the history of bucket shops and their influence on giving the common man access to the stock market in the 1800s.
Has a lot of parallels to today's retail trading craze:
https://elaineou.com/wp-content/uploads/2015/05/history-of-bucket-shops.pdf … pic.twitter.com/UO02SHFfIwShow this threadShow this thread -
An exchange-traded options market didn't appear until 1973. The Chicago Board of Trade needed new avenues of growth and decided to launch a dedicated options exchange. They named it the Chicago Board Options Exchange (CBOE)pic.twitter.com/5dBWWKso7m
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CBOE saw impressive growth in volumes with the help of the Black-Scholes formula, a sophisticated tool to help traders price options. Volumes went from 20,000 ADV in the 70s to 17.5 million ADV in 2019.
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Then came 2020. Free trading + COVID + stimulus checks + no sports = a golden age for retail betting on stocks via options:pic.twitter.com/q8ENhvmjU7
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If power moves from equities to options it would favor the top exchanges. Nasdaq, CBOE and NYSE control 85% of the options market and now make more money from options than equities:pic.twitter.com/ysrd7AWc34
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Exchanges and the analysts who cover them are expecting a new normal in options trading. Below comments from Nasdaq CEO Adena Friedman show an outlook involving higher retail participation in the options market:pic.twitter.com/A8l11hyDmm
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The bottom line - institutions and exchanges are preparing for a bigger options market than we've ever seen. Options are a less competitive business & result in higher volatility for the underlying equity. We're not going back to the old way soon.
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If you find this work interesting, please consider subscribing to get the biggest exchange stories in your inbox every Friday:https://frontmonth.substack.com/
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