It’s getting tougher for even the big boys to make money as middle men in options trading it seems. This week we heard that the mighty Citigroup will no longer be market making in retail options.
While options will still be available for big clients, like funds and the very wealthy, it means that there is only one big Wall Street bank still in the business, namely Morgan Stanley. According to the Financial Times, Citi was no longer able to compete in what the FT is calling “a technology arms race” to be a fast and reliable venue for options trading.
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Citi said it decided to leave the retail options business following a strategic review this summer. It will no longer be servicing the broker dealers in the options space.
Boom times in online US options trading
Citi is leaving the business at a time when the US options market is enjoying a boom, and we expect to see more of the same in the run up to the US election in November. For example, there has been intense retail trading interest in options on the closely followed stocks, like Apple and Tesla. It was further fuelled by big market participants like Japan’s Softbank.
Average daily trading volume in the single name US equity options market hit a record of 18.4m in August.
For the small trader, the options market is now looking cheaper and cheaper to participate in.
Who is left in US retail options trading?
Those market makers who want to continue to compete in mass market options trading have to compete on much thinner margins than historically, especially in the US market. Many US electronic brokers, like Interactive Brokers and ETrade, have been hacking at their commissions in a bid to compete in this new market. Zero fee trading has not helped the big boys like Citigroup stay in the game.
Citigroup may have been on the way out of options market making for a while. It sold its automated market making operation to Citadel in 2016 and it is no coincidence that Citadel remains one of the dominant players in the retail options space in North America.
It is a trend we are seeing across the trading industry, with many big banks leaving the field to smaller, more agile players able to invest in the technology needed to compete. Other decisions are being made to formally partner in order to remain competitive.
Robinhood, one of the leading retail options brokers in the US, said it would be making multiple changes in the way options are managed in its trading app following the suicide of one of its customers. This includes more restrictions on who can qualify for options trading on its platform. The move will doubtless trim some of the volume from the platform.
Ironically, in the forex trading market we are seeing banks relying on a range of white labelling arrangements coupled with increasingly informal partnerships as they seek to control a rapidly changing FX space. The forex market share of the top five banks rose 41% in the first half of 2020, that’s up from 37% in 2016.