Citadel Securities’ David Silber Says Stop Blaming Options

(Bloomberg) -- While burgeoning interest in options has been a big feature of the summer stock market, it isn’t the only reason equities surged or sold off, according to David Silber, head of institutional equity derivatives at Citadel Securities.

Yes, increased retail trading, along with separate buying by large institutions, contributed to swings in Nasdaq 100 shares -- whipping up volatility as dealers hedged against options price drift known as “gamma.” But many other things are at work, says Silber, who confined his comments to broad market trends and declined to comment on any specific trader or investor.

Of course, any argument that says options aren’t to blame for big swings in cash equities accords with the worldview of Citadel Securities, one of their biggest matchmakers. The market-making firm accounts for more than a quarter of all U.S. equity options volume. But while Silber has seen significant and steady growth in retail options activity this year, he says there’s too many things bearing down on stocks to lay all the swings to derivatives.

Below are more thoughts from Silber.

• On the bout of volatility:

“The moves in the market can be more one way or the other based on gamma positioning and you’ve probably seen some of that as many dealers are currently short options due to market demand,” he said. “Other potential factors include retail stepping back a bit to reevaluate as the market takes a breather, as well as some profit taking from the near 80% increase we had seen since the lows earlier this year.”

• On multiple occasions, more options on stocks like Apple and Tesla traded than did options on the largest S&P 500-tracking exchange-traded fund, which trades under the ticker SPY, according to Silber:

That “is a definite shift in market dynamics -- where single stock volume out-paces index volume, with the retail world driving that, perhaps. And then you add on top of it, the story of the large institutional investor, which adds in a new element from a risk perspective.”

• On options market growth:

“Options market dynamics are becoming a larger part of the equity market, but I would not confuse them for being the largest part or the only part of the equity market,” he said by phone. “The large Nasdaq run up that we’ve seen, as well as uncertainty around the virus, elections and international trade, there are many factors that lead to investor sentiment and buying versus selling dynamics in addition to what is getting all the attention right now.”

• On volatility dynamics:

“The Nasdaq selloff over the last few days has been fairly orderly, you’ve not seen implied volatility take another leg up and yesterday we actually saw implied vols tick a bit lower in a new spot down, vol down regime. The implication is that some of this might have even been in the market already and that a pullback isn’t that big of a surprise. What you find though are people now looking for what’s leading or causing that pullback, and that’s where things like growing retail participation and the large institutional buyer start to drive the narrative. So while certainly a part of it, is it the only thing happening in the market right now? No.”

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