Peak6 Says Trading Floor Closures Hurt S&P Product Liquidity

(Bloomberg) -- The closure of U.S. trading floors has taken some liquidity out of the options market, according to Peak6 Investments LLC.

It has become more difficult to trade options on certain S&P 500 products, said Neel Shah, a senior trader at the options trading firm. Some of the volume has migrated to the all-electronic SPDR S&P 500 ETF Trust.

“If you’re a broker, you have access to tons of liquidity providers in the pit. Now, that doesn’t exist anymore,” Shah said in a phone interview. “All those brokers are upstairs, and to call up 10 people is going to take longer to source that liquidity.”

For example, open interest in put options on the S&P 500 has not really recovered since March contracts expired, while the same measure in the SPY ETF has climbed, he said.

Peak6 Says Trading Floor Closures Hurt S&P Product Liquidity

Stock exchanges around the world have been forced to shift to electronic trading in order to control the spread of the coronavirus. CME Group Inc. closed its Chicago trading floor on March 13, while the New York Stock Exchange shut its equity and options trading floors on March 23 after an employee and a person who worked there both tested positive.

Still, there are signs the disruption to the market is coming to an end, according to Shah. While futures bid/ask spreads were significantly wider in the peak part of the rout due partially to the lower liquidity, they are “getting back to normal” now, he said.

“Though liquidity does shift in times of extreme volatility, market participants continue to manage their risk in our S&P 500 options products,” a CME spokeperson said via email. “With block and electronic trading available, S&P 500 options that traditionally have been trading on the floor have averaged 10,500 contracts per day on the screen since March 13. Further, since that time, all S&P 500 options on CME Globex have averaged 859,000 in volume per day, a 36% increase over 2019.”

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