The Growth of Retail Options Trading
Retail options trading volumes have increased substantially over the past decade, accelerated by zero-commission options trading and mobile app interfaces. Many retail investors now trade single-stock options, index options, and short-dated options. The bid-ask spreads in options markets are typically wider than in equities, which means higher potential PFOF and higher implicit trading costs.
PFOF Economics in Options
Per-contract PFOF rates in options are typically higher than per-share rates in equities. A complex options order may generate substantially more PFOF than an equivalent equity order. This means broker routing decisions in options markets have larger financial implications for both brokers and market makers, and potentially larger execution quality implications for investors.
Options Market Maker Concentration
A small number of sophisticated options market makers, including Citadel Securities and Susquehanna International Group-affiliated firms, dominate retail options order flow. The concentration in options market-making is even more pronounced than in equities, reflecting the technical complexity of options pricing and risk management.
Regulatory Response to Options PFOF
The SEC's 2022 market structure reform proposals addressed options PFOF as well as equity PFOF. Options-specific reforms included proposals to increase order competition and improve execution quality monitoring. The status of these options-focused reforms is part of the broader market structure reform picture.