A few derivatives notes have been circulating, so I figured I’d chime in with some thoughts on the current state of the options market. 1) Activity on maker taker exchanges continues to decline, while traditional exchange pricing models keep gaining share. To me, this says something interesting about the composition of end user flow. A growing portion of that flow appears to be less price sensitive and less tactical. On traditional pricing exchanges, customer orders can receive priority at a given price rather than competing purely on time priority. At the same time, there remains significant economics around PFOF and capturing uninformed or less price sensitive flow. The result is that market makers who historically competed aggressively with one another on maker taker venues have less incentive to fight for pennies when there are other pools of flow with potentially better economics. In simple terms: why fight another sophisticated participant for a tiny edge when there is an easier game elsewhere? 2) Volume in longer dated tenors continues to decline. Outside of retail, a lot of the mandate adoption across the asset management industry has increasingly centered around shorter dated options, from roughly 3M all the way down to 0DTE. That has left the back end of the term structure comparatively less active. When natural demand and transaction volume disappear from a part of the surface, liquidity providers have fewer opportunities to recycle risk. But they also have to compete harder for the limited flow that remains. To me, that makes the longer dated part of the surface increasingly interesting. Less volumes mean more attempt at competitive pricing from MM desks to try to attract flows from end users there. 3) Multi leg order tickets are declining while single leg tickets are increasing. I think there are two things happening here. First, sophisticated and tactical end users continue to get better at disguising their footprint. Instead of sending an obvious multi leg structure into the market, they can work individual legs separately, across venues and over time, making the ultimate position much harder to identify. Second, there appears to be more outright directional speculation occurring through options. Less sophisticated participants increasingly use the capital efficiency and embedded leverage of options to express a straightforward directional view on a stock rather than constructing a more complex volatility or relative value position. Those two groups can look identical at the ticket level while representing completely different types of flow. 4) Cboe’s share of options volume continues to decline. Cboe has historically been the elephant in the room and one of the biggest beneficiaries of the growth of the options ecosystem, but NYSE and other exchange operators continue to slowly chip away at that share. There is an interesting incentive dynamic underneath this. Market makers competing for flow on smaller venues may have a greater incentive to tighten markets and improve pricing in order to attract volume. If you primarily interact with flow on the dominant venue, the economics can be different. You don’t necessarily have to sacrifice as much edge to attract liquidity because so much of the liquidity naturally comes to you. Put differently, one group is fighting to get invited to dinner. The other already has dinner being brought to the table. There are a lot of interesting takeaways from how these four trends interact with one another, particularly around where informed flow is migrating, where competition among liquidity providers is increasing, and where pricing inefficiencies may ultimately emerge. I’ll leave those conclusions unstated. Charts via Bloomberg Intelligence, XYT.