Challenges To Developing Options Markets John Tierney Managing Director The Options Industry Council
Potential problem areas are: l Distortion of underlying market l Liquidity l Risk management l Availability of hedging mechanisms l Education l Access
Do options distort the underlying market? l Improve liquidity: tighter spreads and greater depth l Increase trading volume, trading frequency and transaction size l Overall, option listing increases underlying market price efficiency Studies of equity markets suggest options:
Liquidity in electronic options markets l Official liquidity providers? l Choice of model – continuous quotation vs. telephone market l Encouragement of liquidity providers vs. discipline
Risk management l Importance for market participants, exchanges, clearing houses and regulators l Need for sophisticated and appropriate models which are inexpensive l Flexibility in meeting margin requirements will encourage more activity without increasing risk
Hedging mechanisms l Particularly important for liquidity providers l Ability to borrow underlying instrument l Liquidity in underlying in similar maturity
Education l Who are target audiences? l Who will provide? l Will it be self-financing? l Education v. marketing
Access l Barriers to entry l International access allows risk capital into the market l Importance of international business l Benefits of a wide range of participants
John Tierney