Nasdaq bets on boom in ‘zero day’ options with new contracts

Trading in a controversial type of derivative known as “zero-day” options is spreading to Treasury and commodity markets, as Nasdaq and other exchange groups try to replicate a boom that has transformed trading in US stock indices. 

Nasdaq this week listed a series of new options contracts tracking some of the most popular exchange traded funds investing in gold, silver, natural gas, oil and long-term Treasuries. 

Options contracts give investors the right to buy or sell an asset at a fixed price by a given date. Trading a contract on the day it expires is known as zero-day trading and can be used to bet on or hedge against extremely short-term market moves.

Zero-day trading in options tied to the S&P 500 index boomed in popularity during the coronavirus pandemic. Initially viewed as a temporary phenomenon driven by speculative retail traders, the surge sparked concern among some analysts and regulators that it could create systemic risk by exacerbating market moves.

However, Nasdaq’s move is the latest sign that exchange groups are betting that zero-day trading will become a longer-term trend across different assets.

Several industry executives said they expect more US exchanges to follow suit with additional options on ETFs that do not track a specific index now that Nasdaq’s has been approved by regulators.

Greg Ferrari, Nasdaq’s head of exchange business management, said investors were looking for ways to take positions around risky events such as Federal Reserve meetings.

The new listings will make it easier to zero-day trade by adding contracts that expire on Wednesdays, in addition to the existing Friday expirations. Options tend to become cheaper the closer they are to expiry, so adding more days of the week on which contracts expire reduces costs for investors.

Ferrari said Nasdaq hopes to add more contracts expiring on different days of the week over time if the options prove to be popular.

“When investors are trying to precisely manage their exposure, having a defined product that expires on same day as the event itself is exactly what they are clamouring for,” he said.

In August of this year, zero-day options accounted for 50 per cent of overall S&P 500 options volume, according to exchange group Cboe, compared with 5 per cent in 2016.

Exchanges and market makers have pushed back against claims that zero-day trading could cause volatility and have disputed the popular image of it as a market dominated by retail gambling.

“We see this phenomenon servicing all types of investors,” said Ferrari. “There are lots of different use cases for short-dated options . . . all the evidence says the risk profile of the trade is contained because of the deep liquid ecosystem. That’s why we’ve taken this measured step forward.”

The new expiries were approved by the Securities and Exchange Commission.

Recent moves by Nasdaq’s rival Eurex, which is owned by Deutsche Börse, suggest the zero-day trend is starting to gather momentum in Europe too. Eurex launched daily expiries for options on the Euro Stoxx 50 index in August. Last week, it added similar options tied to Germany’s benchmark Dax index. 

Liam Smith, head of US corporate strategy at trading firm Optiver, said “having more granular ability to express an opinion [through new expiries] makes sense.”

He said Optiver was supportive of a further expansion to enable zero-day trading in options tied to single stocks, but said such a move would be more complicated and is unlikely to come before the end of next year.

This article has been amended to clarify the share of zero-day options in overall S&P 500 options volume in August