Before the outbreak of the crisis, the world of derivatives was as exciting as a the running episodes of Sesame Street. Some minor changes, but basically every day the same. Press releases could be copy-pasted from the previous month. Volume of traded options went up, and bid-ask spreads went down. This has all been ruined by the uninvited partycrasher called “the creditcrisis”.
However, there is a little surprise here. According to Alan van Griethuysen, director of Euronext’s derivative trading, the bid-ask spread of options have actually shrunk over the last year. With lower volume and higher volatility swings this sure sounds like an unexpected fairy tale. It may be true the spreads have become tighter on average, but he obviously didn’t mention the quote size. The size on the screens are probably lower than before, and the tradable size in the broker market has definitely left the building. So are the brokers, who are facing a difficult times.
Mr van Griethuysen cheered on the comeback of the small trading firms. Klinkenberg, 323 and Nino are mentioned in the papers, as well as the new primary market maker Tibra. Here’s another thing Van Griethuysen forgot to mention. The valuable liquidity providerships are slowly evolving into a commodity. All option classes started back in 2002 with only three primary market makers responsible for quoting all series. Right now new licenses are introduced every year and now six (or even seven) primary market makers exist in almost all stocks. Van Griethuysen has opened the door, and turns surprised when traders actually walk in.