With a record year behind us, we wanted to follow up our 2018 Options Market Review with an analysis of the options market in Q1 2019. The market experienced a drop in volatility from the highs of Q4 2018, which also brought a reduction in equity option volumes. Market quality benefited from the low-volatility environment as quoted size and some spreads improved over the quarter and options volumes became significantly less concentrated in the top 50 symbols.
Volatility was driven downward as the VIX closed below 13.00 for the first time in over 5 months on March 15, 2019. Lower volatility depressed options volumes, with Q1 2019 equity option ADV finishing at 17.3mm, down 12.9% from the prior quarter. Despite this reduction in volume, Q1 2019 was the second most-active Q1 of all time, trailing only Q1 2018.
As volatility decreased, posted size increased significantly. Notional size in Penny class symbols increased over 75% and in Non-Penny class symbols increased over 80% from Q3 2018 to the end of Q1 2019. Market-wide quoted bid-ask spreads (measured in basis points) stayed relatively flat as spread widths tightened at the same rate as option values decreased. Quoted spreads in Non-Penny symbols were an exception as they tightened by 28.5%.
Q1 2019 also saw reduced equity option volume concentration. We found volume less concentrated in the top 50 symbols by ADV, and market volume attributed to the top 10 symbols dropped 8%. Volumes actually increased from the prior quarter in symbols ranked 51 through 350, which broadened market activity into previously less-liquid symbols.
Options markets currently show an implied probability of VIX being 15 or lower of about 65% 3 months out and 55% 6 months out. The reduced uncertainty yielded an improvement in displayed options market quality with larger posted size and flat or narrower bid-ask spreads. Although volumes have decreased in the most active options, interest in some of the less active symbols increased to this point.
Multi-list options broke nearly all volume records in 2021, driven by the growth of retail participation: daily records (24 of the top 25 volume days of all-time came in 2021), monthly ADV records (April was the only month from 2021 not in the top 12 all-time), and yearly ADV records (37.3M ADV in 2021 was nearly 10M more than in 2020 and double the ADV in 2019).
Increased retail activity in the equities market has affected which stocks are trading the most, and when and where those stocks trade. We’ve previously highlighted retail’s impact on pre- and post-market volume and the opening auction, and now focus on the period immediately after the opening auction. Market participants often avoid this time of day due to higher volatility, an approach worth re-evaluating given current trends.
As the home of ETFs, the NYSE continuously works to strengthen market quality and provide the optimal trading environment for listing and trading ETFs. In April 2021, in service of this goal, the NYSE introduced new requirements and incentives for its industry-leading NYSE ETF Liquidity Program, including the assignment of additional market makers ("Less Active ETF Leads") for new and/or low-volume ETFs.