Jon Stone is the founder/CEO of analytics firm TradeAlgo.com, headquartered in Manhattan, New York.
getty A truism is an obvious or self-evident statement that is hardly worth mentioning. For example, when best-selling author Michael Lewis said, 'The United States stock market, the most iconic market in global capitalism, is rigged,' in this case, the truism should be self-evident. There is no question that the stock market is rigged, but why? Markets have changed dramatically since options trading became popular. As of 2020, Goldman Sachs reported that the average daily value of options traded exceeded that of underlying stocks for the first time. The popularity of options continues to grow today. But for retail investors, this phenomenon has resulted in a massive disadvantage. It is common for financial data to be built around stock volume. On a stock chart, investors typically see volume bars at the bottom.
'But isn't that outdated?'
By looking at just half the picture, they will only get a partial picture of what's really going on. The reason is simple: Stock volume is not counted when buying an option contract, so it won't appear on a stock chart. Because of this, a stock chart is not even an accurate representation of the underlying stock. This brings us to the next problem: Retail investors do not have access to low-latency options data from OPRA (the Options Price Reporting Authority). Unlike internet sites that are popular with the general public, hedge funds and institutions receive option data differently. It's generally necessary to open an account with a brokerage app and sign a bunch of legal documents in order to gain access to even a small window of accurate options data.
Here are two examples of why traditional financial sites are completely outdated when it comes to painting an accurate picture of an underlying stock. The first problem is that retail investors cannot quickly determine the sentiment of a stock in the options market. There are two types of options: calls and puts. Generally, investors are bullish if they buy calls. Bearish for puts. So, looking at whether institutions are buying more calls or puts could quickly inform retail investors of the current sentiment. This is known as the put-call ratio.
For example, a beaten-down stock had a terrible month. After that, its put-call ratio began to shift to favor calls. This could indicate that the stock is due for a trend reversal.
It is almost impossible to find this type of information on mainstream financial websites despite their immense value.
Let's look at the second example. Investors lack easy access to real-time options flow. Suppose an institution purchased an outlier option contract worth $10 million for a stock. It could be a bullish sentiment, right? This could be the beginning of institutional support that propels the stock price in the near future.
This theory can be distilled down to the law of supply and demand. Institutions control roughly 80% of the stock market. If institutions become enamored with a stock, they would be pouring in with millions of dollars' worth of orders. The size of these orders could lead to a surge in a stock's price.
As retail option activity grows, customers are increasingly demanding full depth-of-book option data. A few of the leading technology companies captivating this pent-up demand include:
• Bloomberg: In 2018, Bloomberg announced that its flagship market data feed, B-PIPE, is now available on Amazon Web Services (AWS). By using a common API, clients can simultaneously stream data on 35 million instruments across all asset classes.
• Refinitiv: Refinitiv is owned by the London Stock Exchange Group and offers analytics like real-time implied volatility and Greeks, at-the-money volatility indexes, and volatility surfaces by delta and moneyness.
• CBOE: CBOE's option sentiment data is a product that facilitates both quantitative and qualitative order flow, as well as identifying unusual option activity, directional biases, volatility changes and indications of retail interest.
• TradeAlgo: With artificial intelligence-powered filtering, our company's data platform detects unusual trades in options markets in real time.
There is one thing that is clear from all this much-needed competition: Retail investors should be able to keep up with Wall Street's technological advancements. Despite Michael Lewis' truism that 'the stock market is rigged,' perhaps technology will make it so it won't be that way for long.
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