(Bloomberg) — Wall Street’s biggest exchanges quietly altered rules this summer, fast-tracking investor access to options trading on newly listed companies.
(Bloomberg) — Wall Street’s biggest exchanges quietly altered rules this summer, fast-tracking investor access to options trading on newly listed companies.
This month’s large initial public offerings — Arm Holdings PLC; Maplebear Inc., known as Instacart; and Klaviyo, Inc. — each saw options trading two days after shares started to trade. Under old rules, the exchanges waited four sessions to allow for such trades.
The seemingly minor shift reflects the growing importance of options trading in capital markets. Volumes of these contracts are booming — doubling since 2019 — and have become central to both institutional and retail strategies alike. Marketwatchers say the changes gives investors more insight into market sentiment, helping them to make profits in a stock during its often volatile infancy.
“The recent revision of the option rule, reducing the post-IPO waiting period from four days to two, marks a notable evolution in the trading landscape,” said Rohan Reddy, director of research at Global X Management. “It equips investors with previously unavailable data, allowing for more informed decision-making during a company’s initial days of trading.”
Traders flocked to options of the recent entrants. On Thursday, two days after the shares started trading, Instacart attracted 23,000 options contracts, roughly split between calls, betting on a stock rise, and puts, positioning for the opposite. In its first day of derivatives trading, Arm saw volumes triple that size, with a heavy weighting toward bearish bets. Klaviyo had more muted interest, with open interest in its first day coming in closer to 1,000 contracts — despite its market capitalization being similar to that of Instacart.
While the number of IPOs had stalled over the past year, Meaghan Dugan, head of options at the New York Stock Exchange, said that a robust pipeline of large new listings in 2020 and 2021 piqued the industry’s interest in changing the trading timeline.
“With so many new issues, industry members requested to have options listed faster than the listing process allowed at that time, assuming listing criteria were met,” she said.
Nasdaq, Inc., which operates six U.S. options exchanges, added that industry participants — from investors to liquidity providers — agreed that the shorter timeframe would be beneficial for larger new issuers.
Eyeing this fall’s slate of IPO’s, Nasdaq said it filed for the changes with the Securities and Exchange Commission in the summer, after NYSE filed in April.
There are limits though. For a company’s options to be eligible to trade within two days of the shares starting to trade, it must have a market capitalization of at least $3 billion.
“Collectively, we all came to the consensus that essentially, options being available sooner helps mute volatility” in the shares, said Greg Ferrari, Nasdaq’s head of exchange business management. “The transparency and the resiliency of the listed options market helps investors make some prudent choices around how the stock is going to perform.”
But even minor procedural tweaks come with potential risks, particularly when they pertain to speculative instruments like options. In theory, high volatility coupled with lower volumes in newly-listed companies could prime stock prices for manipulation by options traders — think GameStop Corp., circa 2021.
That said, early signs indicate share prices did not fluctuate more when options started to trade. The underlying stock of neither Instacart nor Arm saw particularly violent moves in the first few days of options trading. The former, in fact, saw swings of less than 3% in its third and fourth days, compared to swings of more than 10% in the first two.
The change “empowers investors to gauge overall market sentiment by analyzing open interest, put/call ratios, implied shares to be sold, volatility trigger zones, gamma tilt, and more,” Reddy said.
(Updates to add information about filing dates in the ninth paragraph)
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