US equity markets are building infrastructure to accommodate 24-hour trading, and the options industry is watching with rollout with great interest for what it may portend for the overnight trading of puts and calls.

Traders Magazine sat down with Aniceto (Andy) Solares, Principal of Regulatory Policy at OCC, and Mike Hansen, Chief Clearing and Settlement Officer at OCC, on May 6 at the Options Industry Conference in Palm Beach Gardens, Florida.

The conversation has been edited for length and clarity.

Andy, you moderated the ‘No Closing Bell: Reimagining Options in a Continuous Market’ panel at OIC. Where does the industry stand with regard to 24-hour trading?

It was interesting to me to hear a strong appetite for a pause, or some kind of break every day.

That aligns well with the perspective from the OCC white paper published last year in which we proposed a phased model to 22.5 or 23.5 hours is probably best for US listed options.

But at the same time, we have a lot of market participants we need to consider. There seems to be different perspectives based on the camp you sit within: of the digital natives, more of the traditional finance or exchanges like we heard on the panel.

We’re in an exciting place, kind of an inflection point of how and where the market is going to transition. If we’re having this conversation in 12 months or 24 months, I think we’ll be there. But there’s a lot of critical work needed to get there.

Mike, what are your thoughts from the operational side?

First I’d like to take a step back to emphasize that OCC has been clearing on an overnight cycle  for more than 10 years now. We clear both index options and index futures through CBOE and CFE. So operationally, the pipes are in place, we know what we’re doing, and we know the risk management piece of it. So that’s all good.

The industry is taking baby steps. For example, some exchanges have already filed for extended trading hours —  two hours on the front end and a 15-minute session on the back end. I think that’s an eventual move to an expansion beyond that, based on the volume and the quality and liquidity of the markets in those times.

At this conference we’ve heard from market making firms who want to make sure there’s liquidity, because if there’s demand they’re going to be making markets.

We’ve also heard from an exchange operator that is taking a wait-and-see approach – they’re not going to rush to file anything now, they’re going to wait to see how it works. If the volume is there, they will want to participate eventually but for now they’re not going to.

We’re not going to be at 23/5 or 24/7 in the options market anytime soon. As a derivatives market, we follow the equities market, which will be the first mover. Options will move following that, but probably not at a full 23/5 cycle. I think we’ll have a first iteration with two hours on the front end and a curb session on the back end – we’ll expand our work from there if volume warrants.

What is OCC doing on a day-to-day basis with regard to extended-hours trading?

MIKE:

We’re agnostic in that we’re not pushing an agenda one way or the other. As a market utility, we have to serve our participant exchanges.

The gist of our white paper is that if we are going to expand trading hours, there are three or four things that need to be resolved by the industry, which spans OCC, DTCC, our clearing members, and participant exchanges.

We are evolving that conversation now internally, to develop our position for what it will take to move forward and evolve the system. We’ll identify the issues from OCC’s perspective, and propose how we can solve them. From there we want buy-in from the industry and make sure that we’re in line with their expectations.

ANDY:

From my perspective, I’ve been tracking a lot of the conversations in Washington, DC around how the Federal Reserve could facilitate opening their payment railways in and around-the-clock fashion as well. To what Mike said, when we put the white paper out, we identified a number of considerations, including staffing and liquidity.

Another big piece is going to be the movement of money, the movement of collateral. Right now, absent national payment railways being open, we’re taking a hard look at leveraging innovation, leveraging new technology, to see how money can move outside of legacy banking hours. And at the same time, we’re trying to see if the payment railways themselves can get to be around-the-clock a little bit faster than what they’ve put out as their plan.

MIKE:

I’m encouraged that the industry is working collaboratively. There are three options-specific committees that OCC participates in, which all met this week at OIC, and far and away this is the number one topic.

We have subcommittees of that group getting together to talk about logistics issues, corporate actions, things like that. We’re all acknowledging the need to work together and answer the questions that need to be answered.

Of the issues that need to be resolved, how are they connected and what’s most important?

MIKE:

They’re not dependent on one another, they’re all separate issues that we’ve identified and they all need to be solved. I don’t know that there’s any priority. From my personal perspective, I feel corporate actions is my highest priority, because already it’s very challenging for us and corporate actions are becoming more numerous and more complex. Now we have down times, maintenance windows where we can analyze proxy statements, come up with adjustments, post memos, and do all the work that has to be done. But the time for that is going to be compressed.

If you think about it, OCC is at the end of a string of events that we’re dependent on and we’re reacting to. The end piece is OCC posting a memo to our public site – that’s what people then adjust their trade parameters upon. So if we’re talking about ETF issuers, for instance, we’re dependent on that ETF issuer making the determination of a certain type of capital gains tax treatment. That’s not something that OCC decides. That then flows through all of these different events that leads to us determining how these options should be adjusted, this is how the memo should be written. That gets posted and it becomes official.

What have you learned about the industry’s appetite and readiness for extended-hours trading at OIC?

ANDY:

I was very surprised at walking out after the panel, how many people stopped me to say, it was very insightful that we tried to close out on the human dimension of it. That was powerful. We can talk about technology and we can talk about solutions, but we’re going to need people no matter what. So that was an amazing takeaway for me.

MIKE:

For me it reaffirmed what we’ve heard in previous conferences including at FIA in March. It’s just a continual solidification of this concept that this is going to happen. When it’s going to happen and how it’s going to happen are questions, but this is an eventuality for our industry. The equities market is in the midst of it right now, and it’s flowing into the options exchanges.

So whether you’re gung-ho about extended hours trading or resigned to it, it’s going to happen and we need to be prepared.

More broadly, what does clearing 70 million contracts a day look like from the only organization that sees the full market?

MIKE:

This is where I knock on wood – our day-to-day processing and our systems are working very well with these elevated levels of contract volume. We’ve avoided any sort of significant incidents or issues, and it’s not just us, it’s the entire industry.

Everything and everyone are connected and dependent on one another. The exchanges send their matched trades to the OCC. We consume those on a real-time basis, validating the trades as they come in, and at the end of the day, we balance down to the contract with each of our 18 exchanges.

Every single day we’re balancing 70 million contracts with the exchanges. Our clearing members come in throughout the day and after the close to move positions around and make  transfers, which has to be completed with their processing before we can move  on. Finally, another big component is that we have to have good pricing data in our system which we pull from our data vendors.

So those three things have to happen and balance before we can move on with our overnight processing cycle.

We‘re always testing our systems, we go two and a half times X volume for our high volume testing just to test and see how the system performs, and all of our high-volume tests have come back positive. So we’re not anywhere close to an edge of volumes straining the system or having production issues.

ANDY:

All of that is a testament to how OCC has invested in human capital. Mike’s team is astounding, and it’s a big reason why we have had such success amid increased demand and increased market activity.