Silver as an investment

“It’s A Vicious Cycle”: Goldman Abandons Equity Options Market-Making As Vol Collapses

October is historically the most volatile month of the year, but in 2017 – the average volatility of US equity markets dropped to an all-time record low…


… And you know something's wrong when, just like in early 2007 when the crash in vol killed the swaptions industry – just before all hell broke loose – Goldman Sachs is pulling back from U.S. options market-making on exchanges.

The Wall Street Journal reports an extraordinary calm in markets has choked the trades that typically funnel through banks’ derivatives desks.

Waning stock volatility is pressuring the equity derivatives business, suppressing revenue and driving traders out of what was once a key Wall Street moneymaker.

Goldman Sachs pulled back from U.S. options market-making on exchanges, a spokeswoman for the firm said Thursday.

It’s the latest to withdraw from the business of continuously buying and selling contracts on venues using automated programs.

Revenue in an equity derivatives business that focuses on listed options shrank by 41% in the U.S. and by 28% globally during the first half of 2017 from the same period a year ago, according to data firm Coalition, which tracked 12 of the biggest banks in the world.

The number of employees in equity derivatives at banks has contracted by about 10% since 2012, Coalition data also show.

“With lower volatility this year, we’re seeing less of those trades come through,” said Coalition’s research director Amrit Shahani.


“It’s a vicious cycle.”

OptionMetrics LLC founder David Hait said investors tend to think of options as insurance for stock bets.

With U.S. equities in an eight-year bull market, people are asking, “What do I need an option for?” he said.

After 16 years of trading options during which he ascended to managing director at Bank of America and Deutsche Bank, Zahid Biviji left Wall Street this year, citing fewer opportunities in the space, partly caused by regulations imposed after the financial crisis.

“I had a good run making money,” Mr. Biviji said, noting that “a lot of the derivatives business is in survival mode right now.”

But as equity market volatility has collapsed to record lows, another asset class has sprung up with record-breaking-high volatility: cryptocurrencies.

“For the most part, you’re not going to get wealthy like you could in the late ‘90s or early 2000s” in equity derivatives, said Arthur Hayes, the Hong Kong-based co-founder and chief of Bitcoin Mercantile Exchange, who traded derivatives at Citigroup and Deutsche Bank.

“In cryptos, you actually get to do what you like to do: trade.”