Comprehensive Retail Equity Option Review: Q2 2024

“If you don’t have time to do it right, when will you have time to do it over?”
John Wooden

Following are 14 charts – updated through June 2024 – representing Alphacution’s ongoing analysis of retail investor engagement in US equity option markets. Retail investor engagement is an increasingly important component of these markets because it’s the last of the human-centric customer constituencies. All other customer constituencies – representing various types of institutional customers – have developed increasingly automated strategy implementations and therefore are less likely to be “emotional” in their response to market events…

Below, you will notice that – in an effort to maximize accuracy – Alphacution has developed “adjusted” and “unadjusted” versions of its retail option market share estimates. The adjusted version of these estimates was triggered by option data reported by Robinhood where reported option volume differed from estimated option volume by an average of 1.6% of total customer option contracts traded per month – beginning May 2021. Of course, this is not a big difference. However, if the cause of the difference was relevant to other retail brokers – as Alphacution believes is likely – it could have a compounded impact on the accuracy of Alphacution’s market share estimates…

Alphacution believes that this difference is caused by zero days to expiry (0dte) options that do not trigger PFOF. This would mean that the volume from these options does not show up in the Form 606 data that we use to estimate total retail option volume. As of June 2024, Robinhood data shows that the difference between adjusted and unadjusted versions of our retail option market share estimates totaled 11 million contracts, or 2.7%…

One of the key highlights from Q2 2024 was the final consolidation of TD Ameritrade‘s 606 reporting into that of Charles Schwab, given Schwab’s $26 billion acquisition of TDA in late 2020. [The same has occurred with the transfer of E*Trade 606 data into Morgan Stanley Smith Barney (MSSB) 606 data. However, the key difference being that there was no prior archive of MSSB 606 data like there was with Schwab.] Anyway, the TDA consolidation puts Schwab and Robinhood as the two largest retail option brokers – by far – as of Jun 2024; each with a 31.7% share of unadjusted retail equity option volume – or nearly two thirds of retail option volume on a combined basis. Fidelity (12.0%) and MSSB / E*Trade (10.6%) are now the closest competitors in terms of scale in option trading…

See “Robinhood Battles Schwab For This Top Spot” for more details…

Also, in terms of wholesale option market makers, IMC Financial Markets continues to gain market share; reaching a high of 29.1% of retail option volume as of Jun 2024. This growth appears to be at the expense of the market shares of Global Execution Brokers (an affiliate of Susquehanna International Group) and – likely – Wolverine Trading, as well. That said, we are learning that wholesale market maker share is influenced – perhaps, heavily influenced – by the nature of retail option order flow. So, for instance, since IMC seems to prefer short duration options (including 0dte), increases in that type of order flow tends to increase IMC’s share while decreasing other market makers’ shares because they have less preference for short duration order flows…

One more thing: In the 8^th chart below, Alphacution includes Interactive Brokers (IBKR) in the “volume by broker” analysis, even though we have long held that IBKR is more of a “Pro-tail” broker than a pure retail broker. Sometimes it’s helpful to include IBKR because they provide good transparency on their customer activity levels in options. In this case, IBKR’s reporting was current through Jul 2024 whereas the 606 dataset was only current through Jun 2024. Long story short, IBKR’s disclosures confirm that July was a strong month for option trading – in fact, it was the first month in history with over 1 billion US equity option contracts traded in a single month – thereby signaling that retail option volume for brokers like Robinhood and Schwab will continue to show gains…