Wall Street Exchanges Shorten Options Trading Wait Period for New Listings

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Wall Street Exchanges Shorten Options Trading Wait Period for New Listings
Credit: © Reuters.

In a significant shift in trading rules, major Wall Street exchanges have reduced the waiting period for options trading on newly listed companies from four sessions to two. This change, which took place quietly over the summer, reflects the growing importance of options trading in capital markets, with volumes having doubled since 2019.

This revised rule was evident in recent large initial public offerings (IPOs) of Arm Holdings (NASDAQ: ARM ) PLC, Maplebear Inc. (also known as Instacart), and Klaviyo, Inc. Each company saw options trading commence just two days after their shares began trading.

The change in the trading timeline enables investors to access additional data earlier, thus facilitating more informed decision-making during a company's initial trading days. It also provides insights into market sentiment, which can be particularly useful during the often volatile early stages of a stock.

The new entrants attracted substantial interest from traders. For instance, Instacart drew about 23,000 options contracts two days after its shares started trading. These contracts were nearly evenly divided between calls, predicting a stock rise, and puts, preparing for a decline. Arm experienced even greater activity on its first day of derivatives trading with volumes triple that of Instacart's, predominantly favoring bearish bets. Klaviyo saw relatively less interest with approximately 1,000 contracts on its first day, despite having a similar market capitalization to Instacart.

This modification in the trading timeline was prompted by an increase in large new listings during 2020 and 2021, despite a slowdown in the number of overall IPOs. The industry sought faster listing of options than previously allowed, provided that listing criteria were met.

Nasdaq, Inc., which operates six U.S. options exchanges, stated that both investors and liquidity providers agreed that shortening the timeframe would be advantageous for larger new issuers.

To implement these changes, Nasdaq and other exchanges filed with the Securities and Exchange Commission in the summer. However, there are restrictions: a company must have a market capitalization of at least $3 billion for its options to be eligible to trade within two days of the shares starting trading.

While such procedural adjustments may carry potential risks, particularly with speculative instruments like options, early indications suggest share prices did not experience increased fluctuations when options began to trade. For example, neither Instacart nor Arm saw significant price swings in the first few days of options trading.

This change provides investors with tools to assess overall market sentiment by examining open interest, put/call ratios, implied shares to be sold, volatility trigger zones, gamma tilt, and more.

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