Using Corporate Event Data to Navigate Low-Latency in Equity Options: Strategies for Institutional Traders and Market Makers
Options remain the closest community of market participants, and the murkiest. Even to its veterans, the options market can seem uncanny; its trading has always been full of mystery. Rumors abound of big-wins and equally huge losses turning on a dime, and there is common sleight of hand. It evolves at its own pace. But wild swings and tectonic shifts can also be born of simple mistakes. Such was the case in 2015, when a pair of microprocessor manufacturers was first reported to be in merger talks. In only a few seconds, the news quietly generated a sizable option contract on one of the companies’ stock prices. Initially costing around $110,000 for more than 300,000 shares, the option went from completely out of the money to worth $2.4 million in less than half an hour.
The reporting subsequently proved wrong, adding intrigue and furrowing eyebrows. But in the end it wasn’t the windfall or the scant information that turned out to be significant; rather it was the speed. The option, most observers agreed, could only have been generated by an algorithm—an incredibly fast one, at that. While neither the first nor certainly the last, this was some of the most dramatic public evidence yet that low-latency and high-frequency trading (HFT) techniques had arrived—and for that matter, could work—in a space where they had only been casually embraced before.
Below we explore new trends in the development of event-based trading signals in the equity options market. Ultimately, we conclude that investors must construct a dual strategy—combining measurable post-trade execution quality analysis with pre-trade contextualized indicators of price movements—to effectively mitigate downside risk and exploit market inefficiencies with options.