Optimal Aims to Disrupt US Retail Options Trading | Risk.net

A new player, Optimal, is entering the competitive world of US retail options trading, aiming to disrupt the established order dominated by market makers like Citadel, IMC/Dash, and Jane Street. Founded by Brian Donnelly, who previously established Volant Trading in 2006, Optimal is assembling a team of market makers to challenge the existing wholesalers who handle order flow from brokers such as Robinhood and WeBull.

Donnelly’s initial foray into this market faced significant hurdles. Volant Trading struggled for three years to gain traction as a wholesaler for WeBull, leading Donnelly to almost abandon the effort just over a year ago. The challenge lies in the comprehensive nature of the service retail brokers demand. These brokers require wholesalers capable of handling all types of options – from single stocks to indexes and, increasingly, zero-day to expiration (0DTE) contracts.

The timing of Optimal’s entry coincides with a period of significant change in the structured products market. According to Risk.net reporting from January 26, 2023, JP Morgan is attempting to become “the wholesale Amazon of structured products,” doubling its US structured notes issuance in 2022 to $37 billion. This shift reflects a broader trend away from traditional autocallable bonds and towards a wider variety of structured products, including those linked to fixed income, currencies, and commodities.

UBS is also demonstrating innovation in the structured products space, particularly in equity derivatives. A November 26, 2024 report highlights the success of a “rainbow” dispersion trade, a new product developed following the merger with Credit Suisse. This strategy, which skews exposure to the most dispersed names in thematic baskets, attracted over $60 million in notional investments leading up to the US election. The merger itself significantly bolstered UBS’s capabilities, increasing its structuring headcount by 45% and adding substantial assets under management in quantitative investment strategies and credit solutions.

The rise of these new strategies and the increased competition in the options market are driven, in part, by evolving investor behavior. Research documented in a March 2024 MIT IDE working paper indicates that retail investors are increasingly drawn to options trading by anticipated spikes in volatility, particularly around earnings announcements. This suggests a demand for more sophisticated products and trading strategies that cater to short-term volatility expectations.

Optimal’s success will depend on its ability to navigate this complex landscape and offer competitive pricing and execution to retail brokers. The firm’s challenge isn’t simply about matching the speed and technology of established players, but also about providing a comprehensive service that covers the full spectrum of options products demanded by the market. The focus on assembling a dedicated team of market makers suggests a commitment to building the necessary expertise and infrastructure to compete effectively.

The broader implications of increased competition in the retail options market are potentially significant. Greater competition could lead to tighter spreads, lower transaction costs, and improved execution quality for retail investors. However, it also raises questions about risk management and the potential for increased volatility, particularly in the rapidly growing 0DTE options market. As Optimal and other new entrants vie for market share, regulatory scrutiny and investor education will be crucial to ensure a stable and transparent trading environment.

The moves by JP Morgan and UBS to automate and innovate within the structured products space also point to a broader trend towards technological advancement in the financial industry. JP Morgan, since 2019, has been integrating technology teams with its equities division to automate structured product processes, allowing for faster quotes and competitive pricing. This emphasis on automation is likely to become increasingly important as firms compete for market share and seek to improve efficiency.