(Bloomberg) -- It’s been blamed for fueling stock volatility and dismissed as the latest case of market speculation gone too far. 

Yet regardless of the threat — real or imagined — posed by the relentless boom in equity options that have zero days to expire, or 0DTE, a band of Wall Street brokers is unleashing new strategies to grab a piece of the action. 

Among them is Options AI, where trading volumes have doubled since the December launch of options tied to the S&P 500. Another player, Moomoo Technologies Inc., is waiving exchange fees for the newly introduced index contracts. At Webull Financial LLC, clients are allowed for the first time to sell derivatives without owning the underlying asset.

Robinhood Markets Inc., which offers 0DTEs on some exchange-traded products, plans to expand into broad index options later this year.

As money managers of all stripes navigate a stock market swinging on new economic data one minute and the latest monetary-policy speculation the next, the securities industry is conjuring up ways to tap into institutional and retail demand for the newfangled options. 

With the investing tool on the radar of the Federal Reserve, it’s an open question whether Wall Street’s risk managers are able to keep up with the 0DTE frenzy. 

“If index options are now the hottest thing, we want to be involved,” said Justin Zacks, vice president of strategy at Moomoo, which in November lowered commission fees on single-stock options to zero. “We have a relatively low market share in the United States, but we’re very big in Asia. So we are really interested in attracting a lot of people to try us out.” 

Volumes in these S&P 500 contracts surged 48% last year, six times as fast as the broader options market, according to data compiled by Bloomberg Intelligence. Cboe Global Markets, the exchange at the center of the craze, estimates retail investors make up as much as 40% of the transactions.

“It’s fun,” said Daniel Crocker, a 43-year old Alabama resident who last year quit his job in the logistics industry to become a full-time day trader and switched to Moomoo’s trading platform. 

To him, the biggest appeal of zero-day options is just how cheap it is to make bets at the get-go, while the upside can be explosive. In the first three weeks of 2024, his roughly $1,000 0DTE investment raked in profits in the neighbor of “several thousand dollars,” Crocker said. Then his trades stopped working. As of Thursday, he’s breaking even year-to-date.   

“You don’t know exactly how things are going to go, but when it plays out in your favor, it’s so rewarding,” he said.

Since S&P 500 option expirations broadened to all five weekdays in mid-2022, 0DTEs have become a money machine for Cboe, driving around 15% of its annual revenue last year. 

While online brokers are known for zero commissions, most of them do charge a contract fee ranging from 50 cents to 65 cents. Based on S&P 500 0DTE volume of 330 million contracts last year, brokers likely generated almost $70 million in revenues, assuming retail accounts for 35% of the order flows and the contract fee is 60 cents. 

The trading boom is raising questions whether the industry’s risk-management infrastructure is equipped to monitor leveraged-up investors trading 0DTEs, given losses can rack up in a volatile market without being detected right away. 

In the September 2023 Senior Credit Officer Opinion Survey on Dealer Financing Terms, the Fed included special questions about risk-management practices and client activity in 0DTE trading. It found only two-fifths of the dealers were able to identify 0DTE strategies typically used by their clients. When asked about changes in clients’ risk appetite on days with elevated volatility early in the session, a great majority of them said they were unable to judge the trend. 

Moreover, two fifths of the dealers don’t require the counterparty to stump up collateral for 0DTE trades, and the rest do so only during market turbulence and before the end of the trading session. Notably, nearly all dealers have kept risk control measures unchanged for 0DTE clients since 2022. 

While acknowledging the risk that a customer could end up having a negative account at the end of a session because of wrong-way 0DTE wagers, Zacks says Moomoo has “a robust system” to track trading activity in real time.

At Webull, risk controls have been tightened even as it starts offering trading in uncovered, or naked, options to qualified clients.

“It has been very impressive to see our risk-oversight intraday as well as alignment with our clearing entity,” said Arianne Adams, the firm’s chief strategy officer and head of derivatives who previously held a similar position at Cboe. “That has allowed us to feel comfortable with offering increased access to additional trading strategies.”

To stand out in competition, Options AI opts to brand itself as a specialist brokerage for short-term options, or those with maturity no more than a week. It offers only eight trading strategies to help define risk exposure. Clients are net sellers of contracts for income and they gravitate toward complex strategies, according to John Foley, the firm’s chief executive officer. 

“I do disagree with the notion that it’s just a gambling tool,” he said. “There is genuine interest/demand for more advanced option trades and that to me means it’s not reckless, it is calculated.” 

To JJ Kinahan, president of Tastytrade, the 0DTE craze reflects how markets, just like society, are getting faster as attention spans get ever-shorter. All that suggests a broadening in zero-day contracts for single stocks is the industry’s next natural step. 

“We’re all getting emails from clients, ‘why can’t I do this in Apple? Why can’t I do this in Cisco?”’ said Kinahan. “Everybody will probably have to do a little bit of technology work to make it happen. That takes a while.”

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