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The explosive rise of ultra-short-dated options trading is reshaping how closing prices of underlying securities are determined. As volumes surge in the final minutes, end-of-day price formation faces unprecedented distortions, raising concerns for investors, exchanges, and regulators.
Over the last five years, 0DTE (zero days to expiration) and 1DTE contracts have surged from a modest slice of total options volume to a dominant force. Within the S&P 500 complex, same-day expirations now account for over 43% of daily volume, up from just 12% in November 2019.
This rapid shift is driven largely by the two most popular symbols: SPY and QQQ. Together, they eclipse the next nine most traded products in retail options volume, underlining how concentrated this activity has become.
To understand price formation, it’s essential to differentiate between volume and open interest. Trading volume resets each day, reflecting the number of contracts exchanged. Open interest accumulates all outstanding positions and changes only when new contracts are created or expired.
While rising volume typically enhances liquidity and narrows bid-ask spreads, sudden intraday spikes can signal indecision or impending volatility rather than clear directional conviction.
Market makers, whose role is to provide liquidity, often engage in delta hedging large options positions. As out-of-the-money contracts approach expiration, hedging flows intensify, leading to rapid buying or selling of shares in the final trading hour.
This clustering of hedging orders can cause the underlying price to gravitate toward a large open interest strike—a phenomenon known as “pinning.” With liquidity thinning near the close, these flows exert outsized influence, pulling closing prices away from levels justified by fundamental metrics.
Historical data paints a clear picture of this trend:
To illustrate the shift, consider the following comparison:
On days of “unusual volume,” Market Chameleon and NYSE reports show closing price swings of up to 1% in high-volume ETFs solely due to end-of-day hedging frenzies.
Such distortions pose risks to the integrity of the closing auction mechanism, which sets official end-of-day prices used by mutual funds and index providers. If these prices no longer reflect broader investor sentiment or underlying fundamentals, benchmarks and Net Asset Values (NAVs) can be skewed.
Regulators have begun expressing concern about price integrity at the close, but formal rule changes remain under discussion. Restoring confidence in closing prices may require new best practices for managing ultra-short-dated flows.
Both retail and institutional traders have ramped up their use of 0DTE strategies. Retail participation has exploded, with algorithmic order slicing employed to reduce visible footprints. At the same time, institutions adjust hedging models to anticipate end-of-day surges.
To safeguard market quality, exchanges, market makers, and investors can consider several approaches:
As 0DTE volumes continue to climb, coordinated efforts will be key to ensure closing prices remain a true reflection of value rather than a byproduct of concentrated hedging activity.
Looking ahead, more robust data analysis and targeted regulatory guidance can help maintain fairness and efficiency in the face of evolving trading dynamics.
By understanding the mechanics behind these distortions and adopting best practices, market participants can adapt to this new paradigm and protect the integrity of end-of-day pricing.
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