Thinned summer liquidity, surging ETF flows, and the growth of zero days to expiry (0DTE) options are reshaping market dynamics in the second half of 2025, says Matt Howell, global head of trading strategy at T. Rowe Price.
He discusses the drivers for ETF innovations and shorter-dated products; he looks at the impact these flows are having on market volatility and how they are reshaping the way traders are reacting and trading volatility.
With the September US Federal Reserve meeting looming and the Fed Chair’s term ending in May 2026, Howell shares his views on the implications of a wholesale market regime change in the US and speaks to the biggest upcoming issues multi-asset desks need to be paying attention to over the next few months.
Interview
Jo Gallagher Set the scene for us. What is driving investment flow and trading activity in the second half of 2025?
Matt Howell Right now, in my opinion, we’ve got a classic summer market. Volumes are thin, conviction is limited, and the market’s twitchiness is being amplified by that reduced liquidity. This set up can lead to fast, outsized and quickly reverting moves with relatively little behind them. So technicals and positioning tend to dominate over more fundamental drivers. This summer, we’ve also seen geopolitics and the Fed dominate the headlines and drive price action alongside some massive thematic trades in AI and defense. So as a consequence, event risk is top of mind. Traders are very focused on growth and inflation data points, as well as anything that might give insight into the resolution of both trade and peace negotiations. The usual expectation is that volumes will ramp up post-Labor Day, investors re-engage, Q3 earnings start to come into focus and the macro event calendar picks up speed. We’ve got rate decisions, inflation prints, and political headlines coming. At the same time, we’ve also got some more structural technicals, low realized volatility one moment, sudden spikes and rotations the next. That’s really created a landscape where trading has to be on top of everything that’s going on.
Jo Gallagher I understand your role has expanded to global head of trading strategy. With that broader lens in mind, what are some of the interesting trends and changes to trading patterns that you’ve seen over the last few months?
Matt Howell There are a couple of structural trends that I think are worth paying attention to. We talked last year about the explosion in short-dated or zero days to expiry options. These activities continue to grow and now makes up more than 60% of SPX and SPY option volume. This is driven by both retail and institutional players and really underscores the market’s appetite for expressing ultra short-term views and hedging event risk really concisely and efficiently from a margin point of view. The second big trend is ETF innovation. ETFs have become the default vehicle for everything from passive index replication to complex quant strategies. We’re also seeing alternatives, crypto, and even private asset exposure. We’re seeing ETFs offer access to strategies that were previously only available to higher fee and harder to access funds, option selling, levered single stop plays, systematic short exposures, and defined outcomes. If we just look at single-name ETFs, there have been 12 and a half billion dollars of inflows in the first six months of the year. Eight billion went into strategies that enhance income through option selling, nearly four billion to funds that are offering increased leverage to individual names, and nearly a billion to ETFs that effectively give you short exposure. Active ETFs have also been a big feature of 2025. We’ve seen lots of fund launches of actively managed products across asset classes, and they’re now competing in a space that has been historically dominated by passive. Finally, the market is increasingly expressing views through the use of baskets traded on swaps. These have always been around, but they continue to proliferate and they cover pretty much any exposure that you would care to imagine from country and sector to thematic and factor and even quant strategies. These are great at getting targeted expressions of investment ideas into portfolios, but there is a risk that they become the tail that wags the dog, particularly in equity markets, where single names can be observed apparently inexplicably moving just because of their inclusion in a particularly popular basket trade.
Jo Gallagher And so how is the rise of retail participation and ETF flow impacting volatility and the way traders trade vol?
Matt Howell That’s a great question, Jo. It certainly has fundamentally reshaped the way that volatility trades. If we just look at the number of option-selling ETFs, that’s nearly doubled if we look across index and single names. An AUM now tops over $120 billion. This consistent supply of option selling helps dampen implied volatility at times and leaves dealers long gamma. This manifests in short-term mean-reverting markets in the absence of other inputs. We can see this a bit in the VIX’s record drop after the April tariff shock. This is the only time that index has fallen by a third in a single session and really highlights the way that trading in that index is changing. Realized volatility has also been extremely dynamic. 10-Day realized vols spiked to above 70 in April and then dropped into single digits within a couple of months. That’s a normalization nearly twice as fast as post-COVID. The old rule of thumb was that volatility spiked quickly and decayed slowly over time, and that’s just not the case these days. For traders, this means you’ve got to monetize those hedges quickly and really think about when you want to run long gamma. There’s a clear tilt towards shorter-dated options, tactical overlays, and dispersion strategies, as classic vol approaches are getting recalibrated. Underneath this, we’ve got new derivatives like lookback puts, we have also got structured vol products, and then all of that aforementioned ETF innovation, all adding complexity to vol in a pretty opaque fashion. Regionally, US markets are obviously leading in retail, option activity, and ETF flows, but Europe is catching up in retail participation and active ETF launches. The combination of ETF flows, derivatives, and relentless product innovation is redefining execution risk management globally.
Jo Gallagher Looking at the rest of 2025, what should multi-asset desks be paying close attention to, and how should they approach the final months of the year?
Matt Howell Yeah, there is a lot to pay attention to. But first up, I think, is the September Federal Market Open Committee (FOMC). FOMC meetings are always a major market focus, but this one’s under even more scrutiny, with Fed Chair Jerome Powell’s term ending in May 2026 and questions swirling about future leadership and policy direction. This has major implications for the dollar, treasury curve, and hence also equity markets. Overlay this with geopolitical uncertainty, and you’ve got a pretty dynamic environment that could potentially usher in market regime change. Second, we’ve talked a lot about ETFs, but keep a close eye on ETF flows and innovation. Actively managed ETFs are changing the landscape, and these flows are expanding into alternatives, commodities, and even digital assets. All of these trends bring opportunities but also require monitoring for the impact on liquidity, changes in correlations, and in the past we’ve seen innovation products backfire and have a knock-on impact to the broader market. Overall, what this means is that trading desks really need to be on top of flows, algo activity, positioning, and cross-asset allocations. The quality of the analysis on the desk has to remain high to ensure that we’ve got the ability to recognize where things are changing and adapt. Agility and foresight become even more valuable as the market’s capacity for rapid structural change means that what worked last quarter just might not apply after the next headline.
Jo Gallagher Thank you Matt, for your insight, and of course, you for watching. This has been Trader TV This Week.
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