As the 28th annual Options Industry Conference wrapped up last week in Phoenix, industry leaders addressed a number of important issues facing the industry, including some potentially big regulatory changes. We spoke with Gary Katz, president and CEO of the International Securities Exchange, the host of this year's conference.
Q: How would a cap on options access fees affect ISE, and the industry?
A: We’ve looked at our fees at the ISE, and except for a minor percentage of the time, all our fees are below that cap, so it doesn’t affect us. A recent SEC release tried to quantify the impact by exchange and the ISE really wasn’t affected. It’s too soon to tell what the other exchanges will do in response to this change. I think we’ll see a variety of responses.
Q: Of the various regulatory proposals, are there some you think are more likely to take place than others?
A: I finally learned after 24 years of doing this that I’m a very bad predictor of what the SEC is going to do. Unlike the time they banned short selling literally almost overnight, with all of the current proposals, they are taking the time to ask the industry for opinions so they can uncover some of what the unintended consequences might be. I don’t have a guess as to which ones they’ll move forward with, or whether it will be all of them. ISE will respond the way we always have, by talking to customers and members and developing policy and functionality based on the current structure the SEC feels comfortable with.
Q: What are some technological innovations that people will be talking about at the conference?
A: At the ISE, we are continuing to develop our new trading platform, which we plan to launch in the fourth quarter of 2010. We’ll be moving from the current one we licensed from Nasdaq OMX and moving on to a brand new trading technology that we and Deutsche Borse, our parent company, are helping to develop. It’s the next generation for both Deutsche Borse and ISE. That’s a huge technology change for us and everyone here is very excited. We’ve built two brand new data centers and have been hard at work for more than two years now on this project.
Q: ISE recently announced that you will be adding 17 new options symbols trading under a new maker-taker pricing. What’s the future for the competing market models - maker taker versus customer priority? ISE has a model that is a hybrid of both, right?
A: We have what we call a modified maker taker model. A maker taker in a classic model makes money by getting a rebate every single time their bid or offer is taken. We wanted to encourage higher quality markets, so the only time a market maker can get a rebate from an exchange is when they are either on the bid or on the offer of the NBBO 80 percent of the time the entire month. The design of the program is to encourage our market makers to put up the best market possible, and when they do we pay them a rebate, and when they don’t they pay a fee. The ISE has always felt it’s important to use the fee structure as a way to encourage behavior—in this case a higher quality market. It’s what makes ISE different.
Q: “Higher quality” meaning…?
A: A tighter bid ask spread. If you’re a market maker and you’re never on the best bid or offer, why would anyone send their order flow to the exchange? So a higher quality is the spread, and also the amount of size available at that quote. ISE has always been very strong in that because of our pro-rata customer priority model, which is patented. We wanted to protect that by modifying the maker taker approach and we continue to offer trading for customers for 99 contracts and lower for free. That combines the best of both programs, the market structure and the price structure.
Q: We know the basic story about how ISE began – that William Porter, then-chairman of E-Trade, and Marty Averbuch approached you and David Krell to start an options exchange, but can you flesh out some of the details?
A: David and I had left the New York Stock Exchange; the options business we ran over there had achieved in the best of times a 1.5 percent market share. We started a consulting firm we very creatively called K Squared (for Krell and Katz). When Bill and Marty showed up with this idea, we really didn’t think starting an options exchange made sense since we had just left an options exchange and sold that business to the CBOE.
What was intriguing was Porter himself. He is an entrepreneur and a very dynamic individual. At the conference he was awarded the Sullivan Award, which is one of the highest honors in the options industry. He had a vision for something that had never been developed in the U.S. before, which was an all-electronic options exchange with no trading floor.
While today you might think that an all-electronic options exchange seems obvious, in 1997 all four options exchanges had floor based trading. There was no size available in the market, you couldn’t see a quote on the screen, no front end screens and a relatively small market of around 1.5 million contracts a day. So the idea of starting an electronic exchange was what got us excited about following him and using the skills we had developed at the NYSE and, in David Krell’s case, years of options industry experience. It was nerve racking at the time. It took more than two years to get SEC approval. These days, new exchanges are approved all the time, but back then, the previous exchange had been approved was in 1973! So the idea was different, and new to the SEC as well, and certainly one of the most exciting projects I’ve worked on – and the rest is history, as they say. Very quickly we showed that it could be successful and you could trade options electronically in the U.S. We’re celebrating the 10th anniversary this month and it’s been a wonderful experience.
Q: ISE has been outspoken about its view that dividend arbitrage trades, which ISE does not use, artificially inflate options volume reports. Have you made headway on that issue and will ISE continue to pursue it?
A: I think we are making headway in that the issue is becoming more well-known and people are talking about it. Making the industry aware that there is a problem was the first step. How many times have we heard, with these bursting bubbles, that there were nefarious activities that everybody knew about but nobody did anything about. That’s a common statement that’s made.
Before the rules separating an analyst from a brokerage firm that was taking a company public, if you read the articles from that time you see that everyone knew there was a conflict of interest but nobody did anything. We are going to try to do more of that, share this information with everyone so they can see how prevalent it is and how specific to only a few options exchanges that are promoting this kind of trading, not for economic reasons, but so they can put volume on the screens and tell everyone their market share is going up. I think that’s an abusive practice, but more importantly it’s a mine waiting for someone to step on it, and one day a clearing member will do something wrong and end up not being flat or hedged in their position and the clearing firm could become seriously exposed. And when that happens, at least I’m not going to say, ‘I knew about it but didn’t say anything.’
Those exchanges have all created fee caps in their rules specifically for this dividend trade, and its designed so that if you don’t put a cap on the fees, if the regular fees were applied, the market makers wouldn’t be able to do this.…so for you and for me, it would be very difficult to do, but not for them.
Q: What initiatives are forthcoming from ISE?
A: We’re hoping this year the SEC will approve the international link we have developed with Eurex, our parent, that will allow Eurex members to send order flow directly to the ISE from outside the U.S. through the clearing facilities they already have in place with Eurex. All the technology is in place and we’ve tested all our systems and are now awaiting SEC approval. We hope to start that in 2010.
We continue to talk about the strategic partnerships we’re involved with, such as Ballista, Direct Edge, Quadriserv, and Hanweck Associates. We’re encouraged by the growth those companies have exhibited and we continue to look for other opportunities for ISE to plant seeds in places adjacent to our core business to diversify our revenue stream and grow the business.
Q: Will regulations on high frequency trading have any ill effects on options trading?
A: I think the SEC wants to understand high frequency trading rather than stop it. They want to make sure there are no abusive practices they are unaware of that would take advantage of investors. That’s why they are asking the industry to help them understand how high frequency trading has grown. A very good example of high frequency traders in the options business are the market makers that are streaming in quotes on a regular basis. That’s high frequency trading that is not abusive, it’s providing liquidity to the marketplace. The SEC just wants a better understanding of the practice. And I know people are writing comment letters and providing the input the SEC is asking for.
Sebi allows exchanges to offer 5-year index options
Business Standard, Mumbai
The move will help investors take long-term calls.
Stock market regulator Securities & Exchange Board of India (Sebi) has widened the scope of index-based options by allowing exchanges to offer option contracts based on Sensex and Nifty with a tenure of up to five years. In January, 2008, Sebi had extended the period to three years.
UPDATE 2-CBOE first-quarter profit falls 7 pct
By Doris Frankel, Reuters
The Chicago Board Options Exchange on Tuesday reported a 7 percent fall in first quarter profit on higher expenses related to restructuring ahead of its planned initial public offering.
Finra to Regulate NYSE Equities, Options Markets
By Nathan Becker, The Wall Street Journal
The Financial Industry Regulatory Authority will take over responsibility for policing NYSE Euronext's equities and options markets, further expanding the body's oversight functions. Finra, which already provides regulatory services to various Nasdaq OMX Group Inc. markets, as well as the BATS Exchange and the International Securities Exchange, will by late June take over responsibility for watching over trading on New York Stock Exchange, NYSE Arca and the NYSE Amex markets.
Stock Market Disconnect in Options Reveals Risk
Jeff Kearns, May 4 (Bloomberg) -- U.S. stocks are rallying the most in seven decades, housing prices are stabilizing and the economy is expanding again after the worst recession since the Great Depression. Yet Dean Curnutt, founder of options advisory and brokerage firm Macro Risk Advisors LLC in New York, is wary. Curnutt studies the equity options market to gauge traders’ expectations of swings in stock prices, or volatility. He’s concerned because he’s picked up mixed signals in recent months, Bloomberg Markets magazine reports in its June 2010 issue.
SEC Rule 605 Likely Coming to Options
Peter Chapman, Traders Magazine Online News, May 4, 2010
The Securities and Exchange Commission may require market centers in the options industry to calculate and disseminate execution quality statistics. In a speech last week at the annual Options Industry Conference, Jamie Brigagliano, a deputy director in the SEC's Division of Trading and Markets, told attendees "it would not be surprising to me if the [SEC] staff were to recommend that the Commission consider making options subject to Rule 605 execution quality disclosure requirements."
UPDATE 2-U.S. options trading up in April; ISE drops
* ISE had smallest share of options pie since 2002
* CBOE maintained market-leading share
* CBOE April avg daily volume rose 6 pct over year ago (Adds CBOE April volume and average daily volume, volume at CBOE Futures Exchange, paragraphs 8-10)
By Ann Saphir, Reuters
Trading in U.S. stock- and stock-index options surged in April but the market share of onetime leader International Securities Exchange fell to an eight-year low.
The Options Industry Council Announces April Options Trading Volume Up 11%
CHICAGO (May 3, 2010) – The Options Industry Council (OIC) announced today that 360,753,581 total options contracts were traded in April, representing a 11.16 percent increase over April 2009 volume of 324,545,671 contracts.
Average daily trading volume for April was 17,178,742 contracts compared to the same year ago period when 15,454,556 contracts were averaged each day. On April 16, a new top ten day was recorded with 27,484,418 total contracts traded, making this the fifth highest day on record for total volume traded.
The Options Industry Council and Financial Technologies Group Partner to Offer Options Education
The Options Industry Council (OIC), the primary U.S. resource for options education, has partnered with India's Financial Technologies Group (FTIL Group) to help achieve the objective of increasing financial literacy in India by offering education on the proper use of options as a risk-mitigating tool and providing an understanding of the benefits and risks of options trading.
Options industry mulls future at yearly confab
Ann Saphir and Doris Frankel of Reuters
At the 28th annual Options Industry Conference in Phoenix next Thursday, participants will focus on such questions as how the Chicago Board Options Exchange will be valued at its upcoming IPO, scheduled for June 30; the possible effects of regulatory proposals such as a ban on flash trading and a cap on transaction fees; and which of the two competing fee models will dominate. A good rundown of the important issues that will be discussed at the conference.
Traditional Options Exchanges Embrace Maker-Taker Model
Peter Chapman, Traders Magazine Online News, April 30, 2010
Maker-taker pricing is making inroads at traditional options exchanges.
Two of the country's four traditional options exchanges are expanding their programs that pay rebates to liquidity providers and charge liquidity takers.
This week, both Nasdaq OMX PHLX and the International Securities Exchange are adding new options to their maker-taker programs.
Options Exchanges Move To Expand Maker-Taker Price Plays
Jacob Bunge in the Wall Street Journal
The International Securities Exchange and Nasdaq OMX Group have both made recent moves toward trading options under maker-taker pricing. The ISE will add 17 new options symbols trading under the new pricing model, and Nasdaq OMX will add five new symbols to the pricing scheme it implemented at the PHLX options exchange. The move toward maker-taker is intended to build market share at a time when competition among U.S. options exchanges is high, and challengers such as BATS options are emerging. Maker-taker involves paying rebates to market makers and other liquidity providers while charging a fee to those who take liquidity.
Options Investors Are More Educated, Affluent And Strategic Than Those Not Using Options, New OIC-Sponsored Study Finds
The Options Industry Council (OIC) today released the results of the latest study conducted by Harris Interactive Inc. and found that not only are investors who use options more educated and affluent than investors who don’t use options, they also tend to be more strategic investors who are more open to new ideas. The Options Industry Council (OIC) sponsored this study, as well as studies in 1995, 2000 and 2005, to assess interest level, knowledge and usage of options by investors to better direct its options education efforts. The studies are also important for financial advisors, showing them how options investors make attractive clients and prospects.
NYSE Euronext Q1 Earnings Call Transcript
NYSE Euronext was the largest U.S. options exchange operator in the first quarter of this year, and it is moving forward with the requisite approvals for semi-mutualization of the NYSE Amex Options business.
CME, NDAQ, NYX: A Play on Euro Contagion
By Steven Sears, Barron's
Keep an eye on exchange stocks like CME Group, Nasdaq OMX, and NYSE Euronext. If concerns about a European economic contagion keep options and stock trading volumes surging, these exchanges could benefit from higher trading volumes, which is the lifeblood of an exchange’s earnings power.
VIX Surges for Second Day as Global Stocks Erase 2010 Advance
By Jeff Kearns and Julie Cruz, Bloomberg
The benchmark index for U.S. stock options rose toward a three-month high as concern about Greece’s bailout wiped out the 2010 gain for the MSCI World Index and boosted demand for contracts to protect stocks.
ISE Launches Order Feed
May 4, 2010
Alexa Jaworski, Securities Industry News
The International Securities Exchange said Tuesday it will expand its market data product offering with the introduction of the ISE Order Feed. The ISE Order Feed notifies subscribers when a new order is placed on ISE's order book, and it shows the size of the individual orders that comprise the Best Bid and Offer (BBO) on the exchange.
CBOE Had Largest Share of Stock, ETF Options Volume in April
Nina Mehta, Bloomberg Businessweek
The Chicago Board Options Exchange captured the largest share of equity derivatives trading on stocks and exchange-traded funds last month, the first time that’s happened since December. The CBOE, whose initial public offering is planned for June, traded 26.1 percent of equity options volume excluding contracts based on indexes. The exchange has an exclusive license for options on the Standard & Poor’s 500 Index, Standard & Poor’s 100 Index and Dow Jones Industrial Average. Its overall share was 30.9 percent, the highest level since December, according to data from the Options Clearing Corp. in Chicago.
BOX to Launch New Operations Platform
The Boston Options Exchange Group plans to launch a new operations platform on Monday, May 10. BOX said it has selected Equinix, a provider of data center services, as the location for their ultra-fast matching engine, which will operate within the Equinix NY4 International Business Exchange (IBX®) data center.
Chicago Board Options Exchange to IPO on Nasdaq
Ann Saphir and Jonathan Spicer, Reuters
The Chicago Board Options Exchange is getting closer and closer to its long-awaited initial public offering, which it plans for June 14. The exchange said in regulatory filings that it will list shares for trading on Nasdaq OMX the following day. It has set a per-share price floor at $25, which would value the exchange at $2.5 billion, and will begin its road show on June 1. The move would give CBOE the opportunity for possible mergers or acquisitions it could not do as a member-owned firm.
The Options Insider's Exclusive OIC 2010 Panel Audio: SEC Keynote Address
Posted on 5/5/2010 in Industry by Mark S. Longo
Our exclusive coverage of the 2010 Options Industry Conference kicks off with the opening remarks by ISE CEO Gary Katz. Those remarks are immediately followed by the Keynote Address from Jamie Brigagliano, Deputy Director of the Division of Trading and Markets at the SEC.
CBOE criticises proposed cap on options fees
By Hal Weitzman, The Financial Times, in Phoenix
The Chicago Board Options Exchange, the US’s biggest options-trading platform, lashed out on Friday at a proposal by the Securities and Exchange Commission to cap options-trading fees, calling the plan “nonsensical”.
The SEC proposed this month to cap equity derivative fees at 30 cents per contract, a move that surprised many in the options industry who had not thought the issue was high on the commission's agenda.
CBOE Intends to Fight SEC Plan to Cap Options Trades
By Jeff Kearns and Nina Mehta, Bloomberg Businessweek
April 30 -- The Chicago Board Options Exchange plans to oppose U.S. regulators’ proposal to cap fees on equity derivatives trades at 30 cents, according to Edward Tilly, vice chairman of the venue.
SR: The above are both good stories from the Options Industry Conference in Phoenix on the SEC's fee cap proposal and how it would affect the CBOE.
US options industry kills reform measure
By Hal Weitzman in Phoenix for the Financial Times
A controversial financial regulatory reform proposal that would have extended the oversight of the Commodity Futures Trading Commission over some equity options contracts has been withdrawn after lobbying by the US options industry. Blanche Lincoln, head of the Senate agriculture committee, proposed this month that options contracts based on broad market gauges should be treated as swaps, a class of derivatives that can only be traded on futures exchanges.
SR: This is big news from the Options Industry Conference in Phoenix. Passage of this particular measure could have had a profound effect on the options industry, as it would have prevented options exchanges from trading contracts such as options on the Standard & Poor’s 500 Index and the Russell 1000 Index. This would mean, for one, that the Chicago Board Options Exchange would no longer be able to offer its most popular options products, the S&P Index Options. No doubt many in Phoenix are breathing sighs of relief.
OptionsXpress Selects ACTIV MPU to Manage Rising Market Data Message Rates
Hardware-Accelerated Market Data Infrastructure Offers Ten-Fold Performance Increases and Measurable Cost Efficiencies
By: Marketwire May. 4, 2010
ACTIV Financial, a leading global provider of fully managed low-latency market data solutions, today announced that OptionsXpress, a pioneer in equity options and futures trading and long-time ACTIV customer, will be upgrading to its ACTIV Market Data Processing Unit (MPU) to accelerate low-latency exchange feed processing and enhance throughput and performance.
SunGard Launches New Platform for Exchange-Traded Derivatives
Chris Kentouris, Securities Industry News
SunGard Data Systems on Monday said that it has launched Cliq, a new Web-based service that allows buy and sell-side firms to electronically communicate with each other and keep track of post-trade activity for exchange-traded derivatives.
Offered as a software-as-a-service, Cliq will act as a single point of entry for account set-up as well as confirmations and allocations. It will provide fund managers and their brokers with a real-time view of their global futures and options transactions.
Such a view, says SunGard, allows fund managers to reduce their operational risk from any potential processing errors and reduce their counterparty risk from using more than one clearing broker.
Tora Trading Selects Orc for Options Market Making on CCFE
Ivy Schmerkin, Wall Street & Technology
New York-based options market maker Toro Trading has chosen Orc Software's options market making solution for connectivity to the Chicago Climate Futures Exchange (CCFE) options platform. Toro said it intends to become one of the first options market makers connected to CCFE's options platform.
Trading Firms Turn To Videogame Chips To Get Even Faster
By Donna Kardos Yesalavich, Dow Jones Newswires
Financial firms are turning to chips traditionally used in videogames and aerospace to speed up their trading, as they try to shave off microseconds to get an edge over the competition.
Hanweck Associates Integrates with SpryWare to Accelerate High-Performance Options Analytics
Hanweck Associates, a premier financial services provider specializing in risk management systems and technology for institutional investors, and SpryWare, a premier provider of ultra low latency feed handlers and direct market data technology, today announced that they have integrated Hanweck’s high-performance, hardware-accelerated options analytics solution, VoleraFEED™, with the SpryWare Market Information Server. The integration provides options market participants with the advanced computing power and access to fast, quality market data needed to deliver low-latency, real-time options analytics to drive advanced trading strategies. This new offerings adds to Hanweck’s existing VoleraFEED integrations, including ACTIV Financial’s ACTIVFeedDirect and IDC’s PlusFeed.
YellowJacket Introduces Negotiated Equity Options on its Industry-leading IM Platform
Intercontinental Exchange press release
YellowJacket, a subsidiary of IntercontinentalExchange (NYSE: ICE) and an instant message (IM) trade negotiation service, has expanded its capabilities to the equity markets following the successful completion of a beta test by equity options market participants. The new technology addresses the specific needs of options market traders by sending components of quoted options strategies via an API to third-party or proprietary pricing systems, allowing customers' models to return theoreticals and greeks to the YellowJacket screen in real-time.
Don't Choke, Strangle When Stocks Turn Volatile
By STEVEN M. SEARS, Barron's
Options strategy can wring returns out of uncertainty.
BUY-AND-HOLD INVESTING is brilliant when the market goes up in a straight line, as it has for the most part of the last year or so. But with stocks turning suddenly rocky, as in the past week, a different tack must be taken.
Investors Use 'Spreads' to Cut Trading Costs
Tennille Tracy, the Wall Street Journal
Investors attempted to reduce the cost of trading options by pursuing "spread" strategies that involve two or more options contracts. Traders pursued these strategies among a variety of companies including Bank of America and CIT Group. In the case of Bank of America, an investor demonstrated confidence in the bank's stock and conducted a bullish "call spread" in longer-dated November contracts. The trade represented one of the largest transactions in the options market on Wednesday.
Goldman Sachs Butterflies Show Options Traders Turning Bullish
...To create the butterfly yesterday, investors bought about 8,000 June $165 calls and 8,000 June $185 calls, while selling 16,000 June $175 calls. More than 108,000 Goldman Sachs calls traded yesterday, 30 percent above than the four-week average, according to data compiled by Bloomberg.
Learning to Love Volatility
Steven M. Sears, Barron's
Investors who are comfortable using the fear of others to their advantage will find that they suddenly have many opportunities to utilize options that expire in two months or less to express fundamental and directional views about stocks by selling options with inflated implied volatility.
The Options Insider "A Look At Options Traders: OIC Study
Posted on 5/4/2010 in Industry by The Options Insider
Who Are You? Options Study Released
On April 29 at the OIC Conference in Phoenix, the results of OIC's Study of Options Users for 2010 was released. The study is designed to provide a profile of options investors and note the similarities between investors who use options and those who do not. So, do you want to see how you stack up to the rest?
Buy-Writes and Legging Into Covered Calls
Josip Causic, Barron's
This article addresses buy-writes, leggin in, and the use of the MACD histogram as a timing tool for the sale of covered calls. But first....what a covered call is.
The Options Industry Council and Financial Technologies Group Partner to Offer Options Education in India
The Options Industry Council (OIC), the primary U.S. resource for options education, has partnered with India's Financial Technologies Group (FTIL Group) to help achieve the objective of increasing financial literacy in India by offering education on the proper use of options as a risk-mitigating tool and providing an understanding of the benefits and risks of options trading. The partnership expands OIC's educational efforts in Asia.
CBOE: San Jose, California
Tuesday, May 11, 2010
Index Options in Today's Markets
Designed for experienced investors and traders who want to improve their
ability to select option strategies. Experienced instructors from The
Options at CBOE will discuss option price behavior, planning options trades
and several intermediate to advanced strategies including debit spreads and
CBOE: Chicago, Illinois
Thursday, May 13, 2010 - Friday, May 14, 2010
The Options <http://www.cboe.com/LearnCenter/ViewSeminar.aspx?SeminarId=4>
Intensive Seminar where you will explore option concepts including spread trading
strategies and implied volatility.
OIC: Atlanta, Georgia
Saturday, May 22, 2010
Investor Education Day
Sessions for investors interested in learning more about options
5th Annual FIA and OIC New York Equity Options Conference
When: Oct. 4-5, 2010
Where: New York, NY
Full info: www.futuresindustry.org/2009-ny-equity-options-conference
The Options Industry Council and the Futures Industry Association have partnered to coordinate the fourth New York Equity Options Conference. Last year, more than 350 delegates representing more than 138 firms attended, including representatives from brokerage firms, funds, exchanges, regulatory organizations, law firms, service organizations, and members of the press.