STAC Mid-Winter Meeting Update: Part Five

Posted January 25th, 2010 by The Options Insider in Industry

STAC Mid-Winter Meeting Update: Part Five
Coverage continues with The Options Insiderís perspective on the STAC84th Annual Mid-Winter Meeting. This round, we review the ìConvergingInstitutional vs. Retail Needs: Multi Product Derivative Platformsîpanel.

The featured speakers were:
    ï    Moderator: Stephen Brodsky, Vernon & Park Capital

Panelists:
    ï    Peter Bottini, OptionsXpress
    ï    Peter Hauser, SunGard Trading
    ï    Robert Mahoney, thinkorswim, Inc.
    ï    Alicia Reilly, Bloomberg Tradebook
    ï    Jonathan Schlossberg, Lime Brokerage, LLC

Institutional vs. Retail
The phenomenon of high frequency trading prompted the discussion ofinstitutional versus retail trading. High frequency traders do nottake on the obligations of market makers, but trade similar size. Theyare significantly more sophisticated than the average retail customer,but have the same customer advantages (fees and execution priority).

Peter Hauser began the discussion by reminding the audience thathistorically, options markets have shown preference to retail traders. In an attempt to define high frequency trading, will it come down tosimply counting the number of trades in a day? That will likely notwork, as the numbers can be manipulated.

So, like equities, which saw exchanges pop up to meet variousconstituenciesí needs, will that happen in options? Yes, says Hauser,with the upcoming launch of BATS and C2. Alicia Reilly added that newexchanges will help both types of customers get filled, as they willprovide more liquidity.

That leads to the question of execution. If the probability ofexecution is the biggest aspect to trading, as was suggested, willcustomers care about which exchange they are filled on? On thesurface, it may not seem like an issue, so long as the fill is at theNBBO. However, getting filled on a maker-taker exchange will incur afee that one wouldnít on a pro-rata exchange.

Peter Bottini suggested that clients donít care about where a trade isfilled, so long as itís at the NBBO, even if a charge is incurred. This seems surprising, given the degree of fee sensitivity in themarkets. Further, because retail customers do not see the size of thebook, it is a disservice to those who want to trade large size. If aquote is only 20 contracts deep, anyone who is not a professionalmarket maker who wants to trade more than that risks getting filled ata different price.

Do you think where trades are filled matters? What about seeing quotesize? Should that information only be for professional market makers? Discuss your thoughts in the forum.

Rules and Regulations
With the SEC considering banning all flash orders, what was the panelsíview on the most critical regulatory issues being debated in Washington?

Peter Bottini suggested that regulators donít understand the OTCmarket, so theyíre looking at the licit market and are trying to fixissues that donít exist. He added that for options, there is a lot ofopportunity to bring OTC volume to exchanges, particularly by usingflex products as hedges. Regulatory bodies would be advised to lookinto the unregulated OTC market and direct volume towards those withstrict regulations.

Peter Hauser thinks that the idea of a transaction fee on listedsecurities is ìinsaneî. The listed securities markets are the ones thatfollowed the rules, Hauser said, but the OTC market messed up.

Alicia Reilly echoed Bottiniís premise that regulators donít understandoptions. She said that theyíre pushing ideas (pennies, linkage)through without much of a pilot period and without adequate commentsfrom the exchanges themselves. She concluded that we need people inWashington who understand options, and suggested that the peopleattending STAC and their colleagues have the knowledge to educatelegislators.

Jonathan Schlossberg thinks that a transaction tax could undermine liquidity.
He added that naked access is the most important thing facing marketstructure and that sophisticated customers can contribute liquidity tothe marketplace. Regulators would be better off trying to figure outhow to take professional customers and allow them to provide a value tothe market holistically.

Thoughts? If not flash trades, what do you think regulators should focus on? Discuss your thoughts in the forum.