04.27.2015
By Terry Flanagan

BOX Focuses on Fundamentals

The options industry is faced with myriad challenges including exchange fragmentation, with 12-going-on-14 exchanges, and a shortage of liquidity that has resulted in institutional traders having to curtail some trading strategies.

Against this backdrop, BOX Options Exchange has elected not to follow the path of some of its competitors by opening multiple trading venues, but rather to focus on product innovation and adding value for customers, according to new CEO Ed Boyle.

“The path isn’t going to change from what the vision BOX has had over the last few years, which is to continue to grow BOX and provide a value-added service to our clients and to work closely with our clients as partners,” Boyle told Markets Media. “You can’t just open up another medallion, put something on the screen, and be able to live off of a small amount of collected fees.”

“BOX is still one of the niche market-share players in the options business,” Boyle said. “What we’re concentrating on now is continuing to provide value through order protections for market makers and servicing the liquidity side of the market.”

Product innovation is a mantra of all options exchanges, as the right new product can ‘grow the pie’ of the overall business by adding new users, which is a more sustainable path to expansion than is grabbing a percentage point or two in market share from competitors. “We continue to look at what new products can bring value to the marketplace,” Boyle said.

Ed Boyle, BOX Options Exchange

Ed Boyle, BOX Options Exchange

BOX will list RealVol SPY Options for trading, based on the VolX Group’s RealVol SPY Index, offering direct exposure to the realized daily volatility exhibited by the SPDR S&P 500 ETF.

Currently, the majority of market participants are not able to trade, or hedge against, actual price risk of realized volatility directly. This type of risk-control tool has been offered only to large institutions in the over-the-counter volatility swaps marketplace.

“Volatility is a growing asset class, as can be evidenced by the CBOE products that they’ve had great success with,” Boyle said. “We don’t see what we’re doing as a competition to VIX or anything else — we see it as a complementary product. We think it will be helpful in that asset class.”

Boyle’s appointment as CEO was announced April 13. The Chicago-based options-industry vet has been with BOX since 2012 in charge of business development and strategy — he previously held key leadership positions with TD Securities, Letco Trading, Getco, and NYSE Euronext

The ever-increasing number of options exchanges is vexing market participants. “Fragmented liquidity is causing a lot of problems,” Boyle said. “Quotes have widened out over the past year to year and a half. This can be attributed to a number of things, but fragmented liquidity is a big part of that.”

“ISE is launching another exchange, and Bats just announced they will launch another exchange,” he continued. “When BOX came in it was somewhere in the neighborhood of 7 or 8 number of exchanges. At that time, volumes were a bit different. Following the financial crisis, the response of options exchanges, just like in the equity world, has been to add another exchange so that you can create another pricing model to segment out your customers.”

Regulators need to start thinking about ways to address this, “so we don’t just end up with more exchanges, but rather allow exchanges to compete in those various segments without having to put another SRO up,” Boyle said. “I’m not saying there’s anything wrong with launching new exchanges — under our current regulatory structure you’re forced to — but I think the regulators can address it at some point, and we can find better ways to do it, so we don’t fragment the liquidity so badly.”

The correct approach for regulators, he said, is “to start thinking more about how we can continue with a single cleared model like options are today through OCC, but at the same time allow the exchanges to compete more aggressively without fragmenting the market.”

Boyle acknowledges that regulators are in a challenging position, but nevertheless need to continuously think of ways to bring efficiency back to the market and to bring rules up to date with today’s electronic markets. “It’s difficult because everybody’s arguing for different things, and the regulators have to sort that out,” he said. “We will continue to work with them to make the markets more effective.”

Featured image via popyconcept/Dollar Photo Club

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