08.19.2015
By Terry Flanagan

Dash Financial: CBOE Rule Proposal Would Benefit End Users

A Chicago Board Options Exchange proposal to enable options market makers to expand their participation would modernize electronic auctions and improve the end-user customer experience.

That’s the opinion of Dash Financial, which supported the CBOE rule-change proposal in a comment letter to the U.S. Securities and Exchange Commission last week.

Gavin Rowe, senior director at Dash Financial, explained the company’s stance in an Aug. 17 interview with Markets Media.

“Our interest in this boils down to this: Dash is an agency-only broker-dealer in the securities markets. Equities and equity options are our focus, and our business model is built around three primary elements: performance, customer service, and transparency. All three of these are the drivers behind our choice to comment on CBOE’s rule filing,” Rowe said.

Gavin Rowe, Dash Financial

Gavin Rowe, Dash Financial

Chicago-based CBOE, the largest U.S. options-exchange operator, has proposed amending rules 6.74A and 6.74B, regarding the solicitation of market makers as the contra party to an agency order entered into two specific electronic auctions, the Automated Improvement Mechanism and the Solicitation Auction Mechanism. The rule changes are “designed to increase the efficiency of the current market structure and potentially increase liquidity,” CBOE wrote in a July 21 letter to the SEC.

The CBOE proposal seeks to terminate a ‘dual representation’ rule, which was enacted back when floor trading ruled the day. “CBOE didn’t want market makers to be represented in the trading crowd twice at the same time: by a broker as the contra side to part of an order, and as a market maker competing in the trading crowd for the balance of the order,” Rowe said. “If a market maker was doing so, the exchange felt like you were gaining an unfair advantage. That rule made sense back then, but it’s persisted past its useful life.”

Striking the dual representation rule would free up market makers to participate both as the contra-party on an electronic cross order in AIM or SAL, as well as in the auctions. That would help market makers, and by extension, end-user customers.

“The market maker will be able to guarantee an order after we have contacted them, giving our customers a price and a fill essentially,” Rowe said. “Then, the exchange allows a second moment of competition in the auctions to see if anybody can do better. The rule proposal would allow the market making firm to participate along with its competitors in that second process.”

“By having more competition in those electronic auctions, we think our customers are going to get better fills,” Rowe said.

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