04.20.2015
By Terry Flanagan

Parsing ‘Best Ex’ for Options Trades

Achieving best execution in options trading can be far more complex than in equities because of exchanges’ multi-tiered pricing models, which results in hidden transaction fees that may negate the economics of a trade.

That’s according to David Karat, head of sales and marketing at algorithmic trading-technology company Dash Financial.

The equities world is complicated only by fragmentation, because the pricing schedule is based on whether one trades either as principal or agent, Karat explained. “You can go to an exchange and know what price tier your broker is at,” he said. “You know what the maker-taker fees or the rebates are.”

In options, pricing is dependent on a wider range of factors. Orders must be tagged whether they’re a customer, professional customer, broker/dealer or market maker. “All those capacities have different nuances, even the schedules for pricing,” Karat said. “It’s even got down to the point where you’ll have some basket of symbols that, based on certain criteria, if you traded it in a certain time, it will have a different rate structure.”

Dash Financial launched in 2011 to provide technology that would enable traders to gain a greater level of transparency into their orders. “The idea behind Dash was to build a firm that was completely transparent to the client using ‘best-of-breed’ technology and show the client everything that we did all the time,” Karat said. “We have a dashboard that shows every aspect of the routing as it’s happening. As the order trades, they’re seeing where we’re routing it, why we’re routing it that way and everything else.”

Dash Financial has launched Blitz, a trading algorithm focused on aggressive liquidity capture. One of the biggest issues facing the marketplace today is institutional traders’ inability to clear the screens as displayed on order arrival.

Sean Sullivan, REDI

Sean Sullivan, REDI

“A lot of people struggle with just lifting their liquidity from the screen,” said Karat. “Their common complaint is, ‘I just can’t clear the screen. I want to buy 600, and I’m getting 400 or 350. Then the price moves and I have no ability to go and get it.”

Initially, Blitz is exclusively available via the REDIPlus execution management system. “We’ve made some groundbreaking moves in network connectivity and the software and hardware stack that’s enabled us to slim down the chassis so that it’s only focused on liquidity capture,” said Karat. “REDI clients are a great fit for this, this is what they need.”

Sean Sullivan, chief revenue officer at REDI, said in a release: “We’ve consistently been impressed with Dash’s technology performance, service level and above all commitment to transparency, which align 100% with our values as a firm. We are proud to build on our partnership with Dash to be the first platform to roll out this innovative new strategy.”

The options industry can be opaque, and traders may not know what happens to an order between placement and execution. “The client just doesn’t know whether they’re getting best execution,” said Karat. “The term ‘best execution’ is such a benign term. It says that all we have to do is to get the best price from all the exchanges when, in reality, there’s a component to that, which is the best net price when you include all the exchange fees and the levies.”

Clients are also unaware of inherent conflicts of interest that may influence the way their orders get executed, such as whether a broker-dealer is also a designated principal market maker (DMM) on an exchange.

“There are so many different conflicts that people have in the industry where you own your own internalization engine or you have a market maker or you’re run by a hedge fund or you own a piece of an exchange,” Karat said. “These are all things that must form part of your mindset when you’re making decisions on a client’s behalf.”

Featured image via James Thew/Dollar Photo Club

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