By Ivy Schmerken, Editorial Director
The appetite for multi-leg options strategies is on the rise.
But this also means capturing liquidity that is fragmented across multiple options exchanges.
Complex orders or spread trades allow traders to simultaneously buy or sell a number of different options in what otherwise would require separate orders.
“The vast majority [of complex orders] have two or three individual series that are legs of a complex order and most of those are generated by the end user,” explains Boris Ilyevsky, managing director at International Securities Exchange. ISE and CBOE are viewed as the leaders and are said to operate the largest complex order books.
Historically, multi-leg orders were executed manually through brokers and by picking up the phone. However, the ability to execute these orders electronically through electronic complex order books has only gained traction in the past five years.
The availability of front-end tools, such as execution management systems (EMS), that scan complex order books and aggregate liquidity across multiple exchanges have leveled the field among asset managers and hedge funds.
“Multi-leg orders have become a huge part of the options market,” according to Andy Nybo, principal and head of derivatives research and consulting at TABB Group. “Partly it’s the ability to increase these complex orders using technology and electronic tools that facilitate these orders,” says Nybo. More than that, those implementing and developing these strategies can obtain significant advantages when they package orders together.
Savvy investors and traders are looking to earn more ‘edge’ from their trades or to construct better hedges. The lower cost of hedging and the chance for higher returns are drivers behind the trend, says Nybo.
Even retail investors are being given web front-ends that they can use to line up the legs of an options trade with the NBBO. (see sidebar)