04.05.2012

Speed Demon

04.05.2012
Terry Flanagan

As high-speed and algorithmic trading ramp up in the options space, OptionsCity seeks to be the technology provider of choice.

Platforms combining execution, analytics, and risk management have become the de facto standard of care for market practitioners as algorithmic and high-frequency trading strategies have proliferated across asset classes.

The options space is a comparatively late arrival to cutting-edge trading techniques, but it is catching up.

“The most mature market for algorithmic trading is equities, and the next most mature is futures,” said Hazem Dawani, chief executive of OptionsCity Software. “The least mature is options.”

An abundance of options exchanges — the U.S. has nine — and the attendant fragmentation of liquidity is forcing options traders to equip themselves with algorithmic techniques.

“The race is on to capture more market share by providing tighter bid-offer spreads by considering a wider range of hedging opportunities,” said John Richards, founder of Webster Trading, a Chicago-based proprietary trading firm. “A computer is well-suited to quickly and constantly scan correlated products, and to re-price and re-size dynamically.”

Simple arithmetic dictates that the fragmentation that’s occurring in options is a pain point for market participants. Fragmentation “hinders execution efficiency,” said Richards. “It’s easier to process and digest one order of 100 shares than 100 orders of one share.”

In 2011, the Options Clearing Corp. cleared a record 4.6 billion options contracts, 17% more than 2010 clearing volume. Average daily volume now exceeds 18.1 million contracts.

Futures contracts cleared by OCC in 2011 were also at an all-time high, up 44 percent from 2010, more than triple the amount cleared just two years earlier.

“We are seeing options traders following the same evolutionary cycle as futures went through a few years ago,” Dawani told Markets Media. “Futures trading quickly moved from open outcry to electronic, and then to high-frequency trading. Options is moving in the same way.”

That applies as well to dark pools of liquidity, which have begun to appear on the options landscape as they have in other asset categories. “The motivations and methods of accumulation and distribution shouldn’t be different between options and other securities,” Richards said.  “Efficient accumulation and distribution is an art in itself.”

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