03.24.2016

WEX Options Algo Built for Market Complexity

03.24.2016

Wolverine Execution Services’s Best-X options algorithm, launched three weeks ago, is meant to help traders navigate complexity.

“The options markets are complicated,” said Kevin Kernan, director of product development at Chicago-based WEX. “There are 14 exchanges with 14 unique market structures and 14 different fee schedules, which can be unmanageable for all but the most sophisticated firms.

“It is our business to look at all of these factors when determining how best way to execute an option order,” Kernan said. “For example, not all buy-siders have access to real-time data from all the exchanges, including depth and priority information that the algo can use to make intelligent decisions about sourcing liquidity and how it will impact the trade.”

Building an options algo presented unique challenges to WEX and Kernan’s team. He explained that many options contracts trade infrequently, and the programming logic is “a different beast”  compared with equities. In the Best-X options algo, WEX uses different inputs to help in determining the best price level to execute without sacrificing high fill rates.

“In equities there is a lot of information contained within the market microstructure and reliable historical data, but in options there is far less information due to the infrequency of trading in a single option, but potentially more in similar options and correlated products,” Kernan said. “For example we may look at what is the size of the bid/offer versus the norm, and if larger than the norm available than Best-X won’t be as aggressive” than if the bid/offer is smaller.

WEX built Best-X for options using its own proprietary order flow as a baseline as the firm was already executing orders manually for clients. Then the firm looked at its own smart order router and some of WEX’s other options algorithms, such as Sweep, and fine-tuned Best-X to be more selective in how it routed orders to options exchanges.

The WEX Sweep-X algorithm works by simultaneously scanning the orders books of all the options exchanges and then decides where to send orders. Sweep-X uses proprietary logic to immediately capture all available liquidity to the specified limit price. Users of this algo told WEX that given the effectiveness of the way that Sweep-X worked, they would be interested in an arrival price algorithm that would not be as aggressive in all cases but look to improve the price. After about six months of looking at the most effective way to model this algo type, Kernan said Best-X Options was born to address this need.

“Once Best-X Options was created, we tested it through some of our sophisticated proprietary trading and hedge fund clients,” he added. “We are now ready for Best-X for options to be released it to a broader array of clients.”

Featured image by Dmitry Nikolaev/Dollar Photo Club

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