LiquidPoint Building Options Tools for Changing Market
May 4, 2009
LiquidPoint, beefing up its options trading technology, is launching a tool that sprays orders simultaneously across execution venues.
Tentatively called Excelerate, the market-spraying tool replicates a technique that is common in the equities market. Currently being rolled out to the Chicago-based broker's clients, the software evolved from its development of a direct-market access (DMA) trading application--introduced in spring 2007--that executes roundtrip trades in less than 10 milliseconds.
Anthony Saliba, president and CEO of LiquidPoint, an affiliate of agency brokerage BNY ConvergEx Group, said the firm began working on the new functionality earlier this year. Excelerate, he added, allows customers to upload as many as 1,500 orders per second. "Typically, DMA firms handle 10 or 15 orders per second, consecutively," said Saliba. "We can distribute simultaneously."
Users probably won't upload anywhere near the maximum number of orders, added Saliba, who sees 100 as a likelier number. "Either they'll get the executions or the orders will be canceled," he said. "Hopefully they'll get executions on at least 50 percent."
High-Frequency Appeal
Excelerate is targeting high-frequency trading firms that appear eager to get into the options market. However, large high-frequency shops like Getco, a recent options entrant, often have their own exchange memberships and tend to develop proprietary trading algorithms internally. "Our clients have the capital and risk appetite and the know-how, but they don't have the technical apparatus, and no other vendor is delivering it," said Saliba. "These clients are predominantly spreading or entering in massive combination orders that depend on relationships driven by their algorithms. This is ideal for dispersion trading."
New York-based Lime Brokerage, which supports active equities traders, is currently building an options trading platform, and the Chicago Board Options Exchange (CBOE) is planning a new execution venue that will likely offer a pricing model designed to attract high-frequency firms. Equities platforms BATS Exchange and Direct Edge are also considering leveraging their high-speed trading technology in the options market.
According to Andy Nybo, head of derivatives research at New York-based Tabb Group, a high-frequency trader executing a strategy involving a portfolio of options would find Excelerate "much more efficient than sending single orders." As active traders move into financial instruments like options, added Nybo, they'll bring strategies originally developed for equities. "They'll either build those tools internally, to prevent others from replicating the strategy, or they'll look to third-party vendors," he said.
Dark Liquidity
The options market only has a few electronic dark pools. Unlike the equities market, where trades can be executed over the counter and then printed to the consolidated tape for all to see, options must be traded on an exchange. As a result, options traders tend to use a variety of crossing-order types and auction mechanisms offered at venues such as the International Securities Exchange, Boston Options Exchange and CBOE. Those trading facilities offer anonymity and potential price improvement.
However, those facilities rules' differ--at any given time one may be more appropriate than the others for a specific order. LiquidPoint plans to launch software in June that automatically takes the differences into consideration and executes the order as efficiently as possible. "These guys need a 'universal fitting' that will take the decisionmaking process out of their hands," Saliba said. The algorithm is designed to let users establish conditions in advance, he said, so they can seek to either fill an entire order or cancel it, for example, or fill the order in the market but "backstop" it with internal liquidity.
