New Options Rule May Add To IT Burden
June 22, 2009
Pending regulatory changes due to take effect over the summer are already stretching the workdays of technology and operations staffs at the most active options-market participants, and the rest of the market may soon have to ramp up its capabilities to adjust to a very different trading environment.
Initiatives to quote options in pennies and link the exchanges to facilitate executing orders at the best bid and offer are set to take major steps forward in the next months.
NYSE Arca's late May filing to expand the pilot by 300 options classes, followed quickly by two other exchanges' filings, brought home the reality of next month's deadline on options quotes. Last Tuesday, the Securities and Exchange Commission requested the exchanges to delay the expansion until October, while the linkage plan goes into effect Aug. 31. Also being weighed into the decision are the anticipated new rules for short sales--used to hedge options positions--which could arrive any day now to tie up back-office resources even further.
"The IT group of a shop like ours will have some significant expenditures to make to stay on top of these changes, especially in terms of getting increasing volumes of market data in the door and processing it," says Steve Crutchfield, director of operations at the Savant Trading broker-dealer arm of Matlock Capital, a family office run by Blair Hull. He founded Hull Trading Co. in 1985 and sold it to Goldman Sachs in 1999.
The first options classes began trading in pennies in January 2007, and today's 63 pilot classes--representing about half of overall options trading volume--have greatly tightened bid/ask spreads. That's a boon to investors, but the exchanges have measured the liquidity behind quotes has fallen by as much as 85 percent, making it increasingly difficult to execute larger listed orders.
Savant Trading is a member of the Chicago Board Options Exchange (CBOE) and NYSE Arca--making markets on the former--and it is awaiting membership with another exchange. Crutchfield says the tighter spreads stemming from penny quotes enable his firm to put on new positions more cost effectively. "In a lot of the very liquid names, you can get huge-size [orders] in very tight markets," Crutchfield says, adding, however, that the same dynamics create challenges to execute large orders in less liquid classes.
For a market-making firm, a large part of expenditures will come from acquiring additional server capacity to handle the increased quote volume from penny instead of nickel increments. In addition to adding raw computing power, Crutchfield said new switches and high-capacity lines will be needed to handle the additional data, and firms will need to adapt software "to properly leverage the new hardware." Trading software, he says, will also have to be adjusted, since more penny quotes means more trading decision information to digest.
Short selling and linkage changes are unlikely to require significant hardware upgrades, but anticipated limits or restrictions on short sales will have to be coded into a broker-dealers trading software, and the ability to deal with new risks if, for example, a stock breaks the circuit breaker threshold and shorting is restricted. In the case of linkage, "We'll be dealing with potentially new interfaces for routing those orders, involving connectivity and coding costs," Crutchfield said.
