Tuesday, February 13, 2007

NYSE Having Options

While so much media focus seems to center around the equities trading marketplace, there is a quickly growing segment of the capital markets space that necessitates some attention -- that's the options marketplace.
Options are a stock deriviative that trade in a unique area of ExchangeLand and require special permission for investors to use (in the way of signed agreements indicating that the investor has an adequate degree of knowledge of options and margin trading). A few fundamental differences between stocks and options are touched on below.
Like the stock marketplace, options markets have made extraordinary advances over the last couple of years. At the heart of these advances was Archipelago Holdings acquisiton of the Pacific Stock Exchange (pictured above; read about that here).
This stroke of management genious and foresight enabled Archipelago to become the first stock exchange to offer electronic trading for both stocks and options.Though Hybrid gets much attention, the ArcaEx platform for trading options is absolutely a world-class system that offers tremendous benefits. While analysts and pop media rags focus on stock volume ebbs and flows between NYSE and (primarily) NDAQ, there are dramatic developments occuring for NYX in the options section of ExchangeLand, and though NYSE ArcaNews is only a little pocket of the world-wide-super-information-highway-web which is incredibly amateur, NYSE ArcaNews feels obligated to expose this exciting options area.
To be sure the rules between trading options and stocks differ significantly. For one thing, today, options typically trade in nickel increments (compared to stocks that typically trade at penny increments). This means that spreads in options are not nearly as tight as they are in stocks. It also means there is a heck of a lot of money left on the table for market makers to benefit from. Arca was a pioneer as it lead the way tightening the nickel spread to pennies. (You can read about this story from July 2005 here).
Also, rules set forth by Regulation NMS do not exactly apply to options trading (this is what a Wall Street analyst that covers NYX recently told me last Friday). Think college football rules and NFL football rules. The rules are quite similiar in many ways, but their subtle differences make the games exciting in their own ways.
As NYX evolves and continues to execute its entrepenuerial/landscape changing vision, the derivitiave area is an exciting one to watch. With the Euronext merger (and Liffe), NYX will continue to offer best-in-class technology and liquidity, and will likely develop additional products in this section of ExchangeLand, as it brings these services to a market on a global scale. The only way to expand this scope would be to link to the Hubble Space Station and somehow offer a benefit for doing so -- safe to say, that's not on the radar.

Developments in this area of NYX are occuring regularly. This is yet another competitive difference between NYX and other bourses in the landscape. Just yesterday, FlexTrade Systems, a big player in the multi-asset algorithmic execution management systems arena, announced that its clients will now have direct access to NYSE Arca Options. FlexTrade's CEO hints towards the quality of NYSE Arca Options as he said,"It's a perfect fit for us," said Vijay Kedia, president and CEO of FlexTrade Systems. "NYSE Arca Options speed and transparency not only enhances the ability of FlexOPT [FlexTrade's brand name for one of their systems], but its competitive price structure creates the ideal trading situation for our clients."

This should translate to order flow and increased NYSE ArcaEx Options volume. Since NDAQ doesn't have a 1:1 competitor for this volume, odds are the WSJ won't print many stories about the volume ebbs and flows here. However, Dow Jones Newswires issues this report this morning:

NYSE Arca Traded 531,442 Electronic Contracts Feb. 9
NYSE Arca Options, the electronic options marketplace at NYSE Group Inc. (NYX), traded 531,442 contracts Feb. 9, surpassing the 467,477 contracts traded Jan. 19, the company said.
The trading also marked a 45% increase over January's average daily electronic volume of 380,142, the NYSE said. The marketplace was launched in October.


Anonymous Jack Santellini said...

Thanks! Best explanation of this side of the business I've seen.

I wish you'd post an update to this blog...

2:19 PM  

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