By Gunjan Banerji
Traders on Wall Street have lamented the end of floor trading.
Now, one exchange is trying to launch the first new open-outcry pit
in the U.S. in decades.
But rivals and trading firms aren't rejoicing.
Box Options Exchange LLC hopes to open a new floor for about 40
human traders at the Chicago Board of Trade Building. The exchange,
which has one of the smallest market shares in U.S. options, is
trying to grow its business by vying for orders executed via open
outcry, which has persisted in options trading.
Its initial plan sparked critical letters this year from rivals
CBOE Holdings Inc. and the New York Stock Exchange, owned by
Intercontinental Exchange, as well as trading firms, who said
another trading venue will exacerbate the market's fragmentation or
lead to less transparency.
Though Box overhauled its proposal to address concerns, Nasdaq
filed another letter last week, saying the new floor needs to be
populated with market makers, trading firms that stand ready to
both buy and sell against existing orders.
"Having an empty room would be completely contrary to the spirit
of the trading floor," said Kevin Kennedy, head of U.S. options at
Nasdaq, in an interview. "My main concern is liquidity. I want to
see an ample pool of liquidity on the trading floor," he said,
referring to the ability to get trades done.
The U.S. Securities and Exchange Commission plans to make a
decision on the new floor by Aug. 2, documents show.
While trading floors have dwindled in almost all markets because
of a shift to electronic trading, old-fashioned shouting and hand
signals in open-outcry pits have endured in the options market,
where investors sometimes prefer human traders to execute complex
orders rather than computer programs.
Open outcry accounts for about 13% of U.S. options trading,
according to Burton-Taylor Consulting, which advises exchanges.
Most trades are done electronically. Over 350 million options
contracts exchanged hands in June in the U.S., with about 2%
flowing through Box, data from Options Clearing Corporation show.
Box is partly owned by TMX Group, which operates the Toronto Stock
Exchange.
Backers of the company's proposal say it will boost competition
among exchanges. Some also say it's Box's right to try to build
market share in the fiercely competitive options landscape, where a
select group of exchanges like the NYSE, Nasdaq and Chicago Board
Options Exchange run the existing floors.
But Box's efforts have rankled some U.S. options traders, who
are already dealing with a labyrinthine market structure. A new
open outcry pit would push market makers to staff the new floor and
incur higher costs, said Peter Maragos, chief executive of Dash
Financial Technologies, a broker dealer and technology
provider.
"Where's the benefit for the client?" said Mr. Maragos, whose
firm has brokers on the CBOE floor. "We're just adding more
complexity, more fragmentation."
The SEC doesn't restrict the number of exchanges, said Box Chief
Executive Ed Boyle. It only creates the legal and regulatory
requirements that exchanges must follow. He also pointed to the
existing 15 venues for U.S. options.
"For someone to make the statement 'Why do we need another one?'
is naive," said Mr. Boyle, who has worked in options since 1981.
"It really comes off as they don't want additional market
competition."
Steve Crutchfield, the head of market structure for CTC Trading,
opposed the new floor in a letter to the SEC. He said that a
sparsely populated floor can make it easier for trading firms that
handle client orders to seek venues where they get paid
commissions, rather than where they can get the best prices for
clients. His firm staffs all four existing open-outcry floors.
One of the changes Mr. Boyle made in response to criticism was
to nix a requirement for traders to post continuous electronic
quotes if they have a floor presence, which others don't
require.
Some options traders said the open-outcry model could help
investors who want to prevent prices from moving when their large
options orders are getting executed.
"There is still a role for human traders," said Andy Nybo, a
director at Burton-Taylor Consulting.
An NYSE spokeswoman said 25% to 40% of the exchange's options
volume flows through two floors in San Francisco and New York. The
number of CBOE floor traders has fallen, but over half of its most
lucrative products -- including options on the S&P 500 index
and CBOE Volatility Index -- are carried out on its Chicago floor.
Nasdaq still operates an open-outcry pit in Philadelphia. And while
CME Group closed most of its futures trading floors, it maintains
pits for S&P 500 futures and options on futures, where
everything from corn to hog options is traded.
Box isn't the first exchange to consider a new floor in recent
years. Before being acquired by Nasdaq, the International
Securities Exchange had considered an open outcry floor but
eventually decided against it, said a person familiar with the
matter.
But its plan has stoked worries that, if approved by the SEC,
the new floor could lead to other exchanges trying to launch their
own.
"Approving the proposal would open the floodgates for every
options [exchange] to open empty 'trading floors' in disused office
space," Mr. Crutchfield wrote.
(END) Dow Jones Newswires
July 09, 2017 09:14 ET (13:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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