Options Press

Exchanges Eye "Gray Pools" On Options Horizon


Reuters

 

 Exchanges Eye "Gray Pools" On Options Horizon

By Jonathan Spicer and Doris Frankel

NEW YORK/CHICAGO, Sept 17 (Reuters) - Professional investors, now more comfortable using options, are expected to increasingly trade in so-called gray pools, which may help U.S. exchanges siphon business from their over-the-counter rivals.

Gray pools -- electronic networks that match institutions' block orders and then deliver them to options exchanges -- are seen as a leak through which hidden trades can reach the tightly regulated world of displayed markets.

The options exchanges are anxious to attract the growing ranks of professional players and hope the upstart networks will drive "dark" trading volume their way. The gray pools, meanwhile, led by broker-dealers Ballista Securities and 3D Markets, are confident they have found a delicate and lucrative balance between light and dark. "We are not competitive to the exchanges, we are accretive to them," Robert Newhouse, chief executive of Ballista, said in an interview. "And we are bringing back some of the OTC volume that has left the exchanges. "There's really no true way to quantify how big this can be."

Gray pools have emerged as institutions pile into options in force, demanding efficient and fast ways to execute their large orders. Banks, funds and other institutions are now behind more than half of U.S. equity options volume, which has grown by about 30 percent in each of the last five years, according to Options Clearing Corp.

Exchanges and analysts say the growth is due to familiarity, lower costs, better technology, and even the credit crunch, which has prompted traditional asset managers to hedge their risk more aggressively.

But most of that business still takes place on the vast OTC market, which in the United States is up to four times bigger than the exchange markets combined. The gap is even bigger worldwide, according to research and advisory firm TABB Group. Traders flock to the OTC market because they can execute big orders without broadcasting their intentions to the world, and they can trade customized products that are uniquely tailored to their positions.

But with gray pools -- where quotes are shown only to internal participants -- professional traders can find natural counterparts to their trades, and avoid the inherent OTC risk that their counterparty might default.

"As big as the OTC market is, they (grey pools) can start satisfying pieces of that," said Chris Concannon, executive vice president of Nasdaq , which accounts for about 18 percent of U.S. equity options volume since its recent acquisition Philadelphia Stock Exchange. "They will grow, and the exchange-traded market will grow with them," he told Reuters.
 
GREAT EXPECTATIONS
Ballista and 3D Markets, however, are relative toddlers. Neither has recorded profit or revenue, nor have they celebrated a second birthday. But as the first of their kind in the options world, they're attracting a lot of attention.
    "If they are able to aggregate liquidity and attract block traders, they have a good chance of success," said Andy Nybo, options and derivatives analyst at TABB Group. "But the challenge is really getting those block trading participants to come."

3D Market Chief Executive David Mortimer -- who with Ballista's Newhouse headed a panel discussion at an equity options conference in New York earlier this month -- told the audience that "demand is there" for his service, adding the credit crunch has boosted business.

3D, now with 14 employees, aims to be the fifth-biggest broker-dealer in the next few years, Mortimer said later in an interview. The New Hope, Pennsylvania-based company struck a deal with Chicago Board Options Exchange in May that allows institutions to use 3D Markets software to trade anonymously on the largest U.S. options exchange.

The deal marks the first time benchmark trades featuring non-displayed orders entered the options arena. "This is the first small step toward bringing some equity-style dark pool functionality to the options market," said Mark Longo, a founder of Web options information site TheOptionsInsider.com.

The deal's framework is similar to that of equity markets, where trading on exchanges and dark pools takes place independently.

The key difference is that trades on 3D Markets are printed on CBOE, with prices determined at the end of the session. All option trades have to executed and printed on an options exchange.

Trading has bloomed on equity dark pools, which now number more than 40 in North America and Europe, suggesting a similar market for options is about to sprout.

Gray pools "are automating the broker process and making it more efficient and faster," said Edward Boyle, senior vice president of NYSE Euronext's Arca Options unit. "Anything that brings further efficiencies to the options market is good for the exchanges."



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The Options Insider Radio Network

The Options News Rundown

Your source for the most important news and information from the world of options.

The Options News Rundown

The Options Insider Radio Network

All of our radio programs in one convenient place.

The Options Insider Radio Network

Options Insider Radio

The original options podcast. Features interviews with leading options figures.

Options Insider Radio

The Option Block

This high-octane program features education, analysis, strategies and unusual activity.

The Option Block

Volatility Views

The premier radio program for volatility traders.

Volatility Views

The Long And Short Of Futures Options

Your source for futures options information.

The Long And Short Of Futures Options

The Advisor's Option

Arming advisors with the info necessary to manage risk.

The Advisor's Option

Options Boot Camp

Get into peak options trading shape.

Options Boot Camp

Options Insider Special Events

Compelling panel & special event recordings from the options world.

Options Insider Special Events

OIC's Wide World of Options

A dynamic mix of current events, investor resources, & strategy insights.

OIC's Wide World of Options

Trading Tech Talk

We break down all the amazing technology that takes your trades from the click of a mouse to the clearinghouse.

Trading Tech Talk

Options Playbook Radio

Break down cutting-edge options strategies and learn how to incorporate them into your portfolio

Options Playbook Radio

Options Oddities

We track all the unusual options trading activity on Options Oddities.

Options Oddities

This Week in Futures Options

The program designed to help active futures options traders stay on top of this ever-changing marketplace. 

This Week in Futures Options

The Business Show

If you like business, if you like humor, if you like stock symbols, this is the podcast for you.

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