Panel Discussion:? Derivative Best Execution Challenges
Moderator:
- Jason Lichthen, Director, Equities and Listed Derivatives Trading Strategies at Wolverine Execution Services (WEX)
Panelists:
- Peter Bottini, tradeMONSTER
- Dennis Medvedsek, managing director, Knight Capital
- Steve Karasick, Derivatives Trader, William Blair & Co.
- Mark Davies, CEO S3
Lichthen: there were 280 different pricing changes last year.? You need to be a Ph.D. to figure it out. Our firm has 5 guys who dissect this stuff on a daily basis.? Isn’t that a drain on the industry for no apparent reason? Can’t we do this better as an industry?
Davies: but the majority of those pricing changes were minor variations that didn’t impact the routing decision.
Bottini: whenever exchanges come to me to explain their fee structure i go cross-eyed. But this is a symptom of competition. And I’d hate for someone to come in and dictate what a publicly traded exchange can charge.
Lichthen: flash mechanisms were abolished in equities but still thrive in options. Isn’t this the essence of information leakage?
Lichthen: 30-35% of order flow is routed to price improvement mechanisms. Does this disincentivize market makers to quote their best size outright? Are we going down a path of less transparency?
Davies: When an order is sent to auction it is effectively halted for a brief period. But the market doesn’t stop moving during that period. That impacts best execution and muddles the process of measuring best execution.
Lichthen: Why does so much option order flow still go up OTC?
Kransick: Some products still derive the bulk of their liquidity in the OTC market. Long-dated equity index options are a good example. Insurance companies have an insatiable appetite for volatility that far exceeds what the crowd can provide. So the OTC market provides that liquidity.
Bottini: I’m a big fan of exchanges. They’re transparent, no counterparty risk and have a clear audit trail. That’s a demonstrable benefit to what takes place in the OTC market.