TSC Options Forum: Taking the Direct Route

Hi Steve:

I found that I would get better fills going through the International Securities Exchange -- typically at least a nickel better than the other exchanges. So, for a 10-contract order I had spent typically an extra $50 by allowing the brokerage firm to direct the order. I typically place limit orders, so I am not sure how much a brokerage can obtain price improvement when the order is placed since what is often most important is adequate volume or size on the bid and the ask. As the price of the underlying stock changes I think I am more likely to get a fill when there is size present. How can I route my orders to ISE? Do I ask my broker to do it for me?

-- Thanks, A.S.

As regular readers should know, I'm a big proponent of electronic trading and have been a loud cheerleader for the International Securities Exchange and credit it with accelerating the evolution of options trading into the electronic age. I have no doubt that floor-based exchanges will soon become extinct. Electronic trading platforms are simply more cost-efficient for everyone involved: from the exchanges themselves, to the market-making members and brokerage firms, and on through to their ultimate end-users of both institutional and retail customers.

Despite that, my general advice regarding routing orders is to avoid it. Your time and energy is much better spent choosing the right broker rather than trying to pick the right exchange at which to trade.

Another question provides a good segue that allows me to explain my seemingly contradictory stance:

Steve:

I'm an avid reader of the column and think it provides valuable insights, and I'm starting to make options a larger part of my trading strategy. But one of my frustrations is my feeling that market makers stack the deck against me by not honoring quotes or providing fair executions. This has greatly curtailed my trading and of course limited my success. Any advice would be appreciated.

-- E.S.

I'm certainly no fan of the specialist system and still suffer from postexchange membership paranoia that caused the hair on my neck to stand up whenever I entered a crowd that led me to believe, rightly or wrongly, that floor-based market makers engage in a certain level of price collusion, which made trying to get options orders filled a dreaded endeavor.

Choose a Good Doctor to Treat the Disease

Use a broker that employs smart-routing technology. While all firms are technically required to get customers the National Best Bid Offer, or NBBO, many will direct orders to a specific exchange (maybe as part of a payment-for-order-flow arrangement or as simply a way to internalize the trade). While technology -- electronic trading platforms and multiple listings through the linkage of exchanges -- has leveled out the playing field, the system is still far from perfect.

"Linkage is simply a Band-Aid on a massive wound," said Tony Saliba, CEO of Liquid Point, which provides direct access trading platforms. "Directing an order to a specific exchange simply creates a pit stop on the order flow, slowing down execution time without necessarily receiving a better price."