Beny Silbert, an online trader in Maui, Hawaii, learned the hard way about the impact that stale quotes can have on options traders, particularly in a fast-moving market.
During the April 4
swoon, Silbert tried to close out nearly 100 put options on the
Nasdaq 100 unit trust
as the market was getting hammered.
When the market started to bounce that day, Silbert says he saw that the puts' premiums, or price, were still rising. He says he held off selling, thinking that, with the premiums rising, the bounce in the market was going to reverse and head back south.
But after he saw the
Nasdaq Composite Index
recover almost 300 points, he placed a limit order to sell his puts, but his offer was $2 below the bid and it never got hit. From there, he watched the premiums on the puts plummet. He canceled the limit order and didn't end up selling his contracts that day.
Silbert learned an expensive lesson about a growing hazard in the options market -- stale prices held up by a logjam of quote traffic. Bids and offers displayed on the floor and on investors' PCs are not reliable. "I didn't even know we were in a delayed situation," Silbert says. "I was at a complete disadvantage."
And as the market's volatility seems to know no boundaries, problems such as Silbert's are likely to be more common, and are at the base of the exchanges' fears of decimalization. What's more is that the fragmented nature of the options market -- in which options are traded on several different exchanges but not linked in any way to keep prices the same -- makes the crush of options quotes disseminated from the four major markets potentially even more erratic.
Keith Keenan, who supervises options trading at
Wall St. Access
, says because of the fragmentation of the options markets, investors don't know if they're getting the best price and are becoming frustrated. And that leads to a loss of confidence in the market.
On extremely volatile days, Wall St. Access says it encourages its customers to call its trading desk so the traders can get "firm" markets from the floors of the exchanges and get the best execution for clients.
The Trouble With OPRA
The standard procedure is that all quotes from the exchanges are sent out to the
Options Price Reporting Authority
. OPRA then transmits that data to quote vendors. Unfortunately for investors and traders, the huge volume and volatility have boosted the number of messages to OPRA and created a bottleneck there. OPRA doesn't have the computer capacity to keep up, according to one industry source.
How heavy has volume been? The
Options Clearing Corp.
said that the country's options exchanges set a new daily volume record on Friday, April 14, of 4.8 million contracts, breaking the previous record of 4.6 million set on Jan. 21.
OPRA's working on the problem, but with the market growing so fast, it simply can't keep up. Calls to OPRA executive Joe Corrigan were not returned.
However, during a March 1 Congressional testimony relating to decimalization, Davi M. D'Agostino of the
General Accounting Office
, said OPRA officials told the GAO that they expect to boost its system's processing capacity to 12,000 messages per second from its current max of 3,000 messages per second. This boost is expected to be accomplished by December.
Trading options in a fast market with delayed quotes is like buying an IPO at the open with a market order, says Douglas Engmann, president of
ABN AMRO Sage
, an option clearing firm.
Exacerbating the problem in some cases is multiple listings. Linkage between the options markets should do much to correct the problem, but it's uncertain when that's going to happen and what form it's going to take. Comment letters on how to best go about linking the options exchanges are currently before the
Securities and Exchange Commission
But that's still some time away, and until then, some market participants say, the troubles in the market are likely to continue.
Here's one example: You could be a customer wanting to sell 10
April 140 call option contracts one afternoon last week. At that point, there were three different bid side quotes on those Yahoo! call options.
Philadelphia Stock Exchange
, the bid side was 9 1/2, the
Chicago Board Options Exchange
had a 9 3/8 bid, and on the
, the options were bid at 9 5/8. Often, the disparity is a result of one exchange simply catching up to the one which has traded most recently. If you're an online trader, you could send your order to sell the 10 contracts, and because it's hard to say where that order might be routed, you might not get the high bid for the contracts you are selling.
While the multiple listing of options was intended to spark enough competition to bring down bid-ask spreads, the volatility of the market has created an atmosphere where investors get quotes that aren't even in the ballpark with their original orders.