Knight/Trimark Ready to Shake Up the Options Biz

The online broker reiterates it wants to buy an options market maker. Plus, watching the downside.
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If you're a retail options investor, you may have a lot more choices coming soon via online brokers. Meanwhile, options traders Wednesday were looking to protect against a further selloff.

Knight/Trimark

(NITE)

may finally leap into the options business before year-end, according to the online broker's chief executive.

"We have a high degree of confidence that we'll have an agreement in principle to buy an options market maker" before the end of the fourth quarter, President and CEO Ken Pasternak said on a Knight/Trimark conference call Wednesday morning. "We'd rather buy than build right now."

Knight/Trimark is already plunging into equity options, exercising its right to buy the maximum amount of seats available on the new

International Securities Exchange, Pasternak said. Under a new clearing agreement,

Merrill Lynch

(MER)

and Knight could also potentially send order flow to ISE, the electronic options exchange set to begin trading in the first quarter of 2000.

Until this morning's comments, Pasternak's promise to buy a market maker in options -- which would provide Knight/Trimark the order flow it needs to participate in the ISE -- was sounding stale.

Speculation has swirled around

Susquehanna

, a large and well-known options-trading firm based out of Philadelphia, as the Knight/Trimark target. But a Susquehanna spokesman said there were no talks taking place between the two firms.

Datek Online Holdings

also hopes to join the electronic options trading game with a launch of trading by early 2000, and has

hired at least one former options trader to build that business.

Separately, the

Philadelphia Stock Exchange

is said to be considering filing the necessary paperwork with the

Securities and Exchange Commission

to serve as a crossing network for options. A representative of the exchange, which is the nation's fourth-largest options exchange, wasn't immediately available to comment.

Back to Wednesday's trading.

As feared, "the market has finally had to pay the piper for those big up days with no breadth," noted Larry McMillan, head of options firm

McMillan Analysis

, in a morning research note.

Expiration was again the focus of trading, and McMillan pointed out that the heaviest trading Friday -- the last day of trading for October-dated options -- could be in the

S&P 100

index, or OEX, options. Movement in OEX options is often seen as predictive of larger market moves, and on Wednesday investors couldn't seem to buy up OEX put options fast enough. The key is program trading: "If the OEX is below 675 on Friday, there will be sell programs; if above 705, there will be buy programs," McMillan said.

The OEX was down 9.7 to 676.5.

In particular, the October 680 puts had traded roughly 15,000 contracts by midday, compared with open interest (the number of contracts bought and sold, or opened, by investors) of 11,000 contracts. October 680 puts were gaining sharply in price, up 3 5/8 ($362.50) to 7 1/4 ($725).

Some lingo: A put gives the holder the right to sell stock at a certain price and time in the future. Buyers of puts are generally regarded as negative or pessimistic on the underlying stock or index, and so purchase puts as a bet that the price would fall.

So-called at-the-money October 675 puts and calls, which were right at the price of the index, showed a bias toward the downside. October 675 calls roughly halved in price, down 7 1/2 ($750) to 8 ($800), while October 675 puts gained 2 1/2 ($250) to 5 ($500). In other words, investors were willing to pay up for downside protection.