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."
Smart-routing systems let the technology do the work it would take to scan all the exchanges manually. It also saves you a phone call to your broker, since you need to verbally authorize the exchange where you want your order directed unless you have a direct access system, such as Interactive Brokers or RediBook.
"When people talk about quality of execution, they are referring to speed and price. Unless you are a professional trader engaged in complex hedging strategies in which time is crucial, price is clearly the more important component," said Saliba.
If you use price limits, routing an order becomes something of a moot point. If you place market orders, smart routing finds you the best price and does it nearly as well as having direct access.
Bill Ginsberg, trading strategist for Alzeon Capital, a New York-based hedge fund, uses RediBook, which shows him all five options exchanges and lets him direct an order with a click. "But most of the time, I simply enter an order with the 'composite' designation, which basically smart-routes the order," he said. "I think the specialists and the floor-based system stink, but if they provide a better price at a particular time, then they can have my business."
For retail traders, it means making sure your broker offers smart routing, and doesn't have a disposition for directing an order to a specific exchange and subsequently relying on linkage to provide you with the NBBO. Most reputable online brokers use smart routing, but active options traders may want to focus on firms such as OptionsXpress, CyberTrader and ThinkorSwim.
Most traders are finding that the ISE does in fact provide the best markets in terms of buy/ask spreads and liquidity, which explains why it has quickly become the market-share leader.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to