Coming soon to your PC: best-price options trading.
For years, regulators gently prodded the four U.S. options exchanges to "link" their price quotes to make the best market for an order readily apparent to investors. Early this year the
Securities and Exchange Commission
began forcing the issue, and this month the agency threatened to impose its own solution on the exchanges unless they develop their own linkage.
Well, there's nothing like the threat of bureaucratic intervention to speed things up. Potential solutions have come from three firms with strong ties to the options establishment, and the issue will be discussed further Tuesday when regulators meet with exchange officials in Washington, D.C.
Ernst & Co.
all offer point-and-click, best-price software programs. Until now they didn't have much of a reason to aggressively publicize them outside of their private client lists. But with the SEC focusing on trading it deems less than transparent in equities and options, one or all may evolve as a solution in this speculative corner of the U.S. market.
The value of these best-price discovery software packages goes beyond their utility to retail investors.
In a best-case scenario, Wall Street's acceptance of the software could result in a de facto network that would allow options customers to seek out the best price on all exchanges and route that price instantly back to the trader's computer. That customer -- who could be either a big Wall Street firm or a retail investor on a strawberry-colored iMac in the kitchen -- would then send orders to the
Chicago Board Options Exchange
In practice, though, the process is more complicated. The SEC could choose any of the options firms' linkage programs, but it's unlikely to favor one firm over another. The SEC could allow brokers to choose, or mandate its own version.
One of the more prickly issues involved is what happens when prices are equal on all the exchanges. By default, some of the trading programs may funnel orders back to the firm that originated it, or to a market maker with a special trading relationship.
Chicago's Ernst & Co. makes no bones about the fact that it sends options orders to the Chicago Board Options Exchange, the largest options market, in part because Ernst has a relationship with
, one of the CBOE's major market makers. Ernst makes the case that for small orders, the CBOE will automatically match a better price on another exchange. Ernst's software will, however, route the order to any exchange at the customer's request.
Typically, Ernst, which is owned by
, keeps a low profile as an options-trading firm, dealing primarily with professionals. Ernst has been demonstrating its trading software,
(Wow stands for Worldwide Options Web), to some New York banks and institutional options customers.
Preferred Capital has been offering a browser-based system to retail investors via its Web site,
TradeOptions.com. The firm is no stranger to options; its parent, Preferred Interactive, is technology partner with
ABN Amro Sage
in San Francisco, one of the largest options clearing firms. Preferred Capital offers electronic option orders by plugging into the exchanges' automatic execution systems, such as the CBOE's Retail Automated Execution System.
"Our system highlights the best price and sends the order automatically, unless the customer decides they want to override it," says Tim Taylor, senior managing director of Preferred Interactive. But the firm hasn't chosen yet to market PreferredTrading to anyone other than its own customers, who have been using the system for the past two years. "That may change," Taylor says.
As option junkies may have noticed, Timber Hill's "better mousetrap" for linking option exchanges has already been in the headlines
"We do give the clients a choice" of where orders will be sent if the best price is represented on more than one exchange, says Tom Ascher, a CBOE veteran who's now a Timber Hill vice president in Chicago.
"Timber Hill will have to compete to be the choice," Ascher adds. "The system's set up so you define destinations by exchange; a broker-dealer can embed its preference behind the screen."
Would an options order be routed to Timber Hill by default? "If there's been no preference established, and Timber Hill is primary market maker in a certain issue -- say,
-- then yeah, sure, it would go to Timber Hill. But this is not being offered as something that forces you only to trade with Timber Hill."