Skip to main content

Options Exchanges and Order Flow

Image result for Andy Nybo

In the TabbFORUM, a web platform for discussion of the capital markets by informed participants therein, I see a new piece by Andy Nybo about the segmenting of the order flow in the U.S. listed options markets.

Nybo is head of derivatives research for the TABB Group, where he has worked for 10 years. So he knows all its mysteries, such as presumably why the capitalization convention for the TABB Group is reversed for the name of the TabbFORUM.

His article begins with the observation that there are lots of US options markets, and that they try to compete with one another with various innovations. Isn't that a good thing? Well ... it depends on the innovation. He complains that one new trend is raising havoc, "price improvement auctions."

He defines a price improvement auction as "a trading protocol that allows market makers to improve prices for a segmented swatch of order flow," and claims it has a "number of detrimental consequences."

In essence the market maker (an exchange member) submits a two-sided offer -- that is, both a buy and a sell price -- into the market looking for takers. If there ARE takers, then this is by definition and for them an improvement on the quoted market price. Otherwise they would have bought (or sold) at the quoted market price.

This bifurcates the market and, in Nybo's view, it has contributed "to a steady decline in the long-term health of US listed options markets."  The so-called "lit" market is stripped of its "most valuable retail flow."

Nybo doesn't suggest a solution, though. In fact he ends with a warning that "solutions often have unintended consequences themselves."

That's an odd way to end the piece but, hey, who am I to question Nybo's literary talents?

The discussion confirms my general sense that huge changes in the business of financing business lie just ahead. The next five years or so will see an explosion of new technologies in the field, along with the playing-out of old institutions that are of as much continuing use and vitality as a physical trading floor in the 21st century.

Huge. I said it.


Popular posts from this blog

Great Chain of Being

One of the points that Lovejoy makes in the book of that title I mentioned last week is the importance, in the Neo-Platonist conceptions and in the later development of the "chain of being" metaphor, of what he calls the principle of plenitude. This is the underlying notion that everything that can exist must exist, that creation would not be possible at all were it to leave gaps.

The value of this idea for a certain type of theodicy is clear enough.

This caused theological difficulties when these ideas were absorbed into Christianity.  I'll quote a bit of what Lovejoy has to say about those difficulties:

"For that conception, when taken over into Christianity, had to be accommodated to very different principles, drawn from other sources, which forbade its literal interpretation; to carry it through to what seemed to be its necessary implications was to be sure of falling into one theological pitfall or another."

The big pitfalls were: determinism on the on…

A Story About Coleridge

This is a quote from a memoir by Dorothy Wordsworth, reflecting on a trip she took with two famous poets, her brother, William Wordsworth, and their similarly gifted companion, Samuel Taylor Coleridge.

We sat upon a bench, placed for the sake of one of these views, whence we looked down upon the waterfall, and over the open country ... A lady and gentleman, more expeditious tourists than ourselves, came to the spot; they left us at the seat, and we found them again at another station above the Falls. Coleridge, who is always good-natured enough to enter into conversation with anybody whom he meets in his way, began to talk with the gentleman, who observed that it was a majestic waterfall. Coleridge was delighted with the accuracy of the epithet, particularly as he had been settling in his own mind the precise meaning of the words grand, majestic, sublime, etc., and had discussed the subject with William at some length the day before. “Yes, sir,” says Coleridge, “it is a majestic wate…