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.

Comments

Popular posts from this blog

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 majesti

Five Lessons from the Allegory of the Cave

  Please correct me if there are others. But it seems to be there are five lessons the reader is meant to draw from the story about the cave.   First, Plato  is working to devalue what we would call empiricism. He is saying that keeping track of the shadows on the cave wall, trying to make sense of what you see there, will NOT get you to wisdom. Second, Plato is contending that reality comes in levels. The shadows on the wall are illusions. The solid objects being passed around behind my back are more real than their shadows are. BUT … the world outside the the cave is more real than that — and the sun by which that world is illuminated is the top of the hierarchy. So there isn’t a binary choice of real/unreal. There are levels. Third, he equates realness with knowability.  I  only have opinions about the shadows. Could I turn around, I could have at least the glimmerings of knowledge. Could I get outside the cave, I would really Know. Fourth, the parable assigns a task to philosophers

Searle: The Chinese Room

John Searle has become the object of accusations of improper conduct. These accusations even have some people in the world of academic philosophy saying that instructors in that world should try to avoid teaching Searle's views. That is an odd contention, and has given rise to heated exchanges in certain corners of the blogosphere.  At Leiter Reports, I encountered a comment from someone describing himself as "grad student drop out." GSDO said: " This is a side question (and not at all an attempt to answer the question BL posed): How important is John Searle's work? Are people still working on speech act theory or is that just another dead end in the history of 20th century philosophy? My impression is that his reputation is somewhat inflated from all of his speaking engagements and NYRoB reviews. The Chinese room argument is a classic, but is there much more to his work than that?" I took it upon myself to answer that on LR. But here I'll tak