So how many miles you got?
For frequent fliers, piling up miles trip after a trip has its payoff. CBOE adopted just that approach for its end-user community, a group which has been somewhat of a mystery to the exchange. Last month, CBOE launched its Frequent Trader program, which gives rebates to traders who reach certain monthly trading thresholds.
The program is designed to do two things – encourage individual traders to trade more of the CBOE’s exclusive products, SPX options and VIX options, and give CBOE a view of just who is trading them. The voluntary program establishes an anonymous numeric ID with the exchange but not with anyone they are trading with, and allows the exchange to examine some of the key questions for any exchange – just who is trading certain products, when and in what increments? Understanding all of that information is a first for CBOE.
“We could never identify individual customers before because they were always behind the broker-dealer,” said Eric Frait, CBOE’s vice president of business analysis, at the Options Industry Conference in Palos Verdes, Calif. “We had some idea, but it’s always been anecdotally.”
Individual customers in the frequent trader program who trade 5,000 VIX options contracts in a month receive a 5 percent fee rebate from the exchange; 10,000 contracts earns them 10 percent and 20,000-plus generates a 15-percent rebate. On the SPX, SPX Weeklys, and SPXpm, the thresholds are higher with 12,000 contracts for a 5 percent rebate, 20,000 for 10 percent, and 50,000 for 15 percent.
Payments are wired directly to the customers’ bank accounts, which typically saves brokers from having to keep track of another source of capital. Brokers are not required to offer the frequent trader program, but CBOE is trying to convince them that it is a good business practice for them, as customers are incentivized to trade more. So far, 32 customers have signed onto the program which, the exchanges estimates, represents about 10 percent of the proprietary trading that occurs in those contracts. Frait said the exchange will never get 100 percent of the volume that is traded because many don’t meet those contract thresholds. But he said the exchange would be happy with 20- to 25 percent of the proprietary volume.
“Some firms we thought were smaller are much bigger than we thought they were,” Frait said of the small sampling of customers so far. “Some are the opposite. And as the program progresses, there will be more information on that.”
CBOE will continue to roll out the program more aggressively in the coming months to attract more individuals and brokers as well. It also may expand the program to other exclusive CBOE products, although it cannot offer it on multi-listed options as that would be considered tampering with order flow with competing exchanges.
In the end, CBOE believes the program will provide unprecedented information that will help it in its product and business development strategies.