Robert Newhouse co-founded Ballista Securities in 2007 as a block trading facility for the equity options market. The company received Financial Industry Regulatory Authority (FINRA) approval as a broker/dealer in August 2008 and live trading on the Ballista ATS platform began on Oct. 28, 2008. Newhouse spoke with MarketsWiki editor-in-chief Jim Kharouf about the company, block trading and where the Ballista name came from.
Q: How did you get started in the business?
A: When I was 14 and in high school, my dad helped me get a job as a runner on the American Stock Exchange (Amex), introducing me to a guy I still owe a great debt of gratitude to: Curt Richmond, head of Sage Clearing. I wasn’t in love with Wall Street but that first day, the action that I saw – paper on the floor up to my waist, being in the thick of it – really seduced me.
I attended college at New York University for roughly a year when I was courted away from school by Island ECN. That was my foray into electronic trading.
Q: You’ve been chief technology officer at several financial firms – TORC Financial and Orbit II Partners. You also worked on Island ECN, how did that experience help in building Ballista?
A: I’ve been able to leverage my experience, of course. Both my experiences at Island and TORC were with really small companies. The management team at Island with Josh Levine, Matt Andresen and Will Sterling are still heroes and mentors of mine to this day. They really gave me the general tenets of speed, the culture of innovation and the philosophy of remaining philosophically pure. That means providing a value proposition for a specific reason to people, sticking by that philosophy and never wavering from that philosophy. If you are right, the product will work and you’ll make money. If you are wrong, the underlying idea will have no merit.
Q: Ballista is often called a block trading facility for options. Can you explain how it works?
A: It’s an alternative trading system (ATS) for block-sized volatility and directional options trades. Previously, if traders needed to source “block-size” option liquidity, they had to call a broker, so an entire community of brokerages grew to provide liquidity.
The Ballista ATS now allows buyers and sellers to meet and match those trades in a programmatic fashion with an algorithm that defines the trade on different parameters such as price and time. So we’re leveraging a lot of the technical advances in the equities space and applying that to the options space. This allows liquidity seekers and providers to meet outside of an exchange to consummate large block trades. We act as an ATS for directional block options and also as the agent for volatility which means options and stock traded together contingently as a single transaction.
Q: Ballista launched in October 2008 and has more than 514 underlying symbols listed. What’s happened since then?
A: At the end of March, we extended that to support all equity option symbols. We’ve also removed our maximum order size restriction. One of our concerns was that we’d get very large orders but that our ATS would lack the liquidity to service them. Now that we’ve built that liquidity base we can handle much larger orders which should improve our average execution size from around 1,700 contracts to something substantially larger.
Building a liquidity pool is like an onion. You have a seed of liquidity with liquidity providers. But then you add stronger layers on top of that and we’re adding bank facilitation desks and more formal initiating parties that require the liquidity that we’ve spent the last four months building.
Q: Why is this the right time to be in the options block trading space?
A: It’s the right time for a number of reasons. The option and equity market seems to be homogenizing in the regulatory landscape. We see rules in equities trading for the first time being applied to the options markets in principle. Options linkage, for example, works similarly to Reg NMS in equities.
We found that the confluence of events that caused the global markets to suffer greatly are actually a net benefit to us. Because banks can commit less capital, they are looking for more sources of liquidity for their clients. There is also a lot of pressure on commissions all across the Street, so it’s a great time to be entering the market.
Q: Will Ballista’s technology work with other asset classes such as futures or forex?
A: The technology is separate from the asset class that it trades. So it supports multiple asset trades. But in terms of overall strategy, I don’t see it going into other asset classes. There are some ancillary asset classes in the options space I’d like to focus on, such as flex options and index options with the idea of using futures as a hedge.
Q: How did you come up with the name Ballista?
A: Ballista really represents the idea of forging a path, in the case of a ballista [catapult], through a castle wall. We see it as forging a path to liquidity, allowing users to leverage a tool, similar to the way in which Roman warriors leveraged a ballista to drive a fuller path to their goal.