Jim Seligman is Beta Manager and a senior strategist at MEB Options, an institutional commissioned brokerage firm located in Chicago, New York, and Philadelphia. JLN Options editor Sarah Rudolph met up with him at the Options Industry Conference in Savannah to discuss the release of ‘Click to Trade’, MEB Options’ new proprietary technology designed for its clients.
Q: MEB announced a new product to coincide with the Options Industry Conference in Savannah. Could you discuss the announcement?
A: ‘Click to Trade’ is our new proprietary technology, and we’re rolling out 2.0 on Monday. It’s not a no-touch solution; it’s a low-touch solution, primarily for marketing spreads off the exchange books and off our internal order flow to our customers.
It’s a proprietary tool. It’s been a success, but it’s taken a little bit of hand-holding to get the customers’ heads around it.
Q: What is the difference between no-touch and low-touch?
A: No-touch is box to box: my computer talks to your computer directly. That’s the method used in high frequency trading. We have some customers who have their own proprietary systems, so that’s not a service they need from us, but they are getting other services from us.
‘Click to Trade’ is targeted for firms that are not necessarily no-touch, though we can easily make this into a no-touch product. As it is we have to translate the data into a human format. We read it, then put it out as a message, and it’s just as easy to leave that message talking to a computer as it is talking to a person.
Customers can also set their own filters by whatever criteria they would like. Those are all algorithmically selected. The decision to trade is not algorithmic, however.
There is a large audience for this. Right now that class of customer is caught in limbo. They have a need for technology, but they may not have enough scale to get sufficient technology. A lot of people have tools to see the options market quotes – so if you want to see the Citibank at-the-money May calls, there are thousands of tools to see that. To see the spread books is a much more difficult process.
Q: So what is the element of touch in the low-touch tool?
A: It turns up on your desktop as an IM that says “Click here to trade” – hence the name. You click on it, and it gives you an “Are you sure?” box and with the 2.0 version, which just came out, it gives you a chance to counter, so if they someone is paying 112, you can offer it at 113 or 114 and so on. You can change the size, you can move all or some of it, you can make it a day order – the standard countering tools that a person would use.
So if you like the trade, you can click, and an “Are you sure?” box comes up, and then the order gets chopped up and sent off to the exchanges. It’s obviously not as fast as no-touch, but it is a useful solution for people not in the low-latency algorithmic business, who are nevertheless competitors for it.
Q: What types of people?
A: Middle sized firms, who have these tools but prefer to see some of the orders and apply their discretion to it. For people who have these tools it’s a supplement, and for people who don’t have any of these tools it puts them in the game.
For example, someone might have ten stocks and they want to be short volatility in these six and long volatility in these four. They can set their filters so they can see those six stocks or those four stocks.
If the launch of 2.0 goes as desired, the next iteration will be to enable customers to filter by short volatility strategy or long volatility strategy.
I think very few people who aren’t in the low latency area are old fashioned market makers capturing bid-ask. Most of the players now want to express an opinion – they have positions they want to put on and their goal is not really to capture the order flow, but rather to accumulate a position as frictionlessly as possible.
Q: When did you join MEB?
A: I joined over the past summer. I was at a hedge fund and one of my former right-hand men signed up with Mike [Michael Barry, Founder and President] and they thought I would be a good fit.
Q: Is what you are doing here with MEB Options very different from what you did there?
A: Yes, I was a lead portfolio manager for a high frequency firm and the firm blew up.
Q: Have you always worked in options?
A: I think when I first started it was on the New York Futures Exchange (NYFE) in August of 1980. It was a futures-only exchange at that point. My first day in the business was the day before the NYFE opened, and I remember standing there listening to the mock trading for a couple of days and at some point the roar cohered and I could start recognizing voices and such. It all came together. It’s sort of like if you’re deaf and then you can hear.
Q: It takes a particular talent for that.
A: Yes…some people it comes to and some it doesn’t. One thing I’ve learned is that not everybody trusts their ears completely. I think the most important thing in floor trading is to be able to listen to a lot of stuff. It’s not really about yelling and being mathematical. In floor trading, you have to be decisive — but you can’t be decisive and be wrong – you have to be decisive and correct.
I used to work for Mike Reilly years ago. His father, Ivers, was a recipient of the Sullivan Award. He always used to say, “Pick a side and be right.”
Q: Not so easy to do. Did you have a mathematical background?
A: I was a history major in college. But I have an uncle who is a world class astrophysicist and was chairman of the department at Princeton for 30 years. There is enough mathematical skill in the background that I think I did better on my math SAT than my English SAT. I might not have to be able to write my own code but I have to be able to talk to the guys who do and understand what their issues are. A lot of my job is translation. Often I have to translate from the technology people to the brokers and the brokers to the technology people.
Q: What is the most important or interesting issue that has come up for you at the conference so far? Are you concerned about the regulatory issues?
A: There is a piece of the regulation that I’m very interested in and they didn’t mention it, which is a tremendous source of irritation — sponsored access. It basically says that before you enter an order on behalf of a customer, you have to know how this affects their overall positions and whether they are able to afford to put the order out. Which basically means you have to know your customers’ positions before you can put them out.
Essentially, this is a huge boon for the prime brokers and a huge problem for anyone else. On some level it’s a solution without a problem. I think the concern is that someone goes crazy and buys a million puts and doesn’t have the money for it.
Q: Aren’t there any safeguards already in place to prevent that?
A: There are a lot of safeguards in place. Really, this is a rule written for equities that has gotten slapped in with options. Typically equity guys don’t have seven brokers on call. They have one they call and probably one or two others they have to keep their prime broker honest. To know someone’s equity options position is almost infinitely complex. It is highly burdensome, and there is a definite distinction between equity clients and options clients. As I said, equity clients are not usually using nine brokers. Not a lot of firms make a livelihood being boutique servicers for equity liquidity. In the options world, if you are only using one broker you either have money to spare or you’re a fool. You need to get prices from multiple people. I don’t know anyone who doesn’t have all those phone numbers on speed dial. It would be an enormous burden if this rule goes through, and I think it is totally driven by equities and is far less burdensome on equities.