At this year’s Options Industry Conference in Miami Beach, participants will discuss such crucial industry issues as market quality and deteriorating volumes, the implementation of Dodd-Frank and Reg SCI, technology and risk management. The conference is hosted by BOX Options Exchange, whose new CEO, Edward Boyle, spoke with John Lothian News about some of these issues and what’s being done to address them.
Deteriorating markets are a concern of the whole industry, and the conference is a great place for those in the industry to get together to talk about that and other problems, Boyle said.
“A lot of people are speculating about what’s causing [market deterioration], and we don’t have a lot of hard research that has told us exactly what the cause is. One of the big topics is that there is too much of the customer business is going to auctions,” he said. “Auctions are very transparent, but deteriorate onscreen liquidity because it’s not worth putting your liquidity on the screen if it’s not going to be interacted with.”
BOX was the first options market to offer the possibility of price improvement to investors via an auction process. At that time, price improvement was needed in the industry, Boyle said, and BOX will continue to support it, as will the whole options industry.
However, “now is the time to figure out how we can make posting a quote again of value,” he said. BOX is addressing that by doing things like protecting the market makers who are on the quote.
In addition, the proliferation of technology has raised barriers to entry, which has also deteriorated the onscreen liquidity. There are a lot more options series out there than years ago, when traders might have quoted 100 symbols; now someone might quote upwards of half a million symbols (strikes) out there. You have to account for risk in each of those liquidity events, and that deteriorates liquidity, Boyle said.
A lot of things contribute to the deterioration of liquidity, not just auctions and strikes, he added. The things that can be done to combat this deterioration include changing pricing schemes, allocation structures, and risk mitigation controls, and BOX is looking at all of that, he added.
“The industry as a whole working is working with OCC to put more risk mitigation technologies into every system and make them more consistent throughout the industry so that when participants are trading, if there is a catastrophic event or a large move in the market or a systems problem, we can get quotes out of the market quickly, we can get quotes back into the market to give the market its value once again – all those things play a role,” Boyle said.