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June 2, 2009

BOX to Target Large-Lot Trades

By Peter Chapman

The Boston Options Exchange, as part of a push by options exchanges to cater to the needs of large lot traders, is adding block trading to its mix. The move comes as institutions bypass the exchanges and conduct more of their business in the over-the-counter market.

By the end of the year or early next year, BOX will add to its services four new capabilities intended to appeal to institutional traders.

The additions will bring the exchange up to the level of its competitors, all of which offer large lot trading services. "We don't compete in 30 to 35 percent of the marketplace," BOX vice chairman Will Easley told Traders Magazine. "This will plug the holes in our product offering."

Specifically, BOX is making rule changes and beefing up its technology to accommodate brokers doing solicitation, facilitation, generic "block trading" and complex order types. Institutional-size orders are often described as those involving 500 or more contracts.

Solicitation involves a broker with an institutional order calling around to find the other side; he acts as an agent for both sides. A facilitation occurs when the broker takes the other side of a trade himself; he acts as a dealer in that instance. Both solicitation and facilitation trades are done upstairs and then brought to an exchange for a print.

Generic block trading involves seeking liquidity on exchanges. Complex order types involve multi-leg options trades or a trade combining an option and the underlying stock.

The move by BOX to accommodate large and complex orders is not unusual, sources say. Institutional volume is driving the options business, so exchanges need to adapt. "The exchanges are accommodating us in the mechanisms they make available for us to print the trades," Joseph Corona of BNY ConvergEx's Liquidpoint said at last month's Options Industry Conference in Weston, Fla. "They are innovating like crazy. The new order types being listed right now to capture crossing business are coming fast and furious. Rule filings are coming 10, 20 a day. A lot of these have to do with order types to facilitate the crossing process."

Other brokers say the exchanges aren't doing enough. A common criticism is that exchanges are not serving the needs of large traders who are forced to conduct their business over the counter.

"The industry as a whole is doing nothing to keep these guys here," Dave Mortimer, an executive with Pipeline Trading, said at the conference. "They trade OTC anytime. I talk to them every day to try to bring them back from the OTC market."

Cantor Fitzgerald trader Mike Khouw agreed. "As far as single-stock options are concerned, we think of the customers as being fairly captive," he told the OIC crowd. "They certainly are not. If they don't like the way the marketplace functions, they will trade OTC. And they do. In substantial size."

BOX is one of the smallest of the seven options exchanges. On a recent day in May, its market share was about 3.5 percent, similar to that of NYSE Amex options and Nasdaq Options Market. That's down from March, when BOX did 5.6 percent of total exchange volume.

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