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June 2, 2009

Pipeline Buys 3D Markets for Options

By Nina Mehta

Pipeline Financial Group, which operates a block crossing platform for equities, expanded into options when it acquired 3D Markets, a two-year-old company that offers block trading for options investors.

Pipeline expects the addition of 3D's technology to broaden the company's appeal to institutions hungry to trade options in size. "We'll allow the two offerings to operate side by side immediately and work with customers over the next few months to figure out how to integrate them," said Fred Federspiel, CEO of Pipeline.

Fred Federspiel

Aspects of 3D's technology could help equities traders in other ways, as well. "We will use this acquisition to look at different ways the options trading world can help the large block equity trader who's looking to accumulate a significant position," Federspiel said.

For 3D, the benefits of the deal are clear: distribution and access to Pipeline's 400-plus institutions. "3D has proven the technology and was looking for a partner to get it distributed to the institutional community," Federspiel said. "We were interested in their Archangel product."

Archangel is 3D's platform for two types of options trades: block trades in which institutions get blind bids from liquidity providers without giving up the name of the underlying stock, and benchmark crosses based on a proprietary GWAP benchmark. GWAP, which stands for gamma-weighted average price, is akin to an equities volume-weighted average price but is for options.

The Chicago Board Options Exchange has an agreement with 3D to offer a facility to trade GWAP benchmark trades prior to the open, subject to approval by the Securities and Exchange Commission. That deal remains in place with Pipeline.

"The long-term goal of the deal is to create a multi-asset block trading platform," said Paul Zubulake, senior analyst for options and futures at research firm Aite Group. "The buyside has always favored the idea of trading large quantities of options at a single price point with anonymity," he said, adding that a dual-asset-class platform could make that process easier.

But the attraction for Pipeline may be broader. "The deal also provides Pipeline with equity option market knowledge and an agreement with the CBOE," Zubulake said. "The questions are: Will there be any issues with platform integration? And will the regulatory landscape change?"

According to 3D chairman and CEO David Mortimer, the options platform has about 20 institutional participants. All but one, which uses the Web-based version of the firm's system, currently seek blocks on 3D by picking up the phone and calling the 3D service desk.

Jen Setzenfand, vice president and senior trader at Federated Investors, based in Pittsburgh, adds that enabling equities executions to occur in conjunction with options trades helps institutions. "Many options trades are packaged with stock," she said. "Having access to the equities market for big options trades should make that easier."

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