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September 9, 2009

Benchmark Cross for Options On Tap

By Peter Chapman

Also in this article

  • Benchmark Cross for Options On Tap
  • Page 2

Traditional money managers may get a big incentive to trade options later this year. A joint venture between the Chicago Board Options Exchange and a division of agency brokerage Pipeline Trading to offer a crossing mechanism that prices block trades at the gamma-weighted average price is back on track, according to a principal involved.

Dave Mortimer, Pipeline Archangel

Pipeline Archangel, formerly 3D Markets, the brokerage firm that devised the idea of a GWAP benchmark cross, is in talks with systems developers to finally build the much anticipated crossing system, according to Dave Mortimer, the head of Pipeline Archangel.

Mortimer, who was busy merging 3D Markets into Pipeline Trading earlier this year, is expecting the CBOE will be able to begin offering the system to its members in the fourth quarter or next year's first quarter.

"Getting the [Pipeline] deal done certainly delayed the project," Mortimer said. "But Pipeline has a huge IT department and great project management folks. It helps a lot."

The New Hope, Pa.-based brokerage and the CBOE announced the plan to bring benchmark trades to money managers with large options orders more than a year ago. So far, progress to bring the concept to fruition has been slow.

The two parties as well as other trading executives believe that creating a benchmark and an electronic facility to match block-size orders would stimulate options trading among traditional asset managers much the way the VWAP benchmark has done in cash equities.

Although the VWAP benchmark has been losing favor among traders in recent years, it is still widely used. A GWAP benchmark is harder to construct, however, and Mortimer's team is in talks with money managers about the best way to perform the calculation.

One sticking point is the choice of implied volatility, a key factor used in options pricing models to determine the value of the option. "Do you use the opening implied vol?" Mortimer asked rhetorically, "Or do you use some sort of 10-minute average of implied volatility?"

Building the matching system itself is not an overwhelming task, Mortimer said. Pipeline is in discussions with several outside developers and expects to arrive at a decision in the next few weeks. Construction of the system will likely be outsourced, he said.

Another sticking point is the need for Securities and Exchange Commission approval of an after-hours cross. There are no after-hours prints in options like there are in cash equities, Mortimer said. The CBOE must file for a rule change with the SEC to enable one. Mortimer is optimistic the SEC will authorize the change.