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November 1, 2010

HFTs Shun Options Marts

By Peter Chapman

High-frequency trading, despite its near takeover of the equities world, is not making significant inroads into options markets. That's the conclusion of HFT firms, and the brokers and exchanges that service them.

Clarke Roberts

At this year's joint conference put on by the Futures Industry Association and the Options Industry Council, executives singled out market structure as the single biggest impediment to HFT adoption.

"We're still not seeing a big crossover into options from equities," Clarke Roberts, co-founder and head of sales at agency brokerage Pico Trading, told the gathering.

Roberts cited several reasons for the shortfall, including less use of maker-taker pricing; inferior access to the markets vis-à-vis market makers; order cancellation fees; an overwhelming amount of message traffic; and an inability to allocate executions to managed accounts.

"Unless there are some major changes, I don't see people pouring into that space," he said.

At least one HFT executive agrees. Cameron Smith, executive vice president and general counsel at Quantlab Financial, blames a lack of competition between exchanges for HFT recalcitrance.

Adam Nunes

Because of the competition from off-board trading in equities, exchanges are much more proactive in wooing HFTs, Smith contends. "In options, there's no internalization," he said at the confab in New York. "Therefore, the competition between exchanges is not as intense as it is in equities."

Adam Nunes, a principal at HFT shop Hudson River Trading and formerly in charge of the Nasdaq Options Market, disagreed with Smith's take on off-board trading, but still finds options a hard sell for HFTs.

The lack of off-exchange trading "creates an environment where if you put the best price in the market, you're going to get the next trade," Nunes said. "Unless someone else gets there first."

Still, when Nasdaq launched its options market in 2008, partly geared to HFT players, "we saw uptake to be pretty mixed," Nunes said. That's despite creating NOM in the same mold as Nasdaq's equities market, with the same market structure, fee structure, data center and protocols.

Nunes also noted that it's difficult for an HFT firm to break into options as a market maker, either secondary or primary, due to a limited number of slots at exchanges.

Thomas Wittman, in charge of the options business at Nasdaq OMX, noted that less options trading compared with equities and limited use of maker-taker pricing contributes to an uninviting landscape.

"It's not an HFT product," he told the crowd at the FIA/OIC conference. "There's just not that much trading compared to the cash markets. There are some products, such as the SPDRs that lend themselves to HFT trading, but we're not going to adopt maker-taker wholesale."

It's possible to view the situation in a different light. Both Nunes and Smith noted that options market makers are little different than HFTs. "Every professional trading firm in the options business is an HFT," Smith said. "Everyone is using the same tools." Nunes noted that "options market makers are sophisticated electronic trading firms. Then you split hairs: Are they HFTs or not?"


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