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April 1, 2011

ISE Wins Clean Cross Battle

By Peter Chapman

Also in this article

  • ISE Wins Clean Cross Battle
  • Page 2

The Securities and Exchange Commission's decision to approve a new order type at the International Securities Exchange could open a new era of institutional options trading.

Boris Ilyevsky

In February, the SEC brushed aside complaints from competing exchanges and market makers and permitted the all-electronic ISE to offer "clean" crosses for so-called delta neutral trades. These are trades whose executions are dependent on executions of a related stock order.

The "qualified contingent cross" (QCC) will let brokers cross jumbo-size delta neutral orders without exposing the trades to other exchange members. The clean cross eliminates the risk that the order will be broken up. Now most of these trades are taken to exchange floors where the rules require the order be exposed to all floor members, which introduces the risk of a breakup.

Under the new rule, the trade must be for at least 1,000 contracts, execute within the market's best bid and offer and be contingent on the execution of a related stock hedge.

"This is going to make my job easier," said David Beth, co-founder and chief operating officer of WallachBeth Capital, which acts as both an interdealer broker and agency broker for the buyside. "Once I get the right price, I can put it up on the tape and move on to the next trade."

By barring other exchange members from participating in the trade, the ISE makes it painless for brokers to cross large prearranged trades. And because the ISE is a 100 percent electronic exchange, the process is likely to be faster and cheaper than consummating the trade on an exchange floor.

"With QCC, market participants can execute large, complex transactions more efficiently," said Boris Ilyevsky, managing director of ISE's options exchange. "This order type reduces fees that otherwise may have been paid to an intermediary, and allows traders to execute these sophisticated trades quickly and easily. The faster they can put up a trade, the faster they can make that next phone call or type out that next IM to solicit the next deal."

According to Tabb Group, at least a quarter of industry volume is done in trades of at least 1,000 contracts. According to industry sources, about 75 percent of all crosses are tied-to-stock trades. The remainder are options-only crosses, also known as "outrights."

Interdealer brokers do most of the tied-to-stock trades on behalf of large institutional brokerages such as Goldman Sachs. To find the other side of the trade, an IDB taps into a network of liquidity providers, often known as "vol" traders.