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October 3, 2011

Simplifying the Complex

Broker Sets Out to Automate Multi Leg Trades

By Peter Chapman

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The trading of complex orders is getting streamlined. MEB Options, an institutional brokerage based in Chicago, has begun automating the process of trading complex options orders, or those with more than one leg. The firm's Click to Trade service uses instant messaging to bring quotes, orders and RFQs to client desktops and then allows for instant executions.

"It's all about speed," explained Jason Stamer, a manager in MEB's business development department. "You've got a lot of computers out there trading with algorithms that are faster than humans. So you have to get the information out to clients as fast as possible."

Stamer, a 20-year veteran of the Chicago Board Options Exchange floor, joined MEB three years ago. He immediately began work on the Click to Trade service, which was finally rolled out this spring. The crux of the job has involved attaching lines to exchanges to suck in data from the various complex order books.

Five exchanges offer complex order books: CBOE, the International Securities Exchange, NYSE Arca, Nasdaq OMX PHLX and NYSE Amex. The mechanisms permit traders to put on spreads, strangles, butterflies, condors, etc.-any trade that involves two or more options contracts. MEB is a member of all the exchanges except for Arca. At this point, it takes in data from CBOE and ISE, which have been leaders in the complex-order-book space. MEB is working on taking in feeds from the books at Philly and Amex.

The first exchange to automate spread trading was the ISE in 2001. CBOE introduced its COB in 2005. Books from Amex, Arca and Philly have only come on line in the past few years. By most accounts, they aren't the easiest mechanisms to deal with. Their contents may not be visible to all interested parties, and orders can often sit on the COB and never get dealt with.

"The automation for spreads is clumsy, faulty, kludgy and incomplete," MEB strategist Jim Seligman told the crowd at this year's Options Industry Conference. "Much of our core business is in providing tools to customers to simplify that process."

Institutional brokers like MEB have always offered their customers quotes for complex orders. Before the advent of the COBs, this was done on exchange floors. The service can involve the assumption of risk when putting a combo together while the broker presents the client with a single price for the trade.

"They're taking the floor model and trying to automate it as best they can to make it more efficient," explained Greg Rickard, a partner with Rickard & Winans, a developer of automated trading systems for hedge funds. "They give the institution a bid-ask and then the institution can trade against it." By contrast, Rickard's customers are risk-taking hedge funds looking to squeeze every penny out of a trade. They assemble their own combos to execute, he said.

For MEB, institutional customers range from hedge funds to investment banks. Many of the options desks of the big banks use MEB to execute trades they are unable to trade themselves. The desks also work with MEB to gain access to floors where they don't have a presence. Credit Suisse and Goldman are customers.