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November 2, 2011

Into the Fray

Amex Jumps into COB Game

By Peter Chapman

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The battle between the exchanges over the electronic trading of complex orders is heating up.

NYSE Amex Options is reporting the number of contracts traded on its complex order book has shot up dramatically since the beginning of the year, positioning the exchange as a contender in what had been a three-legged race.

"This is a greenfield growth opportunity," Steve Crutchfield, chief executive of NYSE Amex Options, told Traders Magazine. "We haven't been very competitive in this space in the past."

Steve Crutchfield, NYSE Amex

In January, according to Crutchfield, only 1 percent of Amex's options volume was traded over its complex order book. By September, that number had grown to 5.1 percent. That amounted to 250,000 contracts per day on average, the executive noted.

With the acceleration of its COB business, Amex puts itself in contention with the three exchanges that dominate the electronic trading of multi-leg, or complex, orders. That's the International Securities Exchange, Chicago Board Options Exchange, and Nasdaq OMX Phlx.

ISE has the biggest business, executing between 25 percent and 30 percent of its volume in complex trades, according to trading execs. CBOE is believed to have the second largest COB program, while Phlx is third.

Overall, the amount of industry volume done in packages of two legs or more is close to 20 percent, exchange officials estimate. That figure includes trades done on COBs as well as exchange floors. Amex does about 25 percent of its volume on its floor and most of that consists of large complex orders, according to Amex officials.

Complex orders involve more than one options series. Typically, they are two-legged, although they can involve three or four or more series. They come in many varieties, typically as spreads, straddles, and combinations. A package could include two calls, two puts, or a put and a call. Complex orders can also be made up of an option and shares of the underlying stock.

Multi-leg trades have been around as long as options have been traded, but have only moved off floors and onto electronic systems in the past 10 years. Traders post complex orders on the books as a package, quoting a single net price. The prices are typically better than would be obtained by trading the component legs separately.


See Sidebar: Leg Risk Remains


Brokers use COBs primarily for small orders of no more than 20 or 30 contracts, while sending the larger orders to market makers or to exchange floors.

As to why volume on the Amex COB has soared this year, Crutchfield cites three major reasons. First, the exchange sold almost 53 percent of itself to a group of large brokerage firms-all of which promised to trade more on Amex.