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Pipeline Gets Into Options with 3D Markets Acquisition
Traders Magazine Online News, April 24, 2009
In a deal announced Wednesday, Pipeline Financial Group, which operates the Pipeline equities crossing platform, gained an options crossing platform and expanded its block trading horizons by acquiring 3D Markets. 3D is a two-year-old company that created a platform to execute block trades in options with little or no market impact.
Pipeline expects the addition of 3D's technology to broaden the company's prospects and enable institutions to execute blocks more easily in related asset classes. "We'll allow the two offerings to operate side by side immediately and work with customers over the next few months to figure out how to integrate them," said Fred Federspiel, CEO of Pipeline.
Aspects of 3D's technology could also help equities traders in other ways. "We will use this acquisition to look at different ways the options trading world can help the large block equity trader who's looking to accumulate a significant position," Federspiel added. He declined to elaborate on how Pipeline might do this.
For 3D, the benefits of the deal are clear: distribution and access to Pipeline's 400-plus institutions. "3D has proven out the technology and were looking for a partner to get their technology distributed to the institutional community," Federspiel said. "We were interested in their Archangel product."
Archangel is 3D's platform for two types of options trades: block trades in which institutions get blind bids from liquidity providers without giving up the name of the underlying stock, and benchmark crosses based on a proprietary GWAP benchmark. GWAP, which stands for gamma-weighted average price, is akin to an equities volume-weighted average price but is for options.
The Chicago Board Options Exchange has an agreement with 3D to offer a facility to trade GWAP benchmark trades prior to the open, subject to approval by the Securities and Exchange Commission. That deal will remain in place with Pipeline. "We will deploy the GWAP cross with the CBOE," Federspiel said. "We hope it will be a significant product for institutions."
"The long-term goal of the deal is to create a multi-asset block trading platform," said Paul Zubulake, senior analyst for options and futures at research firm Aite Group. "The buyside has always favored the idea of trading large quantities of options at a single price point with anonymity," he added, noting that a dual-asset-class platform could make that process easier.
But the attraction for Pipeline may be broader. "The deal also provides Pipeline with equity option market knowledge and an agreement with the CBOE," Zubulake said. "The questions are, Will there be any issues with platform integration, and will the regulatory landscape change?"
Currently, all options trades must execute on exchanges to be cleared by the Options Clearing Corp. 3D sends its crosses to several exchanges for execution. It executes several blocks every week, according to David Mortimer, 3D's chairman and CEO. On the benchmark front, the proposed Options Linkage Plan that's waiting for SEC approval includes an exception for benchmark trades.
Jen Setzenfand, vice president and senior trader at Federated Investors, based in Pittsburgh, notes that enabling equities executions to occur in conjunction with options trades benefits institutions. "Many options trades are packaged with stock," she said. "Moving a block of options contracts with or without stock but with no information leakage gives you an advantage in the market, even if it takes a few minutes longer. Having access to the equities market for big options trades should make that easier." Setzenfand added that the benefit for 3D of pairing up with Pipeline "is that Pipeline is a big name and runs a system that's already on people's desktops."
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