SIFMA Looks at Segregation of Market Maker Desks
Traders Magazine Online News, May 21, 2012
Should a firm’s options market makers be allowed to work together with its stock market makers?
Options exchange rules explicitly bar the sharing of information between a brokerage firm’s options and stock market-making units, but some executives question whether the rules are outdated.
Jim Boyle, SIFMA
Recently, the options committee of the Securities Industry and Financial Markets Association took up the issue. “In some cases, the information barriers that separate equities and options market makers are appropriate,” Jim Boyle, head of the SIFMA options committee and a UBS executive, told the crowd at this year’s Options Industry Conference. “But in other cases, these two businesses are actually complementary and operate as one. We’re going to take a look at that.”
Exchange rules require firms to keep their stock and options market-making units physically separate and to develop procedures that prevent the sharing of “material non-public” information. The goal has been to prevent either department from gleaning order flow information from the other that could be used to the advantage of the dealer over his customers.
The rules date to the days when all or most stock and option trading took place on exchange floors. Because a specialist or market maker stood in the center of a crowd swirling with information, he had advantages others didn’t. The fear was that a New York Stock Exchange specialist, for instance, could place a phone call to his counterpart in the pits at the Chicago Board Options Exchange—or vice versa—and relay important order flow information. His counterpart could use that information to reprice his merchandise to his advantage. “Can you imagine?” said a source. “He would run everybody over.”
The rules were generally accepted, and firms with both stock and options market-making units structured themselves accordingly. Some firms maintain two broker-dealers—one housing the options dealing unit, the other housing the stock trading. Others, maintain a single broker-dealer, but segregate their trading desks into “aggregation units.”
The shift away from floor trading to making markets electronically on upstairs desks in recent years has changed the picture, proponents of looser rules claim. Because the crowd is no more and upstairs desks are isolated, dealers have considerably less information than they used to. That makes them less of a threat.
Others note that there is still plenty of activity on exchange floors—especially in the CBOE’s index pits. Therefore, the rules governing information sharing should not be discarded altogether. Some sort of bifurcation between on-floor and off-floor trading may be appropriate.
Either way, some argue, market makers will be able to make better markets for their customers if they can coordinate their stock trading with their options trading. “Who’s in a better position to be a market maker in the underlying than the guy with the options position? And vice versa?” one dealer asked. “A delta is a delta.”
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