Options: Prop Shop Volant Dives Into Routing

Volant Trading is entering the options routing business.

The proprietary trading firm recently hired two executives formerly involved with Goldman Sachs’ options routing business to head the new initiative. In building a routing business, which involves paying retail brokerages for their flow, Volant will compete against such giants of the industry as Citadel, Susquehanna and Citi/ATD.

"We’ve always wanted to pay for options order flow because there’s value in the routing decision," Volant chief executive Brian Donnelly told Traders Magazine. "We have been at a competitive disadvantage to market makers that do that routing."

Donnelly formed Volant six years ago after spending four years in the derivatives business at UBS. The New York-based prop shop focuses almost exclusively on options trading and is a registered market maker at all 10 options exchanges.

To head the new routing venture—also known as consolidating because the firm aggregates the flow of several brokers—Donnelly hired Vishal Gupta as head of execution services and Patrick McCreary, a software engineer.

Gupta spent eight years in electronic trading at Goldman Sachs, where he last led the business development of their U.S.-listed options electronic trading business. As head of Volant’s new business, he will interact with retail brokerages and bid for their flow. "There’s a lot of opportunity in the space," he said. "We’re a small but crafty market maker that understands vol [volatility] very well."

Gupta left Goldman in August 2011. McCreary spent nearly five years at Goldman, where he was a lead technology architect in the electronic options business. McCreary also left Goldman in August 2011.

It is not unusual for proprietary trading firms to enter the customer business. Both Citadel and ATD were prop shops before they entered options routing and equities wholesaling. There are pluses and minuses involved with the transition.

On the plus side, rather than just trade against whatever comes into an exchange, a firm can capture flow at the source and route the desirable portion to the exchange where its market making unit is more likely to trade against the order.

On the minus side, it is a more expensive business to operate, requiring a high level of customer service. Also, margins are thin.

In any event, success involves paying retail brokerages well for their flow and providing them with quality executions. As with equities, "best execution" can involve executing trades at prices better than the market’s prevailing best prices.

At least one consolidator/router has left the business in the past year or so: Timber Hill/Interactive Brokers. Bill McGowan, formerly in charge of Interactive Brokers’ routing business, is now working more with the firm’s clearing unit, he told Traders.

Volant will spend about six months building the requisite technology, Donnelly added.