OptionsXpress’ Peter Bottini Assesses the Situation

Peter Bottini is an executive vice president of trading and customer service at OptionsXpress, a retail brokerage that caters to active traders. He recently held forth on a wide range of market structure issues impacting the options industry at the annual conference put on by the Chicago chapter of the Security Traders Association.


On retail trading of the SPX at C2–

If you take the quotes in the SPX today and you tighten them by 60 percent or 70 percent, you will see a wider adoption by retail investors. You will probably see a movement away from products like the MNX and Russell into SPX and perhaps SPDRs. If the fees are at the current level, we probably would be passing those fees back to customers as a way to make sure that CBOE charges us slightly less than 60 cents per contract to execute a trade.


On market maker trading of the SPX at C2–

You will see a lot of market-maker-to-market-maker trades as the dealers lay off risk. If Citadel puts up a big trade in the SPDRS and Timber Hill puts up a big trade at a different exchange in the DIAMONDS. And they look at their exposure. And they want to hedge. And they look at SPX and they see a 10-cent wide market, they will go to SPX. And that’s where they will do their hedging. They don’t mind trading market-maker-to-market-maker.


On penny increments–

In 2007 and 2008, we met several times with the SEC both as a firm and also with some of the industry groups. We sat around the table and compared our market structure with that of equities. We told the SEC they shouldn’t push us down the path of the equities market because there would be crisis of liquidity and transparency. The rep from SEC disagreed with the members sitting around table even though we represented about 95 percent of industry volume. So now we’re down the path of the equity model. It’s harder as a retail firm. It’s more expensive.


On the impact of high-frequency traders on retail–

If the toxicity in the marketplace is at a level where market makers are interacting less with uninformed flow and more knowledgeable flow, the quality of the markets will decrease. Our options customers make their trading decisions based on what they see on the screen. We need consistently tight quotes. We need size on those quotes. We also need to quote not just the at-the-money SPDRs, but options across the array of months and strikes.


On the impact of high-frequency traders on market makers–

It makes absolutely no sense for you to be a market maker unless you have a routing business. It is not economical to just go out and quote options.


On creeping internalization–

The cat’s out of the bag. While I would like us to not move to a full equity internalization model, I spend most of my time considering that that will happen. And how do I keep my customers filled at the NBBO for anywhere from an 8-lot to a 100-lot order? And how do I make sure that they see at least a 5-cent market on our screen? If we do move to the equity model and the new pricing structures become more common place, liquidity on our servers will be significantly better than liquidity on exchanges.


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