Rob Newhouse is chief executive of Ballista Holdings, which has operated an options crossing ATS for broker-dealers since October. The firm’s goal is to provide an electronic replacement for interdealer brokers. Last month, Ballista took in funding from four prominent industry firms.
On the funding
We plan to boost staffing on both the technology and the sales and marketing side and invest in technology such as in our disaster recovery area.
On the role of interdealer brokers in options
There is not enough liquidity on the exchanges to service large block flow. Right now the banks are going to the IDBs to try to source that large block flow. We are disintermediating this IDB community. We would prefer to be this electronic pool between the banks.
On the problems with the IDB system
It’s inefficient. It’s instant messages and phones. Every time you bring on a new customer to an IDB, you have to hire more traders. Every time I bring on a new customer, my transaction costs go lower.
On improving the block trading process
Many of the hedge funds have stopped calling banks and have gone into the over-the-counter market because the banks will sometimes say: "I can’t find you 100,000 contracts. They don’t exist. No one wants to trade 100,000 contracts with you. I don’t have the capability to do so. I don’t have the capital. I called my interdealer broker and tried to find 100,000 for you and no one is playing." So the Ballista premise is to replace the IDB with an electronic platform that can automate the process and build a much larger liquidity base. If we offer more and give more players the ability to touch that order flow, we can increase the bank’s ability to find that liquidity to better serve their hedge fund clients.
On trading Vol
The bank facilitation desks service customers’ large block options orders. They act as a kind of transition point into volatility. A hedge fund generally wants to buy a large block option. A facilitation desk, once they actually execute that trade, will oftentimes look to lay off that risk by trading Vol. Once you pop a stock onto it, you become price-insensitive. You are trading a Vol level as opposed to a directional bet. It’s much easier for them to do so. In March, 97 percent of our executions were volatility, meaning an option and stock component. Only 3 percent were directional.
On liquidity building
We originally built our sales process to focus on liquidity providers, the electronic market makers. These are the people who actually execute against the orders the banks initiate. We now have most of the market makers and have shifted our focus in the last quarter to the banks.
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