How low do traders want to go? Under their plan to modernize intermarket linkage, the options exchanges will draft a new trade-through rule, requiring traders to take out top-of-book quotes when sourcing liquidity. That is unchanged from today, as traders need not sweep beyond top-of-book to be in compliance with existing trade-through rules.
Some traders, though–mostly of the algorithmic variety–want the ability to sweep as many levels below an exchange’s best bid or offer as they can. Whatever the rule says, they want to scoop up as much liquidity as possible.
With the exception of one exchange, however, they can’t. No exchange, except for the International Securities Exchange, offers depth-of-book feeds. The others are feeling the pressure to do so, though.
Last October, the ISE delivered a depth-of-book feed to those trading houses willing to pay for it. Simultaneously, traders and their vendors began building functionality into their trading front-ends to sweep the ISE’s many quote levels.
On the vendor front, Belzberg Technologies recently released its Deep Book sweeping tool incorporating ISE data. Plus, the ISE itself just added depth-of-book trading to its PrecISE trading system.
The other exchanges are mulling a depth-of-book feed, but do not have any immediate plans to offer one. NYSE Arca says it is seeking relief from the Securities and Exchange Commission’s quote-storage rule, under which exchanges must store quotes for five years. It would be prohibitively expensive if NYSE Arca had to store every quote dealers sent its way, according to options exec Ed Boyle.
NYSE Arca now stores about 1.4 billion quotes per day, Boyle says. “Let’s say we go three to five quotes deep,” he adds. “All of a sudden our storage goes to 5 billion quotes per day. Of course, we are paying for that storage.”
Phil Slocum, executive vice president of trading operations at the Chicago Board Options Exchange, says the CBOE is working on proposals for a depth-of-book display but is undecided as to whether or not it will offer it. Regarding demand, Slocum says: “We are getting mixed reports on that. We anticipated more pressure for it with the advent of pennies, but it hasn’t been as great as we thought. But as we start to appeal to more algo traders … Well, they like to drink from that fire hose. They like to get every print.”
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