They want the best technology,” McGowan said, adding that some clients want their servers in the same location as their brokers to reduce the time required to access servers handling orders on exchanges. Another factor pushing the adoption of the latest technology is the Securities and Exchange Commission’s ongoing pilot program to quote options in pennies instead of five- or 10-cent increments. This has already led to an explosion of data across the seven US options exchanges, including the Nasdaq Options Market, launched on March 31.
In an electronic format, options exchanges are now adopting some of the incentive programs to lure liquidity that the stock markets introduced, such as NYSE Arca’s “maker-taker” model, which first surfaced in the world of electronic communications networks. Participants who “make” a market by posting orders on an exchange receive a rebate for the fees they are charged when they execute a trade and thus “take” liquidity from the order book. The model is particularly appealing for hyper-active traders armed with smart technology to jump from market to market, contributing to the volume increase. But this model also helps electronic arbitrageurs tighten spreads.
As options trading mirrors more and more the equity markets, it will face some of the same challenges — in particular the hunt for liquidity spread across exchanges, the over-the-counter market, internalisation on brokers’ institutional desks and possibly the development of options “dark pools.” Yet, substantial differences remain between the equity and options markets, so that some of the stock trading models might not apply to derivatives. For instance, institutional investors have embraced equity dark pools for medium- to small-capitalisation stocks. But finding a match for an illiquid out-of-the-money options contract may be far more challenging.