By Gunjan Banerji
Many Wall Street traders have lamented the steady demise of
floor trading. But now that one exchange is trying to launch the
first U.S. open-outcry trading pit in decades, it isn't exactly
being welcomed.
Box Options Exchange LLC hopes to open a new floor for about 40
human traders at the Chicago Board of Trade Building. The exchange,
whose electronic platform has one of the smallest market shares in
U.S. options, is trying to build up its business by vying for
orders executed via open outcry.
While trading floors have dwindled in almost all markets because
of a shift to electronic trading, old-fashioned shouting and hand
signals in open pits have endured in the options market, where
investors sometimes prefer human traders to execute complex orders
rather than computer programs.
It would be a needed respite for floor traders, many of whom
have sought new jobs since screen-based trading took off in the
1990s. Intercontinental Exchange Inc., which owns the New York
Stock Exchange, ended floor trading for options on futures in 2012,
and CME Group closed most of its futures trading pits in 2015. The
largest options exchange, Chicago Board Options Exchange, has seen
its floors thin to about 440 people earlier this year from 10 times
that in the late 1980s.
Box's initial plan, though, sparked critical letters this year
from Chicago Board Options Exchange owner, CBOE Holdings Inc., and
the NYSE, as well as trading firms that said another trading venue
will make it tougher to do business as activity potentially becomes
less transparent and more fragmented.
Nasdaq Inc., which also operates options exchanges, has filed
three comment letters about its concerns. A main one is that a Box
trading floor, if approved, could sit empty for a few months,
potentially leading to worse prices for customers if not enough
market makers are competing. Since trading firms take time to get
new people trained and registered, Nasdaq argues that Box shouldn't
be allowed to open until the traders, known as "market makers," are
ready to participate.
"Having an empty room would be completely contrary to the spirit
of the trading floor," said Kevin Kennedy, head of U.S. options at
Nasdaq, in an interview.
The Securities and Exchange Commission plans to make a decision
on the new floor by Aug. 2, documents show.
Open outcry accounts for about 13% of U.S. options trading,
according to Burton-Taylor International Consulting, which advises
exchanges. Most trades are done electronically. Over 350 million
options contracts exchanged hands in June in the U.S., with about
2% flowing through Box, data from Options Clearing Corporation
show. Box is partly owned by TMX Group, which operates the Toronto
Stock Exchange.
Backers of the company's proposal say it will boost competition
among exchanges. Some also say it is Box's right to try to build
market share in the fiercely competitive options landscape, where a
select group of exchanges like the NYSE, Nasdaq and Chicago Board
Options Exchange run the existing floors.
But Box's efforts have rankled some U.S. options traders, who
are already dealing with a labyrinthine market structure. A new
open outcry pit would push market makers to staff the new floor and
incur higher costs, said Peter Maragos, chief executive of Dash
Financial Technologies, a broker dealer and technology
provider.
"Where's the benefit for the client?" said Mr. Maragos, whose
firm has brokers on the CBOE floor. "We're just adding more
complexity, more fragmentation."
The SEC doesn't restrict the number of exchanges, said Box Chief
Executive Ed Boyle. It only creates the legal and regulatory
requirements that exchanges must follow. He also pointed to the
existing 15 venues for U.S. options.
"For someone to make the statement 'Why do we need another one?'
is naive," said Mr. Boyle, who has worked in options since 1981.
"It really comes off as they don't want additional market
competition."
Steve Crutchfield, the head of market structure for CTC Trading,
opposed the new floor in a letter to the SEC. He said that a
sparsely populated floor can make it easier for trading firms that
handle client orders to seek venues where they get paid
commissions, rather than where they can get the best prices for
clients. His firm staffs all four existing open-outcry floors.
One of the changes Mr. Boyle made in response to criticism was
to scrap a requirement for traders to post continuous electronic
quotes if they have a floor presence, which others don't
require.
Some options traders said the open-outcry model could help
investors who want to prevent prices from moving when their large
options orders are getting executed.
"There is still a role for human traders," said Andy Nybo, a
director at Burton-Taylor. An NYSE spokeswoman said 25% to 40% of
the exchange's options volume flows through two floors in San
Francisco and New York.
The number of CBOE floor traders has fallen, but over half of
its most lucrative products -- including options on the S&P 500
index and CBOE Volatility Index -- are carried out on its Chicago
floor. Nasdaq still operates an open-outcry pit in Philadelphia.
While CME Group closed most of its futures trading floors, it
maintains pits for S&P 500 futures and options on futures for
everything from the S&P index to hogs and corn.
Box isn't the first exchange to consider a new floor in recent
years. Before being acquired by Nasdaq, the International
Securities Exchange had considered an open outcry floor but
eventually decided against it, said a person familiar with the
matter.
But its plan has stoked worries that, if approved by the SEC,
the new floor could lead to other exchanges trying to launch their
own. "Approving the proposal would open the floodgates for every
options [exchange] to open empty 'trading floors' in disused office
space," Mr. Crutchfield wrote.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
July 09, 2017 19:50 ET (23:50 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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