Don, If the options markets were linked, trade throughs shouldn't happen as described in the press release. While your example is internalizing flow, it is more of a situation where a crooked broker is screwing his client for his own benefit. I'd say such practices are more common among sales/traders at the big banks than firms with automated internalization. The same games occur for anything that is traded, on any medium - unfortunately, client beware. In my experience overseas, some exchanges are extremely viligent in policing such practices. Others, turn their backs. In the end, if your orders are being handled manually by a broker, do some homework and get some references.
I agree that the banks and brokers are the "bad guys" when it comes to this type of thing. Another problem I see happening though is when there is a wide option quote on two different series, and by trading "within the spread" they still aren't givent the best price. You're right that any trader (customer or not) should beware...and quote spreads first before entering orders. Don
End Game The International Securities Exchange last week got the go-ahead from regulators to "de-mutualize," or convert to a for-profit company, clearing the way to raise capital by selling equity stakes or do an initial public offering down the road. Why? The ISE sees the writing on the wall. Option-exchange seat prices may continue shrinking. (Paul Liang, owner of the most such seats in the nation, saw the value of his asset plunge from $70 million at the market's peak to around $15 million today). The Boston Options Exchange, or BOX, is gunning for a place as the second U.S. electronic options marketplace after the ISE, which has grown rapidly since its mid-2000 launch and now is the third largest of the five U.S. options exchanges. Rumors abound that yet another all-electronic, free options exchange is getting ready to file with regulators. Options are increasingly a commoditized business. Charles Schwab recently gave up dealing directly with floor-based, market maker-driven options exchanges and outsourced its options business to Goldman Sachs. Schwab last month signed a deal routing its sought-after options business to Goldman-SLK, Wall Street's biggest specialist firm, which will then route it to whichever of the five exchanges offers the best price. However, Goldman specialists can also fill the order in-house, a controversial practice known as "internalization." The Chicago Board Options Exchange took disciplinary action against Credit Suisse First Boston, in essence for violating exchange rules preventing brokers from trading against customer orders. "These are big issues, and the SEC hasn't come fully to grips with this. They have to look at it more carefully," says CBOE Chairman Bill Brodsky. The upshot? Goldman effectively controls Schwab's option business. "The options market is going to a more efficient model. There will be different firms, those with specialist operations or routing flow, providing this service," says Scott Prince, co-head of Goldman's global equity derivatives business. The bottom line: Wall Street specialist firms, and not exchanges, have emerged as portals for option orders.
just 21, Internalization is simply when a broker trades against it's customer orders there are two types of internalization: 1) On the floor - it happens all the time and there are facilitation rules for this kind of trading 2) Off the floor - over the counter market This is "on the floor" internalization. Not what was suggested earlier in this topic (OTC). All of Schwab's orders will still trade on the floor. This kind of trading has existed for years and brokers have to abide by the facilitation rules. (rules that were violated in the Credit Suisse First Boston example). The last comment in the article is quite silly as Wall Street specialist firms and Exchanges are one in the same (Goldman/Hull). ie -if Goldman goes out and buys the order flow then they may have a small advantage over their competitors. However, on some Exchanges, like the ISE, I would rather not buy the order flow as you currently have to wait 20 seconds before you can trade against your own order flow. That is, everyone else would have 20 seconds to trade against your order before you do. They have a new rule in the pipeline that would reduce this to 5 seconds. Either way, I would rather not have this order flow.
Hmmm....If trading options on the floor has lost its edge and retail traders have no edge, where is the edge for trading options??
This was not meant as any "slam" or anything...simply an observation over the years. As I have stated before "options have been very good to us!" So many options traders have given up trading, even on the floor, due to heavy competion from the big off-floor trading firms. OptEx is simply another example, in my mind, of where all this is going. If there was still a significant "edge" trading options, we would still be doing them, and offering them as a complete package for our traders. Adaptation is key to continued trading success, and that is why we went "full circle" back to trading equities from options and futures. Not a big deal, we can always add them or other products as they show trading edges. A lot has to do with capital needs. Since we provide our traders with all (or more) the capital than they need, they don't need the addtional leverage that options provide. Don