Discussion in 'Options' started by just21, Aug 20, 2005.
"PROHIBIT TRADING ON INSIDE INFORMATION:
We lose 20 to 30% of our revenue to insider trading, even in markets with
supposedly strict rules against it. In some markets, insider trading is so bad that
we have given up making markets for options on smaller stocks altogether. If
retail traders or market makers come to believe that a particular market is just
an insiderâs game, liquidity will dry up."
I think they are just bummed that only around 6% of flow goes via the BOX (they have a stake in it).
Very entertaining bitching and moaning
* Someone crosses trades outside the exchange. Handling fourth markets would require them to actually pay attention to the outside world and read the flows. Are they actually expecting that people are going to hedge vol flows for their structured products via electronic exchanges?
* At the fact that people are trading OTC products. Oh, we need more IR and corporate derivative products, but they have to be standardized. Well, look at what a sucess swap futures and muni futures were. This one especially amused me.
* At the fact that delta-autoquoting does not handle jumps and single-sided markets. Well, that means that making markets actually requires to take risk. Insider-trading is part of that risk, if you are not willing to take it, there are plenty desk out there that will.
* Oh, yes, "we would really love to make headways into the institutional markets, but we need help" was another thread in the speach.
"Timber Hill lose 20-30% of revenues to insider trading"
He did not say that there are insider trading losses at Timber Hill. What he ment was that the insider trading in some stocks discourages firms like Timber Hill from making markets in those stocks and therefore they are losing potential revenues to the tune of 20%-30%.
What I read said clearly that "we lose blah blah percent revenues to insider trading." How much clearer can it be?
They need to go into the cheese business to go with all that whine.
before trying to interpret the speech, think of the context and who it was presented to. The speech was made to an audience that contained numerous exchange heads and officials from around the world. The main point is what needs to be done to increase exchange traded derivative volume.
most of the comments above, particularly sle's were taken out of context. The audience was an international crowd. Corporate governance is a serious issue and it is definitely an item that market makers consider before committing to a market.
The other points are also all valid when taking in the context of what exchanges can and should do in order to attract more liquidity and interest.
Since I am stuck at the airport waiting for a flight to London, I might as well answer. I did read the thing rather carefully.
Yes, the speech was outlining the failures of the derivatives exchanges, especially the geared-for-retail ones, IB a prime example. Increasing business is exactly what every exchange was trying to do forever, however, attempts to take business over from the developed OTC segments is usually a failure. There is an incredible number of failed products littering every exchange.
Just to illustrate the point, here are a couple from CBOT, with an appropriate developed market as a counterpart:
- CBOT muni Bond futures as attempt to take business over from BMA swaps. Open interest - 1250 contracts, amounting to 125M in notional. For a reference, a "discussion" notional on BMA swaps is a 100m, a good desk does a billion a day.
- CBOT 10y/5y swap notes, an attempt to take over IR swaps market, 40k open interest. These are just too funny to talk about.
Most of these products are not flexible enough to make people switch from well established OTC markets.
The off-exchange crossing issue is something that I believe is a crux of the exchange vs OTC business. Most of the exotics/structured desks are using off-market trading to hedge their flows. For example, when an index-linked snowball note comes out, very few desks would hedge the flows on the exchange, nobody wants to get raped by exchange market makers. Any attempt at regulation here will fail, such is the nature of the business.
This said, being a "retail" exchange has a lot of advantages and a number of interesting products can be introduced, assuming the exchange is willing to make "betting" style products traded. I believe that the main advantage of the exchanges is in the price discovery and a number of discovery derivatives a-la "GDP options" can be a great success.
i won't disagree with many of the OTC products but keep in mind how bad many of the market makers or exchanges were only a few years ago (AMEX is a good example). Since then (particularly with the aid of the ISE) things have improved dramatically in the options world - tighter spreads, greater liquidity, speed which have led to increased volumes. it is probably a long shot to bring the OTC volume you're talking about to exchanges. However, there is still a great deal of plain vanilla options that for one reason or another trade off-floor that could trade on an exchange.
One last point on the off-floor crosses. In the speech I believe it refers to using the price discovery from the exchanges, pre-negotiating or shopping for markets off-floor and then blocking it or illegally crossing on the exchange. This is very prevalent outside of the states where some exchanges turn a blind eye to obvious rules violations.
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