August 5, 2002

A Moving Target: The State of Trading Technology

CHICAGO (HedgeWorld.com)--The trading floor of the Chicago Board Options Exchange may one day be free of the wadded up slips of paper that litter much of its trading pits, but until that day arrives, the exchange continues to be a place of technological innovation.

Investors such as hedge funds and their broker dealers may soon become used to 'point and click' access due to recent initiatives by the CBOE and by an active designated primary market maker at the exchange, Wolverine Trading.

The CBOE announced earlier this month that it implemented a new system called LOU, which gives users instantaneous execution of large-sized orders that previously were not eligible for electronic execution. With a fondness for acronyms, the CBOE is highlighting LOU as the crowning jewel of its recently introduced trading systems that are part of a new hybrid trading system, which is picking up where the exchanges' RAES or Retail Automated Execution System left off.

RAES was originally built with the small retail investor in mind and over the years has increased the size of the trade allowed on the trading system. The new hybrid system offers the best of both worlds, according to the CBOE. It offers easy access and the speed of an electronic system, which in some cases could be lacking on the RAES system where trades are placed in a queue with no guarantee of speedy execution. The hybrid system also offers deep liquidity and superior price discovery of the open auction.

LOU is offering instant access to the trading floor and, according to CBOE, it's the first on the only options exchange to provide 'point and click' access to a centralized trading floor.

This is the second major trading technology change this year with the introduction of Dynamic Quotes with Size in May. This new technology allows investors to see the minimum number of contracts that are available to be traded electronically at a given price. It continually updates itself to give investors an indication of depth of liquidity during the trading day.

"Advances in technology have enabled CBOE to significantly increase transparency and speed and accessibility to our markets," William J. Brodsky, CBOE chairman and chief executive said in a statement. "The electronic executions combined with the opportunity for price improvement that LOU provides will be a tremendous benefit for our customers."

Other Trading Technology

Chicago-based Wolverine Trading LP is marketing its own brand of trading technology with its latest direct trading access offering, which allows broker dealers and their hedge fund clients full trading access to the QQQ options and MNX options traded at the CBOE.

Wolverine Trading is the designated primary market maker for both options. A DPM is an exchange-appointed organization that functions as a provider of liquidity and as a floor broker, all the while operating the public limit order book. It's Wolverine's role as a DPM that allows them to offer a system to trade directly on the floor of the CBOE.

This form of electronic trading allows hedge funds and other investors to trade those options with increased speed and efficiency and higher quality execution, said John Mulroy, principal of marketing and business development. The program has been underway for almost two months. Execution is offered at 50 cents per contract, representing 100 shares of stock, which is less than what brokers charge for executing a trade on the floor with Wolverine as the market maker.

Wolverine is banking on its strategy of direct trading access at an interesting time as options volume picks up (Previous HedgeWorld Story). The firm was founded in 1994 by two options trading specialists from O'Connor & Associates. Wolverine originally started as an equity index option market making firm and has expanded to trade equities, equity options, equity indexes, equity index options, equity index futures and equity index futures options. The creation of direct access trading marks the first time the firm has agreed to conduct trades outside of its proprietary portfolio.

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