Option Market-Share Data Is in Doubt as Group Calls for Review
The U.S. options industry should consider standards for how exchanges calculate their market share because the current system may be sowing confusion, according to Barclays Plc’s J.P. Xenakis, who is co-chair of a group that is examining data issues.
Most exchanges use information from Chicago-based OCC, which clears all options trades executed by public venues. That tally produces a higher number than the volume of buy and sell requests matched by those venues, said Manisha Kimmel, executive director of the Financial Information Forum, which formed a group co-chaired by Xenakis to examine what data are reported by both the OCC and Options Price Reporting Authority, which publishes trade and quotation data in real time.
“There’s a lot at stake,” said Xenakis, New York-based head of electronic options trading distribution at Barclays Capital. Market share matters to exchanges, while retail brokers and investors may also look at the statistics to decide where to send orders. “It’s pretty important we find out what exactly we’re looking at when we look at market share and volume numbers from OCC and OPRA,” he said.
Options market share has become more important with nine exchanges competing for orders, up from six in 2007. A pilot program to quote some contracts in 1-cent price increments that year also produced changes in the rules some exchanges use to match orders, intensifying the battle for volume.
‘Trying to Understand’
“We’re trying to understand the data,” said Kimmel. FIF is a subsidiary of New York-based Jordan & Jordan, which specializes in securities industry information and compliance issues. “People are seeing different numbers in different places and want to know what the volume includes,” she said.
Exchanges, brokers and the media use OCC data to track options trading because it’s publicly available and segments each venue’s share of volume, Xenakis said. He added that it’s unclear how accurately the current market share data represents the industry’s actual trading volume, which can differ from the cleared volume. The FIF committee will also examine whether users may benefit from changes that identify certain types of orders in the OCC or OPRA data, he said.
Nasdaq OMX Group Inc. (NDAQ)’s Nasdaq OMX PHLX exchange passed CBOE Holdings Inc. (CBOE)’s Chicago Board Options Exchange in May to become the biggest equity-derivatives venue in the U.S., according to data released yesterday by OCC. It accounted for more than 24 percent of total options volume.
OPRA, which administers the dissemination of trade and quote information to brokers, investors and market-data vendors such as Thomson Reuters Corp. and Bloomberg LP, the parent of Bloomberg News, is managed by the nine options exchanges. It charges users for its data.
‘Accurate’
The OCC data is an “accurate reflection” of the options information it’s meant to capture, according to Dan Busby, a vice president at OCC, which is owned by five exchanges. The organization, formerly called Options Clearing Corp., processes all equity derivatives contracts traded on exchanges, as well as other products such as futures on individual stocks and securities-lending transactions.
OCC reports cleared trades, which may be a larger number than the total reported through OPRA, Busby said. The difference occurs because orders sent from one exchange to another that has a better price result in two cleared trades for technical reasons. If the first exchange’s so-called executing broker ships the order to another venue and gets a trade, the broker produces another transaction to give that execution to the original customer, he said.
‘Inflated Number’
That second transaction is a cleared trade reported in OCC volume figures. It is not reported to OPRA.
“There has been some deviation between cleared volume and OPRA volume for years,” Busby said. “The OCC volume is somewhat of an inflated number, but I don’t think we know exactly what that percentage is.”
About 3 percent of the OCC volume may come from cleared trades beyond the actual number of matched trades, based on data from December through April that FIF compiled, Kimmel said. An exchange’s market share may vary based on how much volume it routes to other venues, she said.
“There’s an awful lot of gray here in terms of what constitutes volume and market share,” said Thomas Knorring, vice president for trade processing at the Chicago Board Options Exchange, the largest equity derivatives venue in 2010. “The OCC is very reliable about what it clears, and everyone understands their data is based on cleared trades.”
Less Than 5%
Since less than 5 percent of trades are currently double- counted and every exchange routes some orders to other markets for execution, it’s unclear whether the data used to track volume should be altered, Knorring said. He added that the OPRA data may not “sync with” OCC’s because trade messages sent to OPRA may not be updated or technology outages may lead to missing transactions.
Knorring is a member of the OPRA committee and chairs the policy committees of the Consolidated Tape Association and Nasdaq UTP Plan, which oversee the dissemination of all quote and trade information for U.S.-listed equity securities. The members of the CTA and UTP include U.S. stock exchanges and the Financial Industry Regulatory Authority. Although additional transactions for orders routed to other venues also occur in equities, the 13 stock exchanges use data from the CTA and UTP to report their volume, not cleared trades, Knorring said.
‘Objectionable’
The FIF group will also consider whether it may be useful to identify subsets of options volume reported by OPRA such as so-called dividend trades or complex orders.
Complex transactions include multiple legs. Dividend trades involve strategies aimed at profiting from investors’ failure to exercise options to collect a corporate dividend payment by a certain date. The International Securities Exchange has said the trades reflect “objectionable principles” and shouldn’t be included in market-share statistics. Nasdaq OMX’s PHLX exchange accounts for the vast majority of dividend trades, according to data compiled by ISE.
Segmenting the volume to break out dividend trades or complex orders may allow brokers and investors to gauge the type of orders exchanges attract, Xenakis said. That could provide clarity about the options volume that brokers and their customers can trade with on a particular exchange, he said.
While most exchanges use OCC data to represent U.S. options volume and calculate their share of trading, they don’t hew to a standard for reporting those numbers. The result is that their market shares don’t reflect comparable statistics.
“Because there’s no defined method for calculating market share, there are multiple institutions giving different views,” Xenakis said. “It muddies the water.”
No Dividends
NYSE Euronext, Nasdaq OMX Group and ISE, all based in New York, publish their markets’ share of volume that excludes equity index options. Rival CBOE last month had 93 percent of the marketplace’s index volume in part because it is the only exchange allowed to trade options on the Standard & Poor’s 500 Index. ISE reports its share of trading with and without dividend trades. CBOE Holdings reports the CBOE’s and C2 Options Exchange’s portion of total volume and equity options trading with and without dividend transactions.
BOX Options Exchange, based in Boston, reports its average daily volume for the month without providing its market share. Bats Global Markets in Lenexa, Kansas, publishes its so-called matched share of trading. Matched trades reflect the portion of volume matched on its own exchange and exclude orders routed to other markets that led to executions.
Knorring said that many arbitrary decisions involving market data have been made over the last couple decades as the options industry grew, and “it’s not in the industry’s best interest to rush to a judgment.”
While CBOE hasn’t yet formed an opinion on whether dividend and other trades should be marked as such by OPRA, Knorring said the exchanges should all calculate their share of trading the same way. The stock market has also gone through periods when data was reported differently by different venues, he said.
“There are different conventions for reporting options market share, but we should know what the real market share and real volume is,” Xenakis said. “We want consistency.”
To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
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