Flash Orders: Bad for Equities, Good for Options?

In case you thought the controversy over 'flash trading' that erupted in equities is over, think again. In a CBOE video, Edward Tilly, CBOE Executive Vice Chairman, contends the economics of flash trading in options and how this actually benefits the customer.First, Tilly explains how the market structure in options is different than equities and how there are two different models. CBOE represents the traditional model that allows the customer to first and for free and liquidity providers - market makers and specialists - to continuously quote throughout the day. In the alternative model known as the make-or-take pricing model - participants who make liquidity are paid and all participants who take liquidity must pay to do so.

So what role does flash play in options trading?

When the customer is faced with an order routing decision, and when the CBOE is not on the NBBO (national best-bid-or-offer), the order routing firm has a choice to route directly to that NBBO at the competing exchange, or to route to CBOE "knowing that their orders can be flashed at CBOE and one of our market makers could step up to that NBBO price and execute at CBOE," says Tilly.

As an analogy, Tilly compares the use of flash orders in options trading to searching for a flight online. When we search online, we may find the cheapest flight, but when we click through we may discover baggage fees and connection fees, so there are hidden fees, he claims. Similarly with flash orders,the price looks better at another exchange, but if the customer looks closely, there are hidden fees, argues Tilly, noting that those hidden fees are taker-fees. So CBOE is sticking up for flash orders in options. "We believe banning flash mechanisms in the option market would be bad for customers. We like when customers have a choice when they route orders. And we want to give customers a better solution than routing to a make-take exchange," says the CBOE Executive Vice Chairman.

In case you thought the controversy over 'flash trading' that erupted in equities is over, think again. In a video CBOE Executive Vice Chairman Edward Tilly contends the economics of flash trading in options and how this actually benefits the customer. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio