I spent 15 years of my career in the institutional equity derivatives sales and trading business where I helped buy-side funds manage their positions, generate investment ideas, and gain access to option liquidity. Having experienced the options market from all angles on the sell-side I observed glaring flaws in the way option traders access capital. I lived through the challenges my clients faced when attempting to access options liquidity, helping lay the foundation for aspects of the idea behind our ATS and auction trading mechanics.

I concluded that the existing manual process of accessing liquidity on block-size option orders had to be improved and the electronic solutions created to date would never fully satisfy option traders. The options market structure is complex, and the dark pool-like mechanisms that exist are only partial solutions that will never completely replace manual brokering. The correct solution is to build a fully electronic RFQ that allows for both manual and automated price updates by both initiating and responding clients, mimicking the negotiation process done in the brokerage world today. This can be done by creating one-to-many timed auctions that help to initiate capital seekers efficiently access a network of responding liquidity providers. This process removes a manual workflow that many options traders are eager to avoid, replaces it with an automated process that looks a lot like trading via electronic algo that they appreciate and brings the true providers of capital in the options market ‘to the front door’ of institutional investors.

I decided to build this with SpiderRock because I knew a partner with vision, a strong technology pedigree, and a robust client base was essential for success. Not only does SpiderRock have engineering expertise and experience building electronic solutions for the most sophisticated option investors, but they share the view that off-screen option trading needs to be brought into the 21st century. In addition, SpiderRock is a leader in electronic algo trading, so this new concept fits perfectly into their suite of trading solutions.

Having a well-thought-out idea is a start, but building the future of options trading requires a talented team. Our team has spent the past few years:

• Perfecting the logic behind our Block and Flash Auctions
• Building a new web-based trading platform that allows both algo and auction trading in a seamless electronic workflow, improving accessibility without sacrificing performance
• Integrating Flash Auctions into our electronic algos
• Creating a new proprietary API that supports our intricate auction messages

The result is SpiderRock Connect, which consists of our new suite of web-based applications, and SpiderRock ATS, our new alternative trading system. This is delivered via our new Trade application, which contains novel solutions that we expect option traders to adopt, such as:

1. Access to a network of premier and sophisticated clients that make up what we are calling the SpiderRock Network. This consists of dealers, market makers, and fund liquidity providers, as well as investors who tend to not access off-screen orders because the existing manual process is too time-consuming.
2. Customized interaction that allows initiating clients to select who receives their auctions, as well as decide to whom they reveal their identity. The broker process of ‘shopping’ an order to a wide audience of liquidity providers works well in some cases, while in others having a trading partner quote an order works best. Our process allows clients to do all the above, in any way that best helps them achieve their trading objectives.
3. Ease of use and automation features such as: allowing users to filter for the exact orders they wish to receive; giving responders the ability to automate the process of matching other response levels; and allowing initiators to enter a hidden best price, removing the need to manually manage an auction.
4. Auction transparency. Whether using our app or our API, both initiating and responding clients can view each other’s price levels in real-time. This allows initiating clients to see the depth of market and responding clients to view both the initiator’s price changes as well as competing responder’s levels.
5. Integration of both Block and Flash auctions into the same parameter pulldown as SpiderRock’s algos. For the first time clients can seamlessly switch between trading strategies, allowing them to access off- or on-screen liquidity by simply clicking a pulldown menu.
6. Price adjustment automation. Both initiating and responding Block Auction clients can automatically adjust their limit price using a delta, gamma, and reference price, helping to simplify the process of trading blocks of outright options.
7. Integrated analytical capabilities. We provide our surface-derived fair value in multiple areas within our application to promote that value as the starting point for pricing strategies and initiating auctions. This encourages a more active marketplace, increasing the likelihood of sourcing block liquidity in an efficient manner.
8. Analytics for RevCon and FLEX option trading, helping clients simplify pricing and automate trading in two historically manual markets.

Although we’ve put significant R&D into this new business, this is just the start. We are confident that SpiderRock Connect is a giant step forward for the institutional options market and expect that our new ventures and planned enhancements will continue to change the way our clients access option liquidity.

Sincerely,

Kevin Holbert

Director of Business Development, SpiderRock

Have any questions?