Today's discussion concerns the function of auto-execution with
regard to electronically-traded options. The basic concept of
an electronic exchange system is to allow multiple participants
to trade simultaneously with one another using software that
provides automatic execution of corresponding orders.
Dear OIN,
I recently had a problem with an option order that was routed to
the "auto-execution" system at the CBOE. I know the new process
allows trade requests to be automatically filled by a computer
system, without having to go to a market-maker, when the quoted
price of the option is equal to my order. In my case, the order
(for twenty contracts) was not filled, even though the option was
offered at the price I agreed to pay in the (limit) order. What
am I missing here? Is there a special criteria for this type of
trading that I am unaware of? Any help or information would be
much appreciated.
Thanks,
RJ
Concerning electronic trading and auto-execution:
Over the past decade, a truly unique marketplace for securities
has emerged through the development of interactive electronic
trading. One of the key features of this mechanism is a matching
system that allows multiple participants to trade simultaneously
with each other using direct electronic access and software that
provides automatic execution of corresponding orders. It is a
powerful tool that enhances the way stocks and options are traded
and despite the problems with this new process, the system is a
tremendous benefit to both public and professional participants.
In the derivatives markets, the function of "auto-execution" came
to pass when options on popular (mostly NASDAQ and large-cap Dow)
stocks began trading in higher volumes, causing delays in filling
the orders due to the limited capability of manual order-input
systems. But, the advent of computerized order routing changed
the way stock and option exchanges do business and now the CBOE
claims that, "with very few exceptions, public customer market or
marketable limit orders of up to twenty contracts can be filled
automatically in seconds" using their proprietary system. Through
RAES, or Retail Automatic Execution System, public customer orders
are executed instantaneously at the market price, and confirmation
is immediately returned. RAES is a part of CBOE's ORS system that
automatically fills customer market and marketable limit orders at
the prevailing market quote in the most active series. The CBOE's
"marketable limits" are defined as orders to buy at a limit price
equal to or greater than the market offer, or to sell at a price
equal to or less than the market bid.
The automated system has certainly improved the retail trader's
ability to execute orders during periods of heavy volume in a more
timely manner but there are still flaws in the procedure. For
example, in the past there have been complaints that the options
exchanges' automated execution systems are programmed to route most
incoming orders that are eligible for execution against an order on
the limit-order book, including marketable limit orders, to manual
handling instead of routing them for automatic execution against
the order in the limit-order book. While this activity can lead to
delays in order execution (and potential abuse of the system), most
retail complaints stem from the fact that auto-execution is still
based on the demand for options bid at that price, whether by a
market-maker or a public (book) order. When traders say they have
been treated unfairly by the system, they usually discover (after
a trade inquiry) that there was simply no market for the number of
options they offered to buy (or sell) at the limit price. To make
matters worse, the size of the order also alerts the market-maker
(or specialist) of an increased demand for that particular series
and the price is adjusted accordingly. Another important fact is
there are some major differences among the various exchanges with
regard to the ability to provide liquidity enhancements, including
the size of "guaranteed" auto-executions. In addition, all of the
option-trading exchanges (CBOE, PHLX, AMEX, PSE & ISE) have special
rules and policies regarding the kinds of orders and activities
that are prohibited from entry onto their automatic customer order
execution systems.
Traders who are interested in learning more about the way orders
are handled should visit the CBOE or one of the other exchanges for
a firsthand look at the trading floor and its unique systems. Most
brokerages have representatives that can provide clients with a
guided tour of the facility and the people who work there are very
customer-oriented and happy to answer your questions. The CBOE
also has a "virtual" tour that allows new traders to learn more
about the exchange without traveling to Chicago -- which is very
cold during this time of the year.
Trade Wisely!
Site Last Updated Sunday, November 11, 2001. 11:25:01