Summary
As advances in technology allow electronic trading systems to support the complex nature of options trading, CME has been able to attract both current and new traders to electronic options markets benefiting both market participants and CME's bottom line.
Analysis
There is no doubt that end-traders (such as hedge funds and prop groups) prefer to trade in an electronic market that provides a fully transparent direct access model. Until quite recently, however, the sophisticated strategies employed by options traders were too complex for electronic trading platforms.
Technology advances like CME’s enhanced options system combined with increases in bandwidth available for message traffic are allowing electronic trading systems to begin to replicate the complex trading patterns available in open out-cry environments. Today, CME offers over 120,000 predefined outright and spread combinations in Eurodollar options alone, but is still not able to offer all of the flexibility available in open out-cry trading.
While liquidity on the screen is still not as robust as in the pits, the general feeling is that it’s only a matter of time and technology until the shift is complete. With six lead market makers and ten responding market makers in place, the real trick for CME will be in attracting “order-flow” to the electronic markets.
The availability of electronic trading has expanded the range of participants interested in the options markets. Converting interested traders into active market participants, however, is not as easy as it may initially appear. Despite the positive reception of the enhanced options system on Globex, there are still only a limited number of front end trading systems that support the options functionality. As more and more “options capable” front end systems roll-out, volume growth in the electronic markets will only accelerate.
Electronic volume growth has a significant impact on overall growth of CME because the exchange charges an electronic execution fee for all trades done on Globex. The move to electronic trading brings a shift in the trading value chain. Floor brokers who charge a fee for bringing customer orders to the market are no longer necessary as end-traders are able to directly access electronic markets and place their own orders. The elimination of floor brokerage fees has allowed CME to charge an additional fee for transactions done on the electronic platform without significantly impacting the end-traders total cost of trading. This makes electronic trading both attractive to market participants and beneficial to CME’s bottom line.
