“If we have an order to buy 300 contracts at a price point and we’re able to extract all 300 contracts on all the various exchanges, we consider that 100 percent execution quality,” says Paul Carrozzo, co-principal of On Point Executions, an execution consulting firm that is a member of the On Point Executions American Stock Exchange (AMEX).

Founded in 2004 as a voice broker on the AMEX floor, On Point’s client base has grown from 15 at the end of 2004 to the current 130. It mainly caters to sell-side firms executing retail orders though buy-side firms could request that their brokers use the router. On Point developed the options smart order router in response to clients that were experiencing latency in routing orders to options exchanges and also having problems with the options industry linkage program or being held hostage to liquidity at a single venue.

“We were in a unique position being on the floor of the AMEX and knowing the liquidity providers and the problems with linkage and how the exchanges treat the orders when they come in,” says Carrozzo.

The linkage program was established for any order that out-sizes the liquidity at one particular exchange. If a broker routes an order to buy 200 contracts into the International Securities Exchange (ISE) where 100 is available and there’s an another 100 contracts posted at the CBOE, “You’re first going to exhaust the liquidity at the ISE, then it turns into an agency/principal dilemma at the ISE of how long to wait and when to route away,” says Carrozzo. It takes you five seconds to get your orders from on exchange to another,” notes John Lapertosa, co-principal at On Point.

“When you route into an exchange you’re routing into another firm,” continues Carrozzo, who notes that a specialist can act as agent for the order or as principal. “We wanted to take that out of the equation,” explains Carrozzo. Through trial and error, On Point’s goal was “to create an electronic router into the options exchanges … so that any order that comes into us was not subject to the linkage program,” he says.

On Point does not use the linkage because it routes to the exact amount that an exchange is showing at a given time and then it goes through a regression process to fill the rest of the order elsewhere. In addition to the AMEX, On Point is a member of the ISE and has affiliates on the CBOE, Philly and NYSE Arca exchanges and electronically can access the BOX.

STING also functions as a matching engine and executing against individual market makers non-displayed depth-of-book pricing models. “Instead of splicing it across the exchanges, we can actually interact with their pricing models directly and we can pull out their aggregated size up to their risk tolerance, whatever they can quantify on the bid or offer,” says Lapertosa.

Because On Point routes one order at a time to the liquidity providers, “We can actually allow you to interact with their pricing model and give you more liquidity that is posted on the market,” says Carrozzo. “Not only will they add liquidity but they will price improve by going directly into their models,” adds Carrozzo.

This also serves the needs of the market makers that are posting liquidity on the exchanges and feel they are exposed to too much risk. “When a market maker takes on a product in a particular exchange, he must quote in all the strikes and series. The dilemma is now with all the black box scenarios, a particular market maker can get limited in different strikes and series,” says Carrozzo. “Because of the risk tolerance of the market maker, they won’t expose that amount of risk to the marketplace,” he says.

Another advantage is that STING is very fast. Rather than looking at all the quote changes in all the strikes and series, it takes one snapshot picture of a particular strike and series in that option across six exchanges. Because it’s routing against one strike price and series of puts and calls, “We don’t have to look at the market constantly,” says Carrozzo. This way it avoids processing all the messages per second generated in the OPRA feed. STING’s capacity is currently 200,000 messages per second right no. “That far outweighs any order flow we expect to have,” says Carrozzo.

As for competitors, one other agency brokerage group is offering a smart order router and sweeper for options, notes Carrrozzo, who didn't name the firm. The rest of the sweeper and smart order routers are offered by firms that do proprietary trading, he contends.

According to Brad Bailey, senior analyst at Aite Group, there are several players that offer options smart order routers including Investment Technology Group through its acquisition of RedSky and BNY ConvergEX through its acquisition of LiquidPoint. On the brokerage side, Credit Suisse has a least two options algorithms, Goldman Sachs's EMS REDIPlus has an options smart order router, and Banc of America Securities, either has something or is about to, Citi is working on, Morgan Stanley and Merrill Lynch and MER have. "Also, Tethys (technology company) has some interesting options routing and algos," Bailey notes.

While On Point has been focusing on the July 16th launch of its options smart router, in the fall it plans to roll out execution quality statistics. “I’d like to compare apples-to-apples to every exchange and sweeper,” says Carrozzo. On Point will offer its clients a report that they can show to the regulator and their customers to define how their execution is done.