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Daniel Safarik
Daniel Safarik
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Will Bottlenecks Break The Options Market?

Rising messaging rates threaten to exhaust bandwidth and derail automated trading in the options market.

From the Jan-Feb 2006 issue of Advanced Trading

The sealing of the New York Stock Exchange (NYSE)-Archipelago merger in December most directly affected the U.S. equities market. But, the deal also may send ripples through the options market, which the newly reshaped exchange's leadership says it plans to enter. This would add to an already explosive situation.

The Securities and Exchange Commission (SEC) repeatedly has proposed - to widespread opposition - moving the options market from quotation in 5- and 10-cent increments to 1-cent increments. In June 2005, the Pacific Exchange (PCX) said it would begin quoting in pennies by the end of 2005. Coupled with the volume-increasing entrance of two relatively new exchanges - the International Securities Exchange (ISE) and the Boston Options Exchange (BOX) - and the prospect of NYSE/Archipelago joining the fray means that quotation rates are rising to unprecedented levels at an exponential rate.

Now, the industry - exchanges, infrastructure providers and vendors alike - must cope with the barrage of quotes in order to assure the smooth operation of a growing market. To put things in perspective, the equities market is comprised of about 4,000 stocks. Numerous options contracts, each with different months of expiration, are derived from about 2,000 of these stocks. As a result, the options market has about 200,000 securities, all of which are updated as soon as corresponding stock prices change, according to Mike Walinskas, senior vice president of strategy at the Options Clearing Corp. (OCC), which manages the settlement and clearance of equity options trades.

The OCC, the Options Price Reporting Authority (OPRA) and the Financial Information Forum (FIF), an industry group comprised of exchanges, infrastructure providers and market-data vendors, have been watching the phenomenon of rising quotation rates carefully since 1999, when options began to be listed on multiple exchanges, rather than on one exchange exclusively. According to FIF data, in July 2000, the peak message traffic rate on OPRA systems was 4,000 messages per second (mps), sustained over one minute. By September 2005, that rate was 86,339 mps, a figure that the FIF projects will rise to 153,450 mps by September 2006. Today, OPRA systems currently are rated to handle sustained bursts of 125,000 mps. But, record blips of as high as 107,000 mps already have been recorded. If the trend continues, clearly there will be a problem.

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