See related sidebar: Why the Industry Is Changing Options Symbology(Updated: March 12, 2010)
Friday, Feb. 12, 2010, marked the deadline for the Options Symbology Initiative (OSI), a project to eliminate the old five-character OPRA symbols used to identify U.S.-listed options contracts and replace them with a 21-character descriptor that explains the underlying option. But while the conversion required an exhaustive effort from broker-dealers, clearing firms and exchanges, and while the new methodology has been praised as more intuitive and easier for investors to understand, the deadline garnered little attention.
On Feb. 17 the Options Clearing Corp. (OCC) quietly announced that the conversion had been successfully accomplished. "Five months of industrywide testing paved the way for an exceedingly smooth transition," the OCC stated in a release. Member firms certified that they had completed the industry-side scripted testing, which began in September 2009. The next step in the process is consolidation of the root symbols. Completion of the OSI transition is scheduled for mid-May.
Presumably, no news is good news. But given the far-reaching effects of the symbology changes, some consultants suggest that something still could go wrong.
A Millennium-Size Change
Industry experts liken the technology challenges associated with the OSI to the work required for Y2K, when the two-digit code for representing the year had to be converted to four digits. This time the work involved finding and replacing any code that touches options market data.
"It's a very similar type of problem to Y2K," relates Lloyd Altman, senior executive with Accenture's capital markets practice in New York, who describes the conversion as a "cosmetic" data processing project that shouldn't cause any major problems. "You have to find all the paths through your code that are impacted by the change. A lot of it is going in and remediating the code and testing it till you're blue in the face."
He adds, "The only logic that is changed is being able to figure out what the actual option is based on the symbol you just received."
But, "The initiative cuts very deep across all functions of the firm," according to Navin Surana, a director and senior project manager at Westwater Corp., a New York-based management consultancy that worked with firms on the necessary code remediation for the OSI. He says the change impacts market data and order execution, as well as back-end processes, including clearing and settlement and compliance reporting.
Surana points to a recent Westwater engagement with a large broker-dealer that is among the top five in U.S. options trading volume and whose business spans everything from institutional to retail to proprietary trading, as well as wealth management. While he declines to name the client for confidentiality reasons, he says there were about 100 different applications and processes across the firm that were impacted by the new symbology.
Because there are so many tightly coupled applications that point to options data, Surana explains, standalone applications that are not supported by the central IT organization can present a particular problem. "You can't allow any one application or process to be excluded," he stresses.
While most industry participants predicted that the conversion would go well, some kinks already have surfaced. For instance, in mid-February MarketSimplified, a provider of mobile trading applications for brokerage firms and financial institutions, announced a few temporary restrictions on placing options trades on mobile devices as a result of the introduction of the new options symbology. "We should be fully functional ... in a week or two," the Chicago-based company said in an e-mail alert.
Despite the complex development work that brokers were forced to perform in order to comply with the new symbology, they are optimistic that the change will benefit the industry. "We are big fans of the new Options Symbology Initiative because it makes options trading just that much easier to understand and execute, and therefore more accessible to the average investor," stated Don Montanaro, chairman and CEO of TradeKing, in a release.
The new identification format comprises four key components: the underlying symbol, the expiration date, the strike price and the option type (i.e., a call or a put). For example, a contract based on ABCD Corp. stock with a $50 strike call option expiring March 20, 2010 — which previously would have been represented by the symbol ".ABACJ" — becomes "ABCDMar1050Call," with specific fields for the root (ABCD), expiration month and day (Mar10), strike price ($50) and type (call).
The OSI, mandated by the Options Clearing Corp. (OCC) and driven by both the OCC and the options exchanges, began in July 2005, when the OCC board asked staff to work with industry firms to define a reasonable timeframe in which to eliminate the use of Options Price Reporting Authority (OPRA) codes in the listed options markets. The OCC published a plan for public comment in May 2006, and the exchanges began working on internal testing and implementation phases throughout 2007. While industry test scripts initially were published in September 2008, the financial crisis delayed the testing until late last year.
But these tests were focused mainly on the routing of orders to exchanges, confirmations and clearing information, according to James Leman, advisory committee member at Westwater. He points out that all firms — including brokers and buy-side companies — were expected to do internal testing of their own applications, such as analytics that touch the options reference data.
"A lot of the focus has been on the brokerage community, the exchanges and the [Options] Clearing Corp. I'm not sure of how aware the buy side [has been] that all this is coming together," says Leman. "That's where questions arise in how diligent and exhaustive firms have been in following through on what needs to be done."
According to David Fisher, CEO of optionsXpress, the options, stock and futures broker began the internal IT development work for the OSI nearly a year ago. He says there are two distinct areas that must comply with the new symbology: The first is to make sure that the firm's back-end systems can talk to the OCC and are able to pass the new symbols back and forth. "But equally important," Fisher adds, "is the front end — making sure that the firm provides a good experience for customers, which are primarily retail investors."
The large brokers have done the work, Fisher suggests. "The question is, will some of the smaller brokers that have smaller IT departments ... be prepared?" Adds Westwater's Leman, "You have to make sure all the vendors are ready. You have to make sure all the FIX engines you use to send options orders have been tested. If you don't do an exhaustive review, if you don't go through the analysis and the remediation, there are places you could stumble."