Optionable, a new electronic derivatives trading system that will initially focus on gaining liquidity in the over-the-counter (OTC) natural gas and oil markets, and later plans to license its technology out to any B2B markets and exchanges that wish to trade options electronically, plans to go live by mid-September.
While equity trading may lend itself rather easily to the electronic world, options trading is a little more complex. "There's all kinds of combination trades. For example, there's butterflies, call spreads, put spreads, iron butterflies, ratio spreads-to have a seamless way that those could be traded without having to leg into all those trades was something of a challenge to create," says Optionable co-founder, chief executive officer, chairman and investor, Mark Nordlicht.
But as crucial as the need to be able to perform the said trades is the ability to leverage the system to customize underlying options contracts. That was something few people believed could be translated to the digital world.
A New York options broker who has been in the business for 13 years but required that his name be withheld says, "With futures, you look at a month, you look at spreads between months-it's pretty straight-forward. With options, you have every strike, you have every month, you have everything. You have combinations. You have straddles, strangles, put spreads, call spreads, fences, all different kinds of combinations-with futures, without futures, hedged, unhedged-options can be quoted all day long."
Nordlicht says that, at a competitive two dollars a contract, there is absolutely no kind of options trade that Optionable cannot transact. He says his system is customizable, in that traders can name their own expiration date and strike price, in effect, creating their own option. According to Nordlicht, that is something even floor traders have no time to do. "It's hard to get market makers to make markets on them, because it's a hassle to go and figure out the values on them. With an electronic system, it's much easier," he adds.
The technology for Optionable was designed by Random Walk Computing, Inc. Optionable's Chief Technology Officer, Joel Shandelman, says Optionable can run either within the confines of a browser as an applet or as a stand-alone Java application. The underlying technology is built on an EJB Web-logic implementation platform in pure Java, and the connection to the server is http, which gives Optionable the ability to transcend clients' firewalls without modifying their existing infrastructure.
The New York options trader says, "In OTC brokerage, each house has separate trades that go on internally so, in other words, whatever is in that house is hidden in there, as opposed to on the floor where everything is out in the open." Nordlicht says the ability to address that problem is another advantage of the system. "By creating an electronic marketplace, we are going to have it open to everybody-to level the playing field, where it will be open to all market participants," he adds.
Nordlicht says there are some large players in the OTC gas industry that have given him verbal commitments to use the system. Due to credit requirements in the OTC markets, large companies are the main participants and thus the target of Optionable. He adds that Optionable should go into test phase in mid-August and be live by mid-September.
The New York trader asked that his name be withheld because he didn't want his boss seeing him quoted in an article "about something that, in effect, makes him redundant in the long run," he adds, "I think in the long run, the companies are going to be using it side by side, instead of being on the phone."