At the 24th international meeting of the Swiss Futures & Options Association in Buergenstock last month, panellists discussing whether internalisation and non-fungibility were in the interests of the customer pointed to the market’s structures as the culprit.
James Newsome, chairman of the Commodity Futures Trading Commission, said: “Fungibility is part of the total clearing structure. There is no question that if you were to look at the whole clearing structure in the US and sit down with a blank sheet of paper you would do things differently. But is there a regulatory reason for us to get involved?”
For Bill Brodsky, chairman and CEO of the Chicago Board Options Exchange, the US is at a crossroads with regard to how options are handled. Until now, he said, internalisation had not been prevalent in the options market, where small orders are more significant, but the proposed Boston Options Exchange (BOX) could change this. He said: “The ramifications of the introduction of BOX, basically an electronic internalisation mechanism, on the US options business are huge. And as the Securities & Exchanges Commission review this filing I ask them to please look at the macro, not the micro.”
For the derivatives customer, the choice is very simple: liquidity and transparency reign. Felix Zalauf, chairman of Zalauf Asset Management in Zug, Switzerland, said: “Where a market is not liquid, we stay away from it. The options market is not transparent, so we don’t trade options. I’m not interested in whether or not I take business to an exchange; as far as I’m concerned, over-the-counter options have killed exchange-traded options in Europe.”
Also speaking on the panel, Bill Templer, managing director and European head of exchange-traded derivatives at UBS Investment Bank, said: “In an ideal world, traders would have all the trading information they needed on one screen with tight bid/offer spreads and liquidity. But in reality, it is a case of pragmatism versus ideals.”
