OPTIONS TRADING IN THE PITS IS ON THE WAY OUT AND THE CFTC MAKES NO COMMENT
- by Fred Oltarsh
While commodities regulators testified in front of congress, the Intercontinental Exchange announced the closing of floor trading for all options contracts effective with the close of trading on October 19th. At first view, the elimination of combined floor and electronic trading may not seem important. Trading volume has shifted dramatically from the floor to the electronic trading platform; however, the removal of liquidity provided by market-makers will be sorely missed. On a daily basis market-makers are available for not only standard options transactions, but for spreads of all kinds and sophisticated products like Calendar Spread Options (currently not trading on the electronic platform but scheduled to be available on the electronic platform on August 20th).
ICE is the first major exchange to close floor trading for options contracts. Relegating options trading solely to an electronic platform shows a lack of understanding by regulators of the inherent risks associated with options positions. In times of risk management crisis, market-makers provide a level of liquidity that is essential to orderly markets. While Clearing Members have shopped positions to firms as a means of liquidation, market-makers have been available to provide liquidity for sophisticated strategies which are difficult to attain on an electronic platform. On a daily basis customers will suffer from reduced liquidity and transparency due to a significant reduction of participants.
There is a crisis of confidence in the Futures Trading arena. Whether it is inadequate auditing procedures leading to misallocation of funds (PFGBest, MF Global) or risk management practices which were unable to decipher impending implosions in natural gas (Amaranth and others), cotton and sugar, everyone with an account at a Futures Clearing Member is at risk to other traders in the industry. Eliminating liquidity in the name of increased Exchange profits is a poor Regulatory choice.
It is time for Regulators and Congress to respond to the enormous growth in volume in a proactive manner. Increased fees to traders and an appropriate increase of government funding would enable significant changes in regulatory oversight. Outside auditors and risk managers would add a much needed new dimension to this oversight. It is clear that the staff of the CFTC and NFA is ill-equipped to meet the challenges of today’s futures markets. Decreasing liquidity by eliminating options floor traders, in the name of an increase in the bottom line, is not a good place to start improving risk management.
