CHICAGO, May 21 (Reuters) - The Chicago Board Options Exchange signed an agreement with 3D Markets Inc, a block options crossing network, giving institutional traders a new method to execute large orders anonymously on the exchange.
The CBOE, the largest U.S. options exchange, announced the exclusive agreement late on Tuesday.
The deal comes at a time when CBOE is fighting for market share in a crowded field of six rivals, including the all-electronic Nasdaq Options Market launched this year.
Large trading institutions, which are coming to the U.S. options market in force, are demanding efficient ways to execute their sizable option orders.
“This exciting partnership will enable CBOE to accommodate the liquidity, pricing and anonymity needs of institutional customers in a way that has not previously existed in the listed options market,” said CBOE Chairman and Chief Executive William Brodsky in a statement.
The advance of technology and the desire to keep trade strategies secret has fueled a proliferation of dark pool networks in the securities market.
They now number more than 40, up from a handful just two years ago, as investors seek to place larger orders without showing their hand to the market and risking adverse price movements.
But unlike the cash equity markets, option transactions must be completed or executed on an exchange.
The partnership between CBOE and 3D markets allows CBOE members and their customers to make “benchmark-priced trades” through 3D’s Archangel trading software.
Based in New Hope, Pennsylvania, 3D Markets has created a pricing benchmark, called Gamma Weighted Average Price or GWAP, which will serve as the basis for the benchmark-priced trades.
GWAP benchmark trades would give institutions the benefits of anonymity, help them eliminate counterparty risk and reduce market impact when transacting large option orders.
The trades are similar to how a pricing benchmark called VWAP works in the cash equity markets.
They would enable CBOE members and customers to match large buy and sell options orders in a special auction session with the price determined at the end of the day.
CBOE said it will provide the regulatory framework necessary for option benchmark trades, including the GWAP.
GWAP’s anonymous trades can mitigate the market impact that would occur in the normal trading process. Now that these orders can be traded on the exchange and cleared and guaranteed through the Options Clearing Corp, counterparty risk is eliminated, CBOE said.
The likely customers would be large institutions such as asset managers who have not had the ability to use listed options markets to transact big orders.
Approval from the U.S. Securities and Exchange Commission is required to post these benchmark-priced trades, CBOE said. (Reporting by Doris Frankel; Editing by James Dalgleish)
Our Standards: The Thomson Reuters Trust Principles.