The Chicago Board Options Exchange (CBOE) has signed an exclusive licensing agreement with 3D Markets Inc., a block options crossing network.
The agreement will allow CBOE to introduce institutionally oriented “benchmark-priced trades” through 3Ds Archangel trading software. Under the agreement, the CBOE will provide the regulatory framework necessary for option benchmark trades, including the Gamma Weighted Average Price (GWAP) auction and pricing methodologies, which will be proprietary to CBOE.
GWAP benchmark trades will enable CBOE members and customers to match large buy and sell options orders during a special matching session with the execution price subsequently determined at the end of the trading day using the GWAP pricing methodology. Similar to the way in which Volume Weighted Average Price (VWAP) works in the cash equity markets, the GWAP pricing benchmark will allow execution of institutionally sized options orders at an understandable, fair price that is calculated based on trading activity over a period of time rather than on market conditions at a particular moment.
“We are pleased to have forged an exclusive agreement with 3D Markets. 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,” says William J. Brodsky, chairman and CEO,CBOE.
GWAP trades will be anonymous and can mitigate the market impact that would occur in the normal trading process. Because these orders will be traded on the CBOE and cleared and guaranteed through the Options Clearing Corporation, counterparty risk is eliminated.
“Institutions often have large orders that can be difficult and time consuming to execute. The GWAP trading process will help institutions avoid the market impact associated with the execution of large orders and eliminate the counterparty risk associated with the OTC market,” says Ed Provost, executive vice president of Business Development, CBOE.
“Institutions have become accustomed to relying on benchmarks like VWAP for everything from compliance and transaction cost analysis to algorithms and crossing. But due to the way options trade and their different market structure, VWAP doesnt work. With those same institutions now coming to the options market in force, were thrilled to be partnered with the CBOE and working together to meet their demand for innovative products and efficient executions,” adds Jeromee Johnson, president, 3D Markets.
Securities and Exchange Commission (SEC) approval is required to post these benchmark-priced trades. The CBOE and 3D Markets plan to deploy the necessary technology and obtain all necessary regulatory approvals in the coming months. Pending regulatory approval, the companies will announce a formal testing and rollout schedule later this year.