John Goode, the CIO of the Boston Options Exchange (BOX), recently participated in a panel on technology challenges for the derivatives industry at the Security Traders Association of Chicago’s Midwinter Conference. He spoke with JLN Options editor Sarah Rudolph about how BOX is addressing some of those challenges and expanding its technology offerings.
Q: On the panel at the STAC conference, you mentioned a couple of new developments coming up from BOX, but you did not elaborate on them. What are the two new technology releases you mentioned?
A: The year 2012 is going to be a busy year for BOX. We have three things we are concentrating on. The first is our PIP price improvement auction, which is our bread and butter – it’s what really differentiates us as an exchange. It enables retail traders to get a better price in our market than almost anywhere else.
The PIP is currently set at one second. In the next couple of weeks we expect approval from the SEC to reduce that time, and we expect to lower the PIP to 100 milliseconds. That will allow participants to get quick price improvement and allow the sponsors of price improvement to do more of them. It also increases the opportunity to use the PIP in a more volatile market. A second is an eternity in our business. 100 milliseconds is a bit more realistic, more appropriate for a market maker or a prop trader. So we expect more PIPs and better price improvements on BOX.
Q: You also mentioned BOX’s launch of a complex order book (COB)?
A: Yes, that is another one of our three major projects. Our complex order book is coming out in October, pending SEC approval. It will enable customers to do PIPs on complex orders, which is something new to the market. Our COB and underlying leg books are tightly coupled together in software and hardware, unlike others. It’s really all one book to us. It enables implied prices, in both directions with implieds at both the strategy and leg levels. We’re expecting a very vibrant and active complex order market with these improvements.
About 18 months ago we switched our focus to retail customers. A lot of direction for that segment is going toward complex orders or spreads. There has been an emphasis by broker-dealers to train the retail investor on spreads, so they can drive profitability with downside protection. We expect our COB market to be about 30 percent of the market. I’ve been saying I think we’ll double our market share. It’s the last piece of major functionality that BOX does not have. So now we’ll be full service and can compete.
We will also be working on upgrading performance. Early this year we will be re-architecting our software, streamlining some of the components within the software architecture that will lead to an increase in speed. We expect latency to drop even more. We are currently at 300 microseconds for quotes, 600 microseconds for orders. Now the entire exchange, from order to trade execution, will be done in less than 200 microseconds. Our capacity numbers will go up again too.
Q: The last time we spoke, BOX had recently upgraded to Red Hat Linux Realtime, and Fusion-IO Solid State Drives. Have there been any further upgrades more recently – or the need for them?
A: Red Hat, Intel, HP and Fusion-IO are key components. For 2012, Intel has new CPU chips coming out, HP has new servers, Fusion-IO has released new solid state drives. We’re currently planning our 2012 upgrades and will be taking advantage of these new and improved technologies.
The last thing in our technology evolution is moving our disaster recovery data center to 350 Cermak [in Chicago]. Equinix is our data center partner. They do our primary data center at NY4 in Secaucus and have been a great provider. Having DR at 350 Cermak will be easier for our participants and allow us to rework our network topology and increase its bandwidth.
Q: Have high frequency traders impacted your business?
A: We do have high frequency traders on BOX. It depends on what sort of model they are running. In general, liquidity makers looking to put quotes out are probably going to go to another exchange. But when it comes time to take liquidity, they are doing a type of spread, and in that case BOX is a good destination for them. We have the quote size and are on the NBBO. We have the bandwidth and the low latency to be a good provider.
Q: Regulation was another topic that came up at the STAC conference. Do you see a danger of over-regulation in the US options business?
A: The options business is evolving just like any of the other trading businesses. As everything gets faster, the challenge becomes how do we make sure we’re picking the appropriate regulations to put in place? Will we spend too much time regulating things that aren’t that important and neglecting others that are? We could over regulate or under regulate. We must be sure we have our self regulatory organizations in place and work with the SEC and the CFTC to make sure we build the appropriate regulatory framework at their levels.