Exchange, Software Firm Team Up To Mitigate Impact Of Large Trades

May 30 2008 | 6:48am ET

The Chicago Board Options Exchange has signed an agreement with 3D Markets Inc. that will help hedge funds and other institutional investors avoid the market impact associated with the execution of large orders and eliminate the counterparty risk associated with the OTC market.

Under the agreement, the CBOE will introduce institutionally oriented “benchmark-priced trades” through 3D’s Archangel trading software. The CBOE will provide the regulatory framework necessary for option benchmark trades, including the GWAP (Gamma Weighted Average Price) auction and pricing methodologies. GWAP benchmark trades will enable CBOE members and customers to match large buy and sell options orders during a special 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 VWAP (Volume Weighted Average Price) 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.

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. 
 
“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,” said William Brodsky, chairman and ceo of CBOE.

“We are gratified that CBOE saw the need, as we did, for asset managers to access liquidity using an extremely reliable pricing benchmark that also measures option execution quality,” said David Mortimer, 3D Markets chairman and ceo.


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Chicago-based independent futures brokerage and clearing firm R.J. O’Brien & Associates (RJO) has hired industry veteran Daniel Staniford as Executive Director, responsible for the firm’s institutional business development in New York and London.

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