In a new report based on the first week of trading on the U.S. equity options market penny quoting pilot (which commenced on January 26th), trading platform provider Tethys Technology predicts that algorithmic execution in options markets will grow.
“Multiple exchanges, high data rates, sophisticated counterparties and now low spreads and lower quote depths at best bid and best ask are all ingredients that will drive flow towards algorithmic execution,” notes the report, entitled ‘Penny-quoting in U.S. Equity Options Market: Report on first week of the pilot program’.
It also notes, however, that algorithmic trading in the options market is much more challenging than the cash market.
“Our preliminary estimates indicate a performance improvement of 30-40% for our EBEST algorithm,” the firm says. “The EBEST options algorithm works the order during the available time, seeking to execute within the bid-ask spread and at favourable implied volatility levels,” notes the report. The algorithm hedges simultaneously with the options execution in an automated fashion.