A new range of smart algorithms from Citi will let the buy-side use varying levels of aggression to compete in the increasingly fragmented US options market.
This week the US investment bank rolled out a new suite of algos with new functions focused on accessing liquidity across multiple venues and exploiting the small subset of securities that hold large amounts of liquidity.
Kevin Murphy, head of US options electronic execution for Citi, said the new functionality was based on equity trading algorithms, adapted to the options market.
“They enable traders to work trades in the market over time, with varying levels of aggression, so traders can chose to cross the spread aggressively or follow a more passive strategy,” Murphy said.
Accessing liquidity was still the number one priority for traders and giving algos intelligent functionality to seek liquidity and minimise market impact was the focus of the upgrade, according to Murphy.
“There are several factors taking place in the US options market at the moment, including the proliferation of exchanges and fragmented liquidity, so traders use option algos to access liquidity across multiple exchanges without information leakage.
“Traditional asset managers are starting to adopt the use of these algos because of the fragmentation and because the majority of liquidity is in a few underlying securities,” Murphy said.
Options trading continues to grow in the US, with Nasdaq OMX launching their third US options exchange in June, while exchange companies NYSE Euronext and CBOE Holdings each run two of their own. The Deutsche Börse-owned International Securities Exchange has applied for a licence for a second exchange this year, as has the Miami International Securities Exchange, which would bring the total to 12 exchanges in the US.
Major criticisms to the growing number of options venues surround the role of high-frequency trading (HFT), with the rising number of venues correlating with increased price arbitrage opportunities for HFT firms. The effect on liquidity was also a major concern for buy-side traders, who have found it hard to trade blocks of options across multiple venues.