Nasdaq: The Magnificent Seventh?
IMD:
Why has Nasdaq decided to launch an options market? Isn't the US options market already crowded enough?Nunes: We decided to start a new options exchange because we saw an opportunity for a faster, fairer options exchange as the options market moved to penny pricing.
IMD:
What technology will be powering the new exchange?Nunes: The Nasdaq Options Market will run on Inet technology. That required us to make some changes to account to the fact that we trade options, not equities.
IMD:
What were some of those changes?Nunes
: Most of the components of an options order are also components of an equities order. There are some fields that you don't use in options that you use in equities, and vice versa. Another component we needed to improve was the message throughput that the engine could handle.IMD:
Would you be willing to share any benchmark numbers?Nunes
: We're seeing sub-millisecond response times on incoming orders. We don't have any capacity stats, as we are still in a small number of underlyings.IMD:
That's for someone who has decided to use proximity hosting within your datacenter?Nunes
: Yes, that's a good benchmark, because outside the datacenter it's difficult to determine latency because it depends where users are located. If you're in New York, it's X. If you're in Chicago, it's Y. If your datacenter is also in New Jersey, it's Z. They can count on how long it takes to get to our data center and just add one millisecond to that number.IMD:
How will this new market benefit investors and trading firms, and provide more competition for the markets?Nunes
: Nasdaq's entry into the options market sets a new standard for speed in the options industry. This will allow liquidity providers to better manage their risk and provide better prices.IMD:
You've started with a limited rollout of contracts. Can you confirm the current status, and elaborate on the long-term plan for listings? Doesn't a limited number of contracts also limit the potential of the market?Nunes
: We are currently in the midst of a controlled rollout of symbols. We believe our model lends itself best to the most active options, and we are focusing on those. Options volume is dispersed across a large number of symbols, and we do plan to trade several thousand symbols. We believe that we can compete for the vast majority of volume at this level.IMD:
What choices will be available for members and trading firms to receive data from the Nasdaq Options Market?Nunes
: We have several options: BONO (Best of Nasdaq Options) provides the same data that we provide to Opra-top-of-book and last sale. NOIView provides the Net Order Imbalance for our opening and closing auctions. DAP (Depth at Price) provides the aggregate size at each price level for our full depth of book, and ITTO (ITCH to Trade Options) provides an order-by-order view of our complete depth of book, similar to the ITCH feed in equities.IMD:
How can you leverage that data as a tool to gain competitive advantage for the market?Nunes
: The level and choice of market data we offer provides better insight into our market, and will allow users to spot trading opportunities better than those looking at each exchange's top of book.IMD:
How do you plan on priming the pump for liquidity?Nunes
: We have a few things going for us there. First is our technology, which provides sub-millisecond turnaround times. That allows our customers and liquidity providers a better way to manage their risk and to provide more efficient prices. Second is our market structure. We have a flat price-time market structure where we don't give advantage to some participants and disadvantages to others. We provide a fair marketplace where people can come in and compete for order flow. We expect this to provide Nasdaq with competitive quotes.IMD:
How will Nasdaq's options market contribute to soaring options data levels, the burgeoning Opra datafeed, and the management burden on end-users? How can Nasdaq mitigate this impact?Nunes
: Nasdaq's bandwidth management solutions focus on making different datafeed choices available for the specific needs of particular customer types.IMD:
Symbology and identifiers have been a big issue of late. Recently, Nasdaq dropped plans for a new stock symbology plan in favor of an industry-led initiative. But both Opra and the Options Clearing Corp. have options symbology initiatives underway. Which options symbology is Nasdaq utilizing, and why? Do you forsee that changing in future, and what impact would this have on the market?Nunes
: We currently offer-and plan to continue doing so-a great deal of flexibility as far as symbology is concerned. We will take in standard FIX, fully described symbols along with Opra symbols. On the back end, we send Opra quotes and trade reports in their symbology and Options Clearing Corp. clearing records in their symbology. With the new symbology, we will review the approach we plan to take for our internal messaging.IMD:
Are you going to be using a proprietary identifier with a translation engine to allow the messages to go into the Opra format?Nunes
: The key is that we have our internal messaging at Nasdaq, so we can accept whatever the format we've agreed upon from any customer. Internally, we are moving all of these messages around and we want to be as efficient as we can be. One way to achieve that is not to use so many characters on the symbol field.IMD:
Are we talking just about quote traffic, or does it affect the matching engine as well?Nunes
: It depends on how you implement it. Clearly on the quote traffic side, there's a concern about traffic levels. From a matching engine perspective, it depends on the implementation. If you use the symbol in your matching engine, it would affect it.IMD:
How much of a job was it to implement the new symbology?Nunes
: We have an unfair advantage in that we built the system knowing this was coming. From our perspective, sure, it represents work, but it is not the same amount of work that the other exchanges and some broker-dealers will experience. From an industry standpoint, it's a major effort. From our standpoint, sure, it would have been easier if we could have started this after [the symbology changes] had already gone through, but that really wasn't an option.IMD:
With interest rising in cross-border trading and arbitrage strategies, are there opportunities to combine options data from the recently acquired OMX markets with that from Nasdaq?Nunes
: We don't have anything to announce in this regard.IMD:
Will there be tighter integration between recent acquisition the Philadelphia Stock Exchange and Nasdaq?Nunes
: They are still two exchanges, and they need to be treated as such. We are definitely looking for areas where we can do intelligent things across the two exchanges, but at the same time you need to treat them as two separate exchanges for regulatory reasons. We have two exchanges that have different market structures and serve different clients. They are two models that do not compete with each other head on, though of course, there is some degree of competition. We need to make intelligent decisions about where the right functionality should lie. For instance, PHLX is working on a complex order book. Right now, it doesn't make sense for both exchanges to have one of those. We look to leverage the PHLX complex order book for Nasdaq members to get them to interact with it.IMD:
Understandably for something so new, Nasdaq's options market has only achieved limited market share so far. What are your targets for this year and beyond?Nunes
: We haven't announced targets for market share.IMD:
What differentiators do you envisage for the Nasdaq Options Market?Nunes
: From an order-routing perspective, we are taking a different approach to price improvement. Some of the other exchange systems provide price improvement with a three-second mini auction when an order arrives. For example, say the market is at $1 and $1.05, and an order comes in to buy for $1.05 and the order is available for price improvement. Once the order has come in, the exchange will solicit offers for price improvement on a penny scale for three seconds. Say someone ends up saying that they would offer $1.03, the order would get a two-cent price improvement three seconds later. What we plan to do instead of having that three-second mini-auction is have our users who want to provide penny price improvement to come in with that $1.03 offer before that order comes in. That way, when the order comes in, we can execute them immediately and not have those three-second pauses.Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
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