As an Option Mentor I am always reading up on things to make sure my option mentoring students are up to date with the latest happenings in the trading world. Yesterday, I was reading through an article published by business week involving the BATS and the new CBOE C2 exchange. Both will be put together on the 'maker-taker' model. For the most part I am having trouble seeing many positives of the maker taker model; I do not think they add much value. I am going to be writing an extended piece on the changing structure of the exchanges for an Upcoming Issue of Expiring Monthly: The Option Trader's Journal, we can explore the benefits and negatives then. For now I wanted to point out the first definitive positive news these exchanges have brought to the table.
The SPX options will be trading on the C2 exchange. This will be the first time these extremely liquid options will be on a fully electronic system that does not involve the Pit Market Makers. This is probably bad news for some of the traders in the SPX pit, as I do think some order flow will migrate to the electronic exchange; especially, smaller institutional, professional customer accounts and retail accounts. Chalk this up to another kick in the pants to market making.
However, for the retail trader this should be seen as good news, the C2 will hopefully be a tighter market, with more clear bids and offers than the current SPX (the SPX as it is now has probably the tightest markets but they are harder to navigate). In the process, it will force the SPX to post tighter markets. This will also make trading this product much easier for retail traders. I think this will make trading this product much easier for newer traders, will steal business from SPY and ES, but could be make trading for edge in the product on the open and close more difficult.
I’ll be very interested to see how this process play's out; it could be that the SPX traders balk at the C2 fee for SPX. It is also possible the SPX joins the rest of the floor as a place with more tumbleweeds than traders. Stay Tuned.
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