January 20, 2012
This is a reposting of our original comments from 1/19/2012 with minor typographical changes to account for the SEC web site removing ampersand characters from our original text.
The current as well as proposed Flex trading systems organize the RFQ trading process into Response and Reaction phases. During both of these phases quotes for the RFQ can be posted and modified, with the Reaction phase allowing the RFQ initiator to trade on their RFQ if so desired.
The Flex products that we trade for our customers are much more esoteric than standard listed options and highly customized to accommodate the needs of each customer. Customers are obviously extremely sensitive to price and volume for their Flex trading. Given the unique nature and terms of each RFQ, we believe that customers should have a brief Decision Phase, during which no changes of any type to market quotes would be permitted, in order to decide on trading their RFQ or cancelling it.
The benefit of such a Decision Phase is that it will allow customers to evaluate the bids and offers for their RFQ and be assured that they will be able to actually trade at a certain price and volume level without having to be concerned with issues such as high-speed participants changing the market. This approach would give customers more flexibility and assurances of trading on their RFQ instead of just relying on a limit order. This would also help ease the transition to exchange-based flex trading for customers who are accustomed to OTC flex trading where firms providing quotes are held to their quotes for several minutes while waiting to find out if they have a trade or not.
Utilizing the existing and proposed systems, a customer could place a limit order to execute an RFQ and NOT have it filled if the quote they were expecting to trade with were suddenly cancelled or altered. Allowing a customer the opportunity to enter a brief Decision Phase would let them have a short period of time to confidently evaluate what prices/volumes have been discovered for their RFQ and be able to trade on them without concern for split-second market alterations.
Given the unique nature of Flex products and the regulatory sentiment for moving OTC derivatives trading onto listed markets, we believe that providing customers of Flex products with a deeper and more committed level of price and volume discovery would allay any reservations customers have about moving their OTC trading to the exchange-cleared environment.
Todd Weingart, Spot On Brokerage Services Division Of Trading Block
William OKeefe, Spot On Brokerage Services Division of Trading Block
Steve Stepanek, The SJS Group, Inc.