Scott & StringfellowFebruary 6, 2003 RE: File # SR-BSE-2002-15 - Trading Rules for the Boston Options Exchange Facility Jonathan G. Katz
Dear Mr. Katz: I have thoroughly reviewed the proposed structure and rules for the Boston Option Exchange (BOX) and would like to submit positive comments regarding this possible new marketplace. First, it would be prudent to provide some background on our firm and a description of our core options business. Scott & Stringfellow is a regional brokerage firm headquartered in Richmond, Virginia and is a subsidiary of BB&T Corporation. Established in the late 1800s, Scott & Stringfellow is steeped in history and tradition, and has always been, and will always be, focused on the best interest of our clients. Our options business, while still fairly modest, is growing at a steady pace as we continue to increase our marketing effort of conservative strategies to our clients. In terms of the demographics of our clients, more than 90% of all of our option trades are basic covered call writing. We have very few clients that use options for speculation, and our advisors focus on using options to generate cash flow, reduce risk and reduce portfolio volatility. Because of this conservative focus and the fact that we lack sophisticated options clients, Scott & Stringfellow provides the type of clean order flow the exchanges covet. As a former Options Market Maker on the Pacific Options Exchange, and now in my role as Option Strategist for Scott & Stringfellow, I have become disenchanted and frustrated with the structures and procedures of the existing floor-based exchanges. These exchanges have failed to meet our simple expectations, which can be summarized as follows:
Some floor-based exchanges are worse than others in meeting expectations, with the electronic International Securities Exchange (ISE) being a noticeable improvement. Even the ISE, however, has caused occasional frustrations for our customers and us. I am confident the BOX will meet these expectations better than all of the existing floors, including the ISE. One noticeable improvement of the BOX over existing exchanges is that the membership structure is very open and cost effective, encouraging an unlimited number of liquidity providers to compete for our clients' business. More competition results in tighter spreads and deeper markets, both of which benefit our clients. Also, strict time priority, as opposed to existing Auto-Ex formats, encourage market makers to proactively improve markets as opposed to waiting for "their turn to trade." Once again, this will result in more competitive markets for our clients. The electronic format of the exchange ensures anonymity, eliminating the "crowd mentality" that I am all too familiar with having been in a crowd myself. Also, the electronic platform will result in lower execution costs for Scott & Stringfellow, creating opportunity to pass on savings to our clients. The quote request function will also allow me to seek out additional liquidity for large orders, once again increasing the chances of executing our client orders at more favorable prices. Finally, the ability of the BOX to provide market makers with a mechanism to honor a better market on another exchange will streamline my execution process, and will reduce the need to chase bids and offers on other exchanges. In summary, the addition of the BOX as a new options marketplace will only help improve the quality of markets and executions in the options industry, and will help to eliminate many of the frustrations firms like ours have endured in recent years.
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