Options Market Structure and the Mechanics of Retail Auctions in Options Trading

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PETER HAYNES: Welcome to episode 47 of TD Securities Podcast series' Bid Out-- a market structure perspective from North of 49th. I'm your host, Peter Haynes. And today we have two guests joining the podcast. The first, Mett Kinak, is Head of Equity Trading at T.Rowe and quite familiar to our listeners, while our second guest, Andrew Schultz from Susquehanna Group, otherwise known as SIG in the options world, might not be as well known to our audience. But we're very excited to have Andrew on the show here with us today, as Andrew's chief options strategist for SIG. And Mett and I are going to grill him on exactly how the US equity options market works. Mett and I will then discuss whether retail auctions, which were pioneered for options, can in fact be repurposed for equities, as per SEC Chair Gary Gensler's recent musings. We will also touch on the other aspects of the aggressive Gensler equity market structure agenda. And, guys, I think we have so much material here where we'll be splitting this into two podcasts. And we're going to start with the options discussion. But before we get started, first of all, I want to thank both of you for joining us today.

ANDREW SCHULTZ: Thanks.

METT KINAK: Thanks for having me.

PETER HAYNES: OK, just standard disclaimer here every time. Before we get started, a quick reminder to our audience. This podcast is for informational purposes. The views described in today's podcast or of the individuals and may or may not represent the views of their firm. And of course, content of this podcast should not be relied upon as investment, tax, or other advice. Just before I get into the options discussion, I want to ask you a question, Mett. I did my first external podcast as a guest ever. A couple of weeks back, I was a guest on Boxes and Lines, the IEX podcast. Mett, I believe you have been a guest on that podcast series, which, I believe, is rated R. What was your experience when you went on their podcast and compare it to going on this one?

METT KINAK: Well, I had the pleasure to do their podcast in their little podcast room. So it wasn't virtual unlike this one here. So in this room, I have a lot of space. It's air conditioned. So I'm comfortable. I have all my drinks. I'm ready to go. In that episode that I was on, we were in a small-- well, it felt like a telephone booth. Myself, John, and Ronan all huddled in a small room. It's very hot in there. This is a little bit more enjoyable, but it was nice to have people in person as well.

PETER HAYNES: I'd like to say it's a little more professional. But I'm kidding when I say that, John, I have not laughed that hard in a long time. We had Doug Clark with us from the TMX. We're talking about Canadian market structure. And it was absolutely hilarious. I really enjoyed it. I appreciate the opportunity to talk about Canadian market structure. We did focus on Canadian equities. Today, we'll talk a little bit about Canadian options. But before we get to that, we're going to focus on the US options market structure. And this is a topic that we've covered on this pod series in the past. And in fact, the previous time we covered it, we needed to split it into two episodes. And for those that are listening, it's episodes 6 and 7. At that time, we had our resident options professor at TD Securities, Vishal Hingorani on as well as Paul Jiganti from IMC markets. Since we had that podcast some 40 episodes ago, we have seen exponential growth in options activity. And in some days, the share equivalent volume of activity in the US options market is now as high as 40% to 50% of underlying stock volume. I find this percentage incredible. Andrew, what are the most important factors that are driving this massive growth in options volume?

ANDREW SCHULTZ: Hi, thanks. If I go through the key things that I think have driven this volume, I think the first one is really that on the electronic markets. There are really tight liquid screens for most of these products. And so there are lots of different exposures that, whether it's a retail customer or an institutional customer, can really tailor-make how they want to trade any individual product. I think that's one of them. Certainly, over the last few years, if you go back to beginning of 2020, the change to low or no-cost execution, certainly, was a big driver that-- and everyone-- obviously, the pandemic led to a new set of flow. We were calling it the FOMO style flow, where all of these symbols were really going quite wild. In addition to that, I think there's been lots of single-stock stories. We've seen a change from ETF volume to individual single-stock option volume. And so I think that has contributed to it. And I think it's really just-- there's a multiplier effect. So as these customers are trading more and there's more execution and then mark makers and other participants are trading against it, it just bubbles up. In addition to that, I think there's been-- the electronic markets and the execution quality over these last few years is being improved. And so I feel like there's a chance, where if someone sees a symbol or exposure that they want to take, there's numerous ways that they can make that trade, whether it's-- any of the option strategies that you've spoken about. And so between that, I think there's just a ton of growth in that world.

PETER HAYNES: I always used to-- when I looked at the equity market, I always make sure that I had a lens of what was going on in the Delta trades around stock hedging. And you mentioned the FOMO, it was the Reddit crowd. We know some of the names they were trading. But you also mentioned, I think, that some of the names they trade are, in fact, the institutional names. And that flow ultimately impacts liquidity of the underlying name. What are the five most active options symbols on single stocks in the United States? Is it Tesla and Apple, or what's the list look like?

ANDREW SCHULTZ: I think you get the usual suspects at the top of the list. So there's always Tesla, there's Apple, there's Microsoft. I think Nvidia, Netflix, AMD-- I think there's usually-- there's usually a BAC up there. So that's kind of your general top 10 or so. Obviously, there's always SPY, QQQ, and a couple of the other ETFs dominate. But, I guess, that the names I gave you are nearly always in those top 10.

PETER HAYNES: Well, up until recently, stock exchanges in the United States would differentiate themselves, primarily based on fee structures. More recently, there have been new order types and new innovations that I think are a little bit more institutionally geared. And I think we all agree that that's been a long time coming. I believe there's 16 options exchanges currently in the US. What differentiates each of those options markets?

ANDREW SCHULTZ: Yes, there are 16. And there's a 17th pending. Talking about the Q1, I think fees are certainly a part of it. That's something that they're generally always competing on. They're making adjustments generally on a month-by-month basis. In addition to that, they have different allocation models. So some are a make take model so that make take lined up with fees. And then in addition to that, there's price time versus pro rata. So they have different market allocation models. They have different fee models. And then some of the exchanges-- and I think we'll talk about this in a bit-- offer auctions, and some of them offer spread books. So that's just how they compete on the different models. And I think when you combine the allocation method and the fees, you can find little sweet spot where each exchange is happy to participate in that chunk of volume. And that's how they're operating, right? The volume moves around. There's some reasonable ranking, or you can tell if something's not correct on any given day if something was broken, for example. But the 16, they're up and down. And it's really just which pieces of volume are busy that day and how they've adjusted individual fees month over month.

PETER HAYNES: You mentioned, Andrew, that there's a 17th market on the way. Can you tell us a little bit about what that market is? ANDREW SCHULTZ: Sure. It was announced to be the MEMX options exchange. So MEMX already has a stock exchange. They announced an options exchange, I believe, in around the spring. So in Q2. And I think they're looking at a Q1 launch. I don't have many more details as we're still waiting to see some of those things as they get published.

PETER HAYNES: I think everybody would agree. There's too many stock exchanges. I think there's 16 and maybe sometimes 17 soon. What would be the perfect number of options exchanges if you had your druthers? Would it be 17, would it be 30, or would it be a lower number?

ANDREW SCHULTZ: It's a pretty tough question. I think there's reasons to have competition. I think they're competing on fees. They're competing on market models. They're competing on functionality. They compete on technology. One is not correct. I don't know if 100, for example, is too many because then there are lots of connectivity costs and other costs to be able to trade across all of those venues. When I look back, I've worked in this industry since '97. So in 2006, let's say there were five. And then it went from 5 to 10. And then it went from 10 to 15. As I mentioned, it seems like the exchanges have reached some reasonable expectation of how much volume they're going to trade on any given day, given how much volume trades overall. So I don't think one is right. I think 100 is too many. The exchanges had reasons to add additional exchanges. I like to think of it as-- in the US, there's really-- if you exclude the 17th that's coming up, there are five option families. There's NASDAQ, FELIX. And there's SIBO, then there's AMEX. And there's MAYEX and then there's BOX. They have competing venues. Always in their mind their steady state of where they want to see their volume and trading. I know that was a little wishy-washy, but the competition is good. Obviously, there's an extreme if it went too far, I think.

PETER HAYNES: Well, there are certainly some big differences in how equities trade versus options. And one of the biggest market structure differences is that all options trades must be executed on an exchange. It's been well documented, in fact, by Chair Gensler that he's concerned about-- some days there's 50% of the trading in stocks that actually is happening off exchange. So let's just walk through the anatomy of an institutional investor order. And we'll use a simple example here, Andrew. T.Rowe wants to sell, say, 1,000 three-month 5% out-of-the-money calls on a large cap name. How would that execution take place?

ANDREW SCHULTZ: I think there's two different ways that this trade could take place. I think the one that you're probably most familiar with would be T.Rowe recalls and finds around to different market participants, gets a price on the order. And then depending on exactly how it's set up, who would execute the trade? Did they either bring it down to the floor, or they had, in lots of cases now probably submitted to any of the exchanges electronically. I know we're going to talk about auctions down the road. But there's nothing to say that that 1,000 lot that you referred to couldn't be discussed with the counterparty. The counterparty then sends it to the exchange as an auction. And it trades, and it's exposed. And other firms can potentially respond to it and interact with the trade. I think the other alternative is and probably the one that I'm a bit more familiar with is the standard electronic flow. So that person could-- that person could directly send 1,000 down to the exchange. That person could decide to send 1,100 at a time-- an aggressive limit order. If that's what they wanted to do, they could post something mid-market. So I think there's lots of ways to do it. I think there's-- the floor is there. They can execute it on the floor, but I think we're still seeing certainly the growth electronically. And some of the big trades go up on the floor, but, obviously, the vast majority of things are trading fully electronic.

METT KINAK: Hey, Andrew. On that second example you just provided as far as electronically interacting with the exchanges, are there any rules we have in the equity space, where, obviously, we have OPR or the protection rule, which says we have to achieve the best price available? And the exchanges will honor that by making sure they're communicating with each other. Or is the router that you're using potentially incentivized to go one of many of the exchanges or all of them? Is there a way that that's built?

ANDREW SCHULTZ: So there's-- definitely, when you're executing a custom order, there's kind of best X obligations. And then the exchanges are generally providing an NBBO protection. So I think between the person who's executing the order has an obligation to get their customer the best price at the time and then the exchanges, which are all essentially linked together, so that even if an order was aggressively priced through one exchange, you can't lock the markets. And so then that order would then get either rerouted to the other exchanges, or in some cases, the exchanges have different mechanisms to let traders respond to orders on that exchange before it gets routed away, since they all want to have the trades executed on their exchange whenever possible. So there's certainly an obligation to get that prices. And I think that combined with the linkage NBBO protection they generally are getting. Something that's a trade through, even on a massive order is fairly rare.

METT KINAK: So you're basically working in the same regulatory framework that equities work in when you're dealing in the options market.

ANDREW SCHULTZ: I think so. I don't think it's all that much different. I think the acronyms are a little bit different, and the terms are a little bit different. But I think they're getting to the same place for the customer side of the order.

PETER HAYNES: Let me put some numbers on this one, Andrew. The market's $1 at $1.25 on my hypothetical example. And an upstairs desk, XYZ broker gives Mett a bid for $1 for those options. He's going to go down to the square on one of the exchanges where it's $1 bid and try to cross 1,000 options at the bid. How does the allocation process work on that 1,000 contracts? I'm sure it differs exchange by exchange. But can you explain how much that the institutional broker would have to give up to the square?

ANDREW SCHULTZ: So in your example, he's got a sell order to trade at a dollar, and he's trying to buy him essentially on what the market maker bid is at the time?

PETER HAYNES: Correct.

ANDREW SCHULTZ: This is an area a bit outside my expertise. I think the crossing rules are generally around 40%, but I'm not confident in that. I know if this was going in electronically and it was submitted, then the contra side of that electronic order-- so in this example, the customer would be at $1. It would be essentially a paired order sent down to the exchange via an auction mechanism. That paired order would be essentially guaranteed 40% if their top price is the executable price. In that example, it's one 1:1.25. In order to sell 1,000 at $1, that would be exposed to all of the market participants for some period of time, all about 100 milliseconds. They can respond-- let's say there's a 107 bid to respond. Making up numbers. If the countryside also had a 107 top on their response, then they would be getting at least 40%. If it was two people, it's 50%, along those lines. If they had a 107 top and someone responded at with a 109 bid, they would get shut out entirely.

METT KINAK: Got it.

ANDREW SCHULTZ: That's an easy 40%, 50%, depending on how many participants are actually responding. The floor one, again, out of my expertise. I'd have to refamiliarize myself with the actual cross rules on each of the exchanges.

PETER HAYNES: I think that's the point is that the rules are all different. And some exchanges have floors, and others have these auctions which we're going to get into in a second, in fact. Maybe you can contrast that example we just used a moment ago for an institutional order with the anatomy of a retail options order execution, where, clearly, all the volume has been coming from recently with all the Reddits and FOMOs and everyone else. My understanding is that most, if not all, retail orders are executed via quote, "an auction." How exactly do these auctions work?

ANDREW SCHULTZ: So here, I think I disagree a bit on the exact percentages. I think auctions represent about 20% of the volume in the US marketplace today, plus or minus. When I think about the volumes on the exchanges, I break them up into few categories. One would be auctions, which is what we've been talking about. Some execute against quotes. Some are mid-market orders. So in your example, it's one 1:1.25. Someone just has a 110 offer and simply posts it on an exchange. It would execute if someone sees them and wants to pay 110. If someone-- if nobody wants to pay 110, then the new market would be 110. And then there are spreads. So I think auctions are probably really only about 20% of the overall volume and that mix-- 20% of the overall volume probably slightly higher when you're dealing with retail-only volume. But I think of those categories as trades on the posted markets, trades mid-limit, trades auctions, and then trades as part of a complex spread order.

PETER HAYNES: So how does the auction actually work? I'm retail, I'm Robinhood customer, and I want to buy 10 IBM calls, three months out. Does that go to an auction, and how does that process exactly work?

ANDREW SCHULTZ: So Robinhood is generally sending orders to some type of aggregator. That aggregator then has the ability to route those orders. They have a best x obligation, which we discussed. They can route those orders to interact with the screens. They can route those orders to post. In your example, it's likely a marketable order. So an auction is probably an available choice. They would send the order just as I described before. There's a 10 bid. They would have the ability to put a contra side on that order with a limit price below 110. So basically, it arrives at the exchange as-- I like to think of it as a paired order. Customers are 110 bid for 10. This contra party is already willing to sell it, let's say down to 108 as an example. They sell it down to 108. There's 100-millisecond auction on the exchange market makers. And people who are listening to the-- People can respond to those auctions. If they respond at 108, there's an allocation, depending on exactly how many responds. If someone responds 107, they might get it all. If no one responds, then it's going to trade. It guaranteed to trade better than 110 because it went down with that auction. So at worst, it's trading in 109 in the example if nobody else responded at all. They arrive at the exchange as a two-sided paired order with a 100-millisecond exposure.

METT KINAK: Andrew, those orders at that point when they're arriving at the exchange, they're already paired off for quantity as well, or is it potentially not an exact contra match, but they're looking for other side interest to come in and increase the size of the match?

ANDREW SCHULTZ: Nope. They're, generally-- when they need to arrive, they need to arrive fully full contra, which is reasonable for the retail sizes, where the sizes are much, much smaller. A 10 lot goes down to one of the 12 exchanges that have these auctions. That 10 lot is guaranteed to trade, no worse than the screens at the time. There are funny exceptions if things happened or halts or crazy other orders that are happening during that under millisecond auction. But essentially, it's going to trade. And it's going to trade no worse than the screen limit. And there are rules about greater than, less than, 50 contracts-- how much you need to improve the screen size in order to do that. You can't just sell on the offer as part of an auction. Below 50 contracts, there needs to be an improvement amount.

METT KINAK: So, Andrew, you've described the different ways that trades can get executed. And I know you mentioned there are 16 exchanges where all of the executions occur. If you were to look at the totality of the option space, would you consider a competitive environment for, specifically-- I mean, I know the exchanges compete with each other, but do you think there's actual price competitiveness or an order-by-order type of competition that takes place on the options market?

ANDREW SCHULTZ: I definitely feel like the options market in the US is extremely competitive. There are many, many participants. And they also can each have areas where they specialize. So someone may be looking at longer term options and is much more aggressive with vague and longer term options. Some participants may be better with bigger orders and not deal with attempting to trade one lots and two lots on the screens. There are some that are more aggressive, better at posted screens. There are some that are trading mid markets. There are some that are trading spreads. There are some that are trading in their auctions. It's not by appointment. It's not by phone call. So when any one of these orders arrive, sure it might be that this is a very illiquid symbol where there aren't too many market makers. But on any of those names that I mentioned early and certainly much, much further down the list, there's lots of different participants that have lots of different strategies that are trying to interact with those orders and whether it's market makers quotes. Even in some cases, other retail orders are looking at these traits, too, because it's possible that some retailers are interacting with other retailers. So I think that mix of all the participants happening at the same time certainly makes for very competitive executions across what turns out to be over a million different strikes.

PETER HAYNES: That is a crazy number for sure. One of the things that I need you to just explain a little bit better for the listeners is, we talk about options market makers who are pricing and keeping quotes on screens all day long on those million lines you just discussed a second ago. And then we talk about payment for order flow and the so-called wholesalers who are the ones who, I think, are bringing down that paired order to the auction. They're the one that gets the order from, say, Robinhood. And then takes the other side of it and then brings it down to electronic options exchange. Are the firms the same that are market makers as they are as wholesalers?

ANDREW SCHULTZ: There's certainly a lot of overlap in that group. There are wholesalers that have market makers. And then there are market makers that don't have the wholesaler arrangement. I think the interesting thing is that when these auctions arrive, you don't have any information about any type of contra information prior to the trade executing. So when you see one of these auction messages on one exchange, you don't really have any idea who it's going to-- you don't know who routed it, and you clearly don't know who the customer behind the order is. So the competition is there. You see an order. You see an auction. You want to respond to this auction. You're basically forced to respond, and you can't really-- you don't have any information about who it is at the time when you're doing it.

PETER HAYNES: Andrew, what happens if an auction can't be filled entirely? I think you said earlier that you have to bring the entire size down to the floor. Does that mean you wouldn't be able to execute an auction if you didn't have both sides paired up to the amount that's needed?

ANDREW SCHULTZ: Right. So the exchanges would not let you send that. So if it was with a 10 lot, it's straightforward. But if a retail customer were sending in a 500 lot or a 5,000 lot, unless the contra side is putting the full size up, it can't go to an auction. There may be a variety of different ways that that firm could choose to execute that 5,000 lot by stuff we talked about earlier, right? They could do bits and pieces. They could post it. They could lift the screens. But the auctions are generally full size only in the US.

PETER HAYNES: There's the school of thought that options market makers, the screen quotes are artificially wide on the exchanges-- electronic exchanges in order to compensate for the lack of exclusivity on retail options flow. And that if you eliminated wholesaling and you forced the likes of Robinhood to go directly to the options exchange, this would result in narrower spreads and better executions net-net for investors. Do you agree or disagree with this statement?

ANDREW SCHULTZ: I disagree. As I mentioned, I think on the order of 20% of the orders are going to the auctions. In a lot of cases, if the Robinhood in your example was forced to route directly to the exchange, they lack a lot of the different risk tools. They don't necessarily-- they would need to be aware of all the different fees and all the different routings. And then they would essentially have to deal with all of the various mechanisms. And in the auctions example, there would be no contra side. I suppose there could be some set up where they could have some type of arrangement within their own firm to provide that liquidity. But one of the features, one of the benefits of the wholesaler-- and I know you're going to talk about the payment forward flow arrangement-- is providing this liquidity to the screens. So even though the screen may at the time look wider than someone might feel reasonable, trades are going up inside those screens, and customers are getting liquidity. You can make lots of examples. A screen is 1-110, 10 up. If someone trades an auction and they're able to sell 100 at 110, I'd argue that that's more liquidity than the screens were offered at the time, right? More standard example is it's 110 and an auction trades at 107. So there was extra liquidity provided-- size and/or price liquidity at the time. I don't think getting rid of the auctions would instantly narrow the spreads. I think the spreads are the best ways for the market makers to advertise the prices on the quotes. And so without those prices, there'd be no incentive to put those screens out there. And again, the auctions are just really-- they're a large portion. And certainly, they've grown over the last 10 years. But there are lots of other trades that are happening outside of auctions on the screens and mid markets and through Street. Someone posts an order on the screen, and someone responds with an order to execute it. Those are happening zillions of times a day.

METT KINAK: Andrew, I think it's my turn to ask a question here. So again, I'm not as familiar with the option space as I am in the equity space. And there are terms in the equity space that usually have a negative connotation to them like maker-taker. I think there's similar terms in the option space that some people view as being an evil term like specialist appointments, price improvement mechanisms, marketing fees. Can you talk a little bit, firstly describing what those terms actually mean for some of the folks, including myself to understand better? And do you feel like that's a necessary evil for the options market to function the way it does, or do you think these are some of the things that should be revisited by a regulator and improved?

ANDREW SCHULTZ: So going through those one at a time. I don't-- I don't necessarily consider any of them evil. The specialist appointments-- again, the options exchanges have been around for a long time. I've been around for 25 years. And so there were times where the specialists-- and this is still the case where the specialists have a higher compliance obligation. They're forced to have screens out there more consistently across more strikes, across a higher percentage of the time than a market maker in a symbol. So as part of that, the specialists, in some cases, can get a higher allocation. It may seem different now in the electronic world. And so maybe it's a slight carryover, but there is certainly a higher compliance burden on them. And their force is there. And in lots of cases, if they're the only quote, then the exchanges need that quote to open the symbol that morning. If there were no other market maker, then-- certainly, I've seen examples where a symbol can't open because the specialist isn't quoting that world. So they have a higher obligation. And so then that's why on certain types of trades, there's the specialist allocation or-- I think another term that we've talked about would be called like a carve out. Price for mechanism are all the auctions that we've just discussed. One of the exchanges, actually, their acronym is PIM. P-I-M for Price Improvement mechanisms. So all of those auctions that in lots of cases are getting the customers tighter screens and better liquidity and better execution prices, those are the price improvement auctions that we've been talking about. As far as the marketing fees, that goes into the payment for order flow. Robinhood is routing orders to an aggregator. That aggregator is paying for those orders. And then when they arrive at the exchanges depending on what exchange and how they're executed, there's a marketing fee charged to the market makers that are interacting with that flow. And so that's the two-sided flow. So if there was no marketing flow, they would be, in a way, very difficult to have a payment for order flow arrangement, right? There are the two sides of the coin.

PETER HAYNES: Aggregator is a wholesaler. Is that-- just to make sure we got all our terms right. Is that right, Andrew?

ANDREW SCHULTZ: Yes.

PETER HAYNES: OK. And the marketing fees. If I understand correctly, they would ultimately form the pool of cash that gets sent back to the person that originated the order of the Robinhood of the world. That marketing fee is aggregated by the exchange themselves and then sent back through the routing broker to the end client. Is that done monthly? Is that done weekly? How exactly does that work?

ANDREW SCHULTZ: That is done monthly. So the marketing fees, which are, in general, $0.25 for penny names. And I believe it's $0.70 for nonpenny trades. Those orders are-- that fee is collected by the exchange when a market maker interacts with a customer orders on the exchanges that have these systems. So this is another one where it-- way back at the beginning, right? The competition and the maker taker, price time, pro-rata, which exchanges have PFOF programs or marketing fee programs and which don't. But in the case-- if the exchanges [INAUDIBLE] do, that 25 or 75 is collected from the market maker. The exchanges are essentially just. They're keeping the books. And then at the end of each month, those fees are then pushed back to the firms that routed the order. I think the aggregator wholesaler, in our terminology, that's the flow that's going back to the Robinhoods of the world in our example.

PETER HAYNES: I've tried to figure that out literally 20 times in my career. I think I actually might have it figured out right now. So don't change it so that I, all of a sudden, will get confused.

ANDREW SCHULTZ: When you try to look for some of the dollars, you have to follow it through sometimes. And I hate to say it was a smooth education process for myself.

PETER HAYNES: Well, my good friend and former colleague, Eddie Boyle, who I'm sure you know from Chicago-- the Boyle family is well known, especially on the CBO. Eddie, he used to come in, and we would whiteboard for half an hour. And he would go through this process. And I must admit, I don't think I ever fully understood what he was saying. I think maybe, finally, the light has gone on for me to understand that. As you say, the cash flows and how they flow around.

ANDREW SCHULTZ: We used to call that whiteboard the circle of life. When there were new people working in me and my group, I'd go and grab a whiteboard for two to three hours. And it felt like you could just keep drawing more circles and more arrows and more exceptions and more-- well, but if it's this and not this. So I've done that whiteboard session a few times.

PETER HAYNES: I bet you have for sure. So one of the things that Mett and I talked a little bit about is why there isn't as much scrutiny on best execution or perceived to be as much scrutiny on best execution in the options market versus, say, the equity market? And I had a theory which-- related to the fact that in equities when you have a large order, which we call parent order, and it gets broken into smaller orders, we call them child orders, and then routed through algos to all the different venues, there's all these conflicts that arise from brokers routing to venues that they favor. And that becomes this whole best execution question for institutions. But I didn't have a perspective in options that there are very many orders that are large that can be broken into smaller components and then routed to various venues. Do you see much of that happening in the options market, whether it be through time slice or algos? Does it ever happen? And if so, how frequently?

ANDREW SCHULTZ: I don't have a sense of how frequently it's happening, but it's certainly happening. I think the scrutiny is similar. I think the big difference is that for the options exchanges, they're going to fully lit venues so that 1,000 lots or that large order that you're seeing that might be getting chopped into parent child or an oversized order that needs to get split across different venues, they're going to those exchanges. They can see them trade on those exchanges. So I think the scrutiny is there. I think there's certainly the-- best x is a real thing. Getting the customer the NBBO and the best x obligations are real. I think the scrutiny just feels a bit different because they're executing on fully lit venues. And so you can see where that routing is happening. It's exposed to the world. It's either lifting a quote or you could see it in the market data. You could see the orders arrive. You can see them execute. You can see them all on the tape as they're happening attributed to the different exchanges. And then with the various-- I call them opera execution codes. I don't I think that there's probably an equivalent up in Canada. You can see exactly how that order was essentially traded, right? Was it part of an auction? Was it part of a spread? Was is an iceberg order? You can see these different attributes made public right from the opera tape.

PETER HAYNES: Mett, I'm curious. You mentioned earlier that T.Rowe is active in the options market. As you talked to other head traders in the United States, do you have a sense that those firms, the traditional asset managers, and large funds are more active today than they might have been a few years ago in trading options?

METT KINAK: Oh, that's a good question. The sense that we have-- I mean, obviously, when we're trading in options, we're not engaged in the same activity that you see from-- as Andrew mentioned, the FOMO crowd or any kind of retail type of activity. A lot of what we're doing is writing covered calls. We're not necessarily putting on risk via options per se. Our behavior hasn't changed much materially. And I haven't heard from folks that have changed their behavior significantly either. At least our peers that look a lot like T.Rowe. So I think our engagement is consistent to what it was previously. And I think a lot of our peers that look like T.Rowe are pretty consistent there as well.

PETER HAYNES: So, Andrew, you mentioned Canada briefly. I know you've got some experience in our options market and have been working with the TMX's derivatives subsidiary-- the Montreal Exchange or MX-- extensively on market structure for options trading in Canada. Do you have any takeaways from your discussions in Canada and how market works here that can actually be potentially applicable in the United States?

ANDREW SCHULTZ: So I think the one thing that's directly related to what we've been discussing is TMX is looking or Montreal is looking to essentially bring an auction very similar to what we discussed up to the Montreal Exchange. I don't have any details on timing. We've talked about it across a couple of their market maker forums, their market maker calls. I think that's an interesting way for them to try to grow the retail volume by allowing these orders to arrive and have other market makers have the ability to interact with some of these orders as opposed to-- it seems like some of these orders-- the crossing rules are very different in the single list. And so I feel like having this auction mechanism can certainly-- allowing the retail customers and even institutional in some cases to potentially get more liquidity, possibly at different prices and different sizes than what they're seeing now. So that's one of the things that has been discussed in their forums. And hopefully, it's something that changes over the next, say, a year or two.

PETER HAYNES: As a firm that's very active in the Canadian options market-- relatively speaking, it is a smaller market-- would be great if there could be more flow directed there. In fact, it's been frustrating that so much Canadian names-- option flow actually goes down and trades in the US. And part of that is because of the marketing fee. It'd be interesting if the Montreal Exchange ever tried to figure out a way to get a, quote unquote, "marketing fee" into their structure, which might make them more competitive from the perspective of the routing firm. We'll see. So just as we finish up here, the first part of this two-part podcast, and then move to equities in the second part, I want to give a shout out here to Paul Jiganti who I mentioned, was previously an options expert speaker on this podcast. And he's chairing a Joint Committee of SIFMA and the STA. And the mandate of that committee is trying to improve options market structure. What improvements have you seen to date, Andrew, and what would you like to see improved in the US options market?

ANDREW SCHULTZ: So I've worked pretty closely with Paul on some of these issues across the different committees. I think over the last two or three years, I've been [INAUDIBLE] on them. And we've made some pretty good strides in what we call the obvious error rule. So making sure that customers are getting protections when there are market incidences or where there are liquidity problems to make sure that those customers are treated fairly, and it's treated fairly across different participants. There's been work on strike listing. So I mentioned over a million strikes, there was a time-- it's gone up over time as more symbols have gotten listed, and we've added more weeklies. And in some cases, the ETFs have dailies. But I think one of the things that committee has done pretty well, what we were calling a strike mitigation plan. So to make sure that reasonable strikes are getting listed and they're not adding-- some of these big names have split, some have come down. So it's not quite the same issue as it was, but there were some symbols where there were just so many strikes. And essentially, those strikes have nearly identical deltas, nearly identical Greeks that it felt like there was no real reason to have that extra message traffic, extra strikes. And so that's one thing that I've worked on-- done some work on in the US, the pro-customer rules. And then the other one is some of the position limits. As the volumes have grown as you've mentioned, making sure that the position limits for some of these large ETFs and symbols have maintained and stayed the course.

PETER HAYNES: Well, it's a complicated space. And I think it's important that we socialize these discussions to make sure people like Mett and myself that spend most of our time focused on equity market structure are at least paying a close enough attention to the options market given it's related. And a lot of stock flow comes from option executions. And I think you've done a great job, Andrew, demystifying a lot of these topics. I'm not sure I'm a fan of daily ETF options or weekly single-stock options. I think that might be something that should be-- hopefully, your committee, Paul and the team there, are able to maybe rein some of that in as well. But thank you very much, Andrew and Mett, for joining us for this episode. And in a few days, we'll be back to talk about equities market structure and put a little bit of a lens on whether or not Mett thinks that these retail auctions that we talked about in options can in fact be repurposed for the equity market. Thank you, Mett and Andrew, for joining us today.

ANDREW SCHULTZ: Thank you.

METT KINAK: Thanks Peter.

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