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New Options Symbology a Costly Proposition
September 29, 2008
The options industry will spend at least $245 million preparing for a new nomenclature for listed options, according to a survey by the Financial Information Forum (FIF), a technology trade group in New York. The study also found little consensus on how companies intend to implement the 21-character options symbology key, which in 2010 will replace the current 5-character codes.
“We didn’t find any of the survey results surprising and are looking forward to coordinating the efforts of exchanges, data vendors and firms to come up with some standardization,” said Tom Jordan, chairman of the FIF’s advisory committee and CEO and president of New York-based consultancy Jordan & Jordan. The survey was distributed in August and the results were revealed at the Securities Industry & Financial Markets Association’s options symbology symposium last week.
The FIF arrived at its cost estimate--the first time a figure has been attached to the transition--by extrapolating from the responses of 46 of its members, representing 26 broker-dealers, 12 service bureaus, 7 market data vendors and one options market. The number cited in the study does not, however, include expenses for fund managers, the options exchanges, Depository Trust & Clearing Corp. or Options Clearing Corp. (OCC), the clearinghouse that since 2005 has led the Options Symbology Initiative (OSI).
The FIF predicts that $223 million will be spent by institutional and retail broker-dealers, clearing firms and market makers, as well as other members of OCC, NYSE Arca and the International Securities Exchange. Market data providers and service bureaus are expected to pay about $22 million.
In addition to the greater number of characters, the OSI also calls for fractional pricing with an explicit series key and decimal strike prices. Exchanges, vendors and industry participants will need to alter their security master databases, pricing databases, options analytics systems, trade processing and clearing systems, compliance systems and customer interfaces. While 35 percent of respondents said they expect increased capacity as a result of the new nomenclature, only 11 percent are incorporating it into their preparations.
Because many firms can only store nine- or 12-digit identification codes, they will have to create proprietary IDs to identify the listed contracts for client reporting and processing. The FIF asked its members to weigh in on proposed approaches for creating the nine-character, “dummy” IDs from the Cusip Service Bureau (CSB), North America’s numbering agency; Thorofare, N.J.-based Symbol Management Clearing Corp. (SMCC); Interactive Data Corp. (IDC); and an open-source code the FIF dubbed Mark 1 Algorithm.
Thirty-nine percent of respondents said they would use codes created by CSB “if the cost structure were reasonable.” The Cusip Service Bureau, which is operated by Standard & Poor’s, has not disclosed its fee schedule and officials declined to comment on the survey. While 7 percent picked Interactive Data’s solution and 2 percent said SMCC, no one selected Mark 1 Algorithm. Seventeen percent said they will use their current internal ID, 7 percent were uncertain and 24 percent did not answer.
FIF members also differed on the order in which they will present descriptive information on confirmations, statements, online portfolio screens and order-entry systems. Twenty-six percent said they will follow the OSI’s example by starting with the symbol followed by the expiration date, call-put indicator and strike price. For 17 percent the order will be symbol, expiration date, strike price then call-put indicator, while another 17 percent will start with the call-put indicator, followed by the symbol, expiration date and strike price. The remainder did not respond.
