Why Pit-Traded Options Have Held Strong


While times are changing and options trading is becoming more automated, the lion’s share of options trading by most estimates is still conducted by pit traders. And, according to industry experts, various factors could conspire to make it years before options trading fully makes them move from the traditional pit trade to the computer screen.

“The pit still has a fundamental role… to deal with large orders and different dynamics,” says Javier Paz, senior analyst in the wealth management practice at Aite Group. The type of options trade, its complexity, and the time of day the trade is conducted all factor in to whether it makes more sense to execute the trade electronically or via pit traders, says Paz.

For example, if the trade being conducted is a more complicated options trade, like an ironfly or iron butterfly – where four different options are being bought and held at three different strike prices – or the trade involves a combination of several contracts being simultaneously executed, that trade may be handled more readily through the pit because it is still “hard for a machine to express that electronically,” Paz says.

Thomas Peterffy, founder and CEO of Interactive Brokers Group Inc. of Greenwich, Conn., believes the traders themselves are holding up the move to more electronically executed options trading. “It is true that traders in the pit used to be able to earn more money than they do with computerized trades,” he says. “Traders have an entrenched interest in the old-fashioned way of doing it.”

The move to increased electronic execution could be attributed to the fact that options trading is seeing many new entrants to the market. According to Paz, 27 percent of options traders have arrived in the business in the just the last three years. “We’re seeing a steady popularization of options trading and a higher level of popularity,” he says.

Whether due to complexities in the trading process or simple self-interest, it seems that for the time being the pit still holds a critical place in the options trading market. “The pit still plays an important role, it continues to offer value,” Paz says. “I don’t see that changing going forward.”

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Karen Epper Hoffman is a full-time freelance writer with more than 15 years’ experience covering financial services, technology and general business issues. For the past three years, Karen has been OpenMarkets’ technology writer and has written articles about co-location and algo trading. In addition to OpenMarkets, Karen has written for American Banker, Bloomberg, Entrepreneur and Internet World. She lives in Europe.

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