SPOOZ Inc (SPZI)

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Here's an older article - November 2007 - I don't think it's been posted here yet???... but anyway, it was put out by the Securities Industry.com.

The reason why I'm posting it is that SFB Market System's own CEO Lee Clifford is interviewed here - which also tells me SFB Market Systems is seriously recognized by the Options Market and that SMCC is very real. Also shows where the DTCC fits into all of this too.


Options Symbology Gets a Makeover~OCC's new nomenclature will eliminate exchanges' proprietary work-arounds.

Source: Securities Industry News

Publication Date: 12-NOV-07


With the publication last month of an implementation timetable, Options Clearing Corp. (OCC) and the U.S. options exchanges are proceeding with their efforts to overhaul the symbols used to represent exchange-traded options contracts despite the operational burdens for member firms.

Instead of the current five-character designation, which meets the criteria of the Options Price Reporting Authority (Opra), the new options configuration will consist of up to 21 characters.

The exchanges and OCC, the clearinghouse for all U.S. listed options, said they will devise record layouts for new data fields by June 30; firms can use the remainder of 2008 to conduct system-readiness testing. While firms must be able to accept options data in the new format by the end of June, they won't need to send it until July 2009.

In January 2009, OCC, the options exchanges and their members will begin a six-month period of scripted testing of in-bound and outgoing communications. All firms will need to fully convert to the new formats for all data elements, except symbols, by July 31, 2009. Symbol conversions, or consolidations, will be phased-in on a yet-to-be determined schedule.

The change in nomenclature will allow an option symbol to match that of the underlying security as well as provide additional information on the option. "In the new environment, the vast majority of listed options will carry the same symbol as the underlying securities for multiple expiration dates," says Mark Baumgardner, VP of business development at OCC. "This will simplify the process to identify the appropriate option contract when searching through the numerous contracts available."

The OCC-led Options Symbology Initiative (OSI) started work in 2005 with the formation of a symbology committee--of which Baumgardner is a member--comprised of representatives from broker-dealers, exchanges and vendors. An initial plan was released in May 2006 and updated in December 2006. The committee has since been working out the details and the time frame.

The new nomenclature will eliminate much of the proprietary symbology used by exchanges for new types of options as well as the ad-hoc symbols adopted by third-party service providers to compensate for identification inadequacies. As a result, the potential for errors in trading and post-trade processing will be reduced.

"In addition to using the current symbology, we have devised our own syntax, similar to what the OCC and exchanges are now proposing to help firms understand just what they are trading," acknowledges Michele Magdo, options product manager for London-based trading platform provider Fidessa.

For corporate actions, the new methodology will mean a substantial reduction in exceptions processing. Firms will no longer need to keep track of two disparate and nonrational sets of names--one when the option is listed and a second when the corporate action is announced (when the event expires, the option reverts to its initial identifier). When the corporate action is announced, only a numerical symbol will be included to indicate the option is affected.

Currently, listed options use up to three alphabetic characters to represent the root symbol and two to identify the expiration month, call-put indicator and strike price. "While this system of naming options worked well during the early years of option trading, the shortcomings of the current configurations are becoming increasingly evident in light of the new options products," says James Leman, principal of Westwater Corp., a financial services consultancy in New York.

Three-character root indicators cannot accommodate underlying over-the-counter securities, nor does the configuration allow market players to identify quickly the underlying security. And the current call and put codes assume all listed options expire the following month on the same day--the Saturday following the third Friday--meaning they cannot be used for long-term equity anticipation options (Leaps), which can expire in the next calendar year, or flexible exchange (Flex) options, which can expire up to four times in a single month. A short-dated option may also expire several times a month and require special handling.

Exchanges have had to construct their own symbology to identify such options. For Leaps, they implement one configuration when the option is issued and a second, which resembles Opra's, within six months of its expiration. All are distributed, along with updates, by the exchanges on a daily basis through OCC.

"Broker-dealers have to tinker with their operating systems and devise manual work-around situations to keep track of options which were not defined under the Opra nomenclature," says Leman.

The new options symbols will include the expiration year, signified by two characters; the month, another two; and the day, two. The call and put indicators will be represented by one character while the strike dollar will be five and the strike decimal three. A Microsoft call option with a strike price of $27.50 that expired on Oct. 20, 2007 would be recorded as MSFT 07 1020 C 00027 500 rather than the current MSQJY.

Instead of relying on a single numeral to indicate the style of a Flex option (American or European) and the settling terms (AM or PM), a European, IBM listed Flex contract on opening would be written 21BM, with the expiry date, month and day transmitted.

Y2K-Scale Revamp

For front-, middle- and back-office systems, the scope of changes needed to accommodate the new identifiers is comparable to the Y2K efforts, when the industry had to change millions of lines of coding. While such massive efforts won't be necessary for financial institutions that do little options trading, they will at the very least need to become familiar with the new symbology, say industry experts, even if they outsource their processing work, because of the multitude of systems involved--from order management and trade execution platforms to security master databases, options analytics platforms, and clearance and settlement systems.

Notes Leman: "All interfaces to exchanges, market data and clearing entities are affected, so even if they outsource a portion of the option processing stream, there are still many touch points that need to be reviewed and tested to ensure compatibility."

The security master file will be most affected since any changes made to the database will peripherally touch every system. "This database will require the greatest attention and analysis to help ensure trading is not affected and sensitive data is not corrupted by the changes to the option configuration," explains Leman.

Such operational issues have raised a question: Does the effort outweigh the benefits? "The exchanges have not evaluated the cost impact of the new nomenclature, and we have not been properly consulted and informed about the changes," contends George Tull, CTO of New York-based agency options brokerage OnPoint Executions.

Tull says that the OSI methodology isn't necessarily an improvement and that, due to its complexity, OCC and the options exchanges will be forced to push back the timetables. Rather than managing the issuance and distribution of options symbols, the exchanges and OCC should outsource the work to a centralized industry clearinghouse, he argues.

Alternative Clearinghouse

Lee Clifford, chief executive of SFB Market Systems, a Thorofare, N.J. vendor whose software is used by the exchanges to create and store option symbols as well as generate strike prices, says she has created such a clearinghouse, the Symbol Management Clearing Corp. Instead of exchanges issuing the options symbols, which OCC then distributes, they can outsource the entire process.

Clifford, who will present her alternative at the Financial Information Forum's options symbology conference on Nov. 13, says there is nothing wrong with the current nomenclature that couldn't be fixed with enhanced mapping and unique identifiers. "The real problem is that the exchanges are issuing multiple symbols for the same contract, which confuses market players," says Clifford, who asserts that the initiative was undertaken without a cost, risk or impact analysis.

OCC's Baumgardner says there has been ample input from the brokerage community on the initiative and OCC is "already structured to balance the needs of both the broker-dealer community and that of the listing exchanges."

The simplified symbol designation process will negate the need for special mapping vendors, according to Baumgardner. "For the past 15 years, industry experts have recognized the need to overhaul the current options symbology," he says. "Some vendors have developed business models designed to profit by providing solutions to overcome the inefficiencies that have existed. The OSI plan is specifically designed to address and eliminate those inefficiencies."

Clifford agrees that several market-data vendor and brokerage clients use the firm's software and data to reconcile discrepancies between the exchanges' options symbols. Her options database, Symbol Master, keeps track of historical and new option nomenclatures. However, she says her firm won't suffer if the options initiative goes forward. "SFB has long-standing experience in the options industry and can adapt to the future needs of the market," she says. "There will always be a need for a centralized one-stop shopping database."

Ned Miles, principal software engineer for Penson Worldwide subsidiary Tick Data, a Great Falls, Va.-based market data vendor, concedes that the OSI is necessary to improve market transparency for listed options, but his firm has not decided whether it will change the format of the data it submits to clients. "Our data is used for pre-trade and post-trade analytics purposes and our clients rely on nomenclature we create which better describes listed options," says Miles. "There may be no need for us to change the nomenclature which closely matches the one proposed by the OSI."

Baumgardner agrees there is a divergence among market players' preparedness. "Large executing broker-dealers and clearing firms have made the most advancement while asset management firms are still catching up to learn the topics," he said. Clearing firms, which do much of the operational work for executing brokers, may well be the most affected by the changes, according to Baumgardner, since they must keep close track of inventory in options and the expiration timetables.

The new options symbols will also alter how the industry communicates with the Depository Trust & Clearing Corp. (DTCC). The affected OCC applications underpin DTCC's Automated Customer Account Transfer System (Acats), which transfers customer accounts between financial intermediaries, as well as the OCC Pledge and Release Service and the Payment Orders Service, which support options premiums. DTCC participants pledge collateral through DTCC to OCC for their transactions in exchange-listed options while they pay for options contracts through the depository's premium service.

"We are now required to expand the number of data fields used to store the information at the application level," says Edlyn Meringolo, director of product management for clearance and settlement at DTCC. Meringolo heads a team that is addressing the coding issues involved.

In conjunction with the OSI implementation plan, DTCC will have the new data fields available on June 30, 2008. Meringolo says that participants should in January 2009 be prepared to participate in scripted testing as they will be required to use the new format that July.

(c) 2007 Securities Industry News and SourceMedia, Inc. All Rights Reserved.

http://www.securitiesindustry.com http://www.sourcemedia.com




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