Block Trades in Options Markets

Eleni Gousgounis

University of Scranton & U.S. Commodity Futures Trading Commission

Sayee Srinivasan

University of Scranton & U.S. Commodity Futures Trading Commission

 

Abstract:  This paper documents the evolution of block trading in the crude oil options market and examines how it may have affected trading in the downstairs market. While sparse prior to the reduction of the minimum permissible block size threshold in October 2012, block trading currently accounts for about 30% of the trading volume in WTI crude oil options. We compare the execution costs of large/block orders across trading venues before and after the October 2012 rule change, in order to gain a better understanding of the factors behind the recent increase in block trading. We find that while block orders share similar characteristics with those routed to the pit, they have lower information content and face higher execution costs, which can be linked to high search and negotiation costs. However, when we condition for the choice of placing such orders as blocks, we find that block orders would have been costlier to execute at the pit, which may have contributed to the eventual demise of the energy options pits.