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| In 2009 the Tel Aviv Stock Exchange (TASE) initiated the trading of stock options on TASE’s four most active shares: Israel Chemicals, Bank Hapoalim, Bank Leumi and Teva Pharmaceuticals. Trading volume in these options tends to be relatively low, despite the fact that stock options are considered one of the fastest growing asset classes worldwide. Over the past few years, turnover in stock options has exceeded that of index options.
After consulting with TASE members active in the derivatives market, the TASE has formulated a new model of market making designed to significantly improve the liquidity of Israel’s stock options market. As a result of the new model, the number of market makers and the demands placed on them has increased. At the same time, market maker remuneration has been revised to enhance incentives for providing liquidity, as is practiced in many markets abroad.
At the beginning of February of this year, the TASE released through its members a call for market maker candidates under the new model. Threshold application criteria were derived from the candidate’s activity in TA-25 index options. The TASE selected the three applicants most active in the index option market:
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- Barak Capital Group – owned by Eyal Bakshi and Delek Capital, Ltd;
- Goldfish Fund and Investment Management, Ltd. - managed by Amnon Riftin and specializing in automated trading in derivatives, bonds and stocks on the TASE and exchanges abroad.
- PAI Finance Group – specializes in securities, options and financial instrument trading. Controlling shareholders include Aharon Cohen.
These three companies join veteran market makers, Tradomatix, which specializes in developing trading strategies, infrastructure and algorithms for automatic trading. Tradomatix has been a market maker since March 2009 and is already operating under the new rules.
The new model will be implemented immediately and will be based on the following principles: |
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- Significant reduction of maximum bid/ask spread;
- Addition of the striking prices which compel market makers to submit buy and sell orders;
- Obligation to perform market making activities in options for all four stocks (Israel Chemicals, Bank Hapoalim, Bank Leumi and Teva Pharmaceuticals);
- Submission of buy and sell orders for one-month and two-month calls and puts.
In exchange for the more stringent market making rules, the TASE has substantially increased the remuneration to which market makers are entitled and constructed a model that encourages competition between market makers.
The engagement with market makers will be long-term and trading volume will be checked periodically on pre-determined dates. Should future trading volumes fail to justify continuation of market marking under the new model, this activity will be curtailed.
“The TASE attaches great importance to the development of a stock options market in Israel”, remarked Rina Shafir, Senior Vice President of the Trading and Clearing Department. “This is a vital market with tremendous growth potential, as witnessed in other markets around the world. TASE members and those active in the market believe in its success and for this reason we decided to undertake comprehensive measures to improve liquidity and reduce bid/ask spreads in order to ensure continuous, fair stock options trading for all investors, regardless of the size of the transaction.”
Organized stock option trading started in 1973 with the launch of the Chicago Board Options Exchange. Google and Apple are but two examples of blue chip stocks on which options are written. Options on Israeli shares, including those of Teva Pharmaceuticals and Nice Systems trade in several capital markets in the United States, Germany, Italy, Hong Kong, France, Britain and other countries.
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