The Striking Price

Vesel Interactive: Peeking Inside the Black Box

STEVEN M. SEARS

Saturday, April 19, 2014

Vesel Interactive, a technology firm, is trying to illuminate one of Wall Street's biggest secrets: Who trades what in the options market.

Vesel Interactive, an obscure technology firm, is trying to illuminate one of Wall Street's biggest secrets: Who trades what in the options market.

The firm is creating league tables based on executed trading volumes, much as Autex does in the stock market. Autex ranks brokers based on stock-trading volumes and value. Nothing similar exists in the options market.

Everyone knows that major trading desks at Goldman Sachs, Morgan Stanley, and Credit Suisse dominate the options market. But no one really knows just how big these firms are in options, or even which firms dominate trading in the more than 2,000 listed securities. "We built Vesel because we believe there's more information than people think as to who is executing options, why they're doing it, and who they are. We're trying to bring that whole picture to investors and traders," says Joe Wesley, Vesel's founder and CEO.

Wesley believes that Vesel's data will help investors trade at better prices by identifying which firms are most active in options on stocks, exchange-traded funds, and indexes. The idea sounds reasonable, but it's also heretical. It is now essentially impossible to identify options buyers and sellers. Options trade electronically, and investors make significant efforts to conceal identities. No one wants anyone to know what they're doing. Firms take confidentiality as seriously as Swiss bankers.

"What 30 pieces of silver is worth losing my customer's trust?" says a trader at a major firm who on any given day trades more options than nearly anyone.

Wesley contends Vesel provides a better way for investors to access the options market. Vesel has built an electronic network where some sell-side firms post data what they've traded to attract customers. The data can be reviewed by buy-side firms. The key idea is that this information will help investors better navigate the market.

Capstone Investment Advisor's chief risk officer, Matt Tonelli, says banks, institutional investors, and hedge fund managers need more transparency in options. "Vesel gives all participants a better understanding of who is doing what," says Tonelli, a Vesel director. "Their simple, effective tools make it easier for participants to source options liquidity."

Rather than sending an order to Goldman Sachs, for example, investors could use Vesel's data to identify the most active dealer in a security. The idea is that going directly to the source saves money. In addition to posting trading-volume rankings, Vesel allows buy-side investors to query sell-side firms to see if they want to trade their orders. For now, Vesel is not registered as an exchange or a broker-dealer.

IN THE OPTIONS MARKET, brokers shop big orders to "show desks" that banks and dealers operate to handle the equivalent of stock-market block orders. Some investors complain that shopping orders worsens prices. As more people learn there is a big buyer or seller in, say, Apple (ticker: AAPL), the information changes prices in anticipation of a trade. If Vesel succeeds, those orders might be executed without adversely affecting prices before execution.

So far, Wesley says some 28 sell-side firms use Vesel, including Lakeshore Securities, Stifel, BTIG, Seaport Securities, and Nomura, as well as about 140 buy-side firms. No major banks are customers.

Vesel has attracted investors with significant experience in reshaping trading markets. SenaHill, a financial technology merchant bank, is backing the firm. Neil DeSena, SenaHill's managing partner, founded the REDI trading system, one of the first electronic-trading networks. DeSena also serves on Vesel's board.

"You can't fight transparency," Wesley says, sounding like a man who understands what it means to be threatening and hopeful at the same time.

Reprinted by permission of Barron's Online, © 2014 Dow Jones & Company, Inc. All Rights Reserved Worldwide.

The views expressed in the above papers and articles are solely those of the author of the article, and do not necessarily reflect the views of OIC; the information presented is not intended to constitute investment advice or recommendations to purchase or sell securities of any company; and the information presented is based upon particular events that may or may not recur in the future.

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