PHLX, the US options platform owned by Nasdaq OMX, shot to the top of the rankings in US options trading in December. But how much of this is due to dividend arbitrage trading – large market makers placing lots of call orders in the run-up to a company declaring its dividend?
Such strategies involve multiple intraday trades between market makers, who trade large volumes of call options between themselves many times during the day before a stock goes ex-dividend, in an effort to gain ownership of the dividends.
This generates heavy flow on an exchange’s order book, especially in months when blue chip companies declare their dividends.
Other exchanges – the Chicago Board Options Exchange and NYSE’s Arca and Amex platforms – allow investors to execute similar trading strategies. So why is liquidity gathering at PHLX? Some argue the bourse’s pricing structure, which is flat rather than tapered,...