New CBOE Interest Rate Options To Bear Telerate Name, Use Telerate Contributed Data To Set Cash Settlement Price

Telerate, Inc. has put its prestige on the line by allowing its name to be attached to two new options contracts proposed by the Chicago Board Options Exchange. The two interest rate contracts are among the very few based upon proprietary contributed data collected by a quote vendor rather than publicly-available data on exchange-traded issues.

While other financial information vendors -- notably Standard and Poor's -- have had their names attached to trading vehicles, the Telerate Short-Term (symbol: IRX) and Long-Term (LPX) Interest Rate Composites mark the first time an outright real-time quote vendor has done so. Telerate will collect a royalty on every trade, but given the mortality rate among hatchling options, the company clearly is taking a risk.

"If it bombs, it bombs," says Telerate's Barry Clark. "I'd rather have our name attached to it than Reuters." Under the exclusive ten-year deal, Telerate will calculate short-and long-term composites based upon, respectively, the average yield to maturity of newly-auctioned 13-week Treasury bills, and yields of newly-auctioned seven- and ten-year Treasury notes and 30-year Treasury bonds. As we went to press, the long-term composite stood at 8.720, up from 7.561 last September 18th.

The composites will be based upon page five data, says Clark, including quotes contributed by primary dealers and interdealer broker Cantor Fitzgerald. They will be recalculated about once per minute during CBOE trading hours and distributed to other quote vendors through the Options Price Reporting Authority. Telerate will also display the composites, but it's not sure where.

"We haven't quite decided yet," says Clark. "We have to make it visible obviously somewhere on our standard service and right now we're thinking in terms of giving it maximum visibility. If we can fit it in on page five that would be the most logical page." The company has time to make up its mind. The contracts aren't set to start trading until November 5th, pending SEC approval.

Telerate also hasn't decided whether to compute the composites 24 hours a day or just during trading hours. In a somewhat similar situation, Reuters provides the calculation for the New York Cotton Exchange's U.S. Dollar Index, which is delivered to other vendors via the Commodity Exchange Center's data feed during market hours. After the market closes, however, Reuters continues to compute the index and display it on its USFX and USDX pages.

Besides the new Telerate-CBOE agreement, only two other deals involve a quote vendor computing a benchmark index for an exchange from proprietary contributed data. One is the Reuters-Cotton Exchange deal, in which Reuters is an arm's length provider. The other is a less than successful European Currency Unit option traded on the Philadelphia Stock Exchange using Telerate data.

Since no one but the vendor knows what the quotes are and where they're coming from, such contributed data composites pose oversight problems not found in indexes based on exchange-traded instruments. These problems are compounded in the U.S. government securities market, where the relatively small universe of primary dealer contributors leaves open the possibility of the composites being skewed.

CBOE believes it has taken the steps necessary to protect the integrity of the composites. The algorithms automatically eliminate extreme values, says CBOE spokesperson Mitchell Hirsch, and the polling procedure is randomized so that not all dealer quotes are included in each iteration. "The dealers in fact don't actually know when their quotes are being included in the calculation and when they are not," he says.

Telerate plans to make the algorithms public once the SEC has approved the CBOE plan, says Clark. In theory, this would allow traders to compute the composites themselves, using their own data. Whether this might provide an advantage to the primary dealers, who have access to quotes from all of the interdealer brokers, isn't clear.

Clark doubts that Telerate is starting a trend among quote vendors. While it's true that this is "the first time that a contract has been developed where a name such as ours has been actually applied to the contract designation," he sees no evidence that other market data services are about to make themselves part of the information they report.