Options Report:Exchanges To Take Step To Linking Mkts
By Kopin Tan
Dow Jones Newswires
NEW YORK -- You have heard the drumroll for years. Now, get ready for the curtain to rise.
U.S. option exchanges today are scheduled to begin the long-anticipated process of linking their markets, when they begin trading 14 option classes on an electronic network connecting the five exchanges. Despite the buildup, the impact on option investors might be muted, traders and exchange officials said. For years, the Securities and Exchange Commission pushed for the linkage, arguing it would allow trades to be executed at the best possible prices.
But trading rules put in place since the SEC began its push ensure that. Current "best execution" rules require option orders at any exchange to be filled at the market's best prices, or traders will be called on to explain the lapses. "And [specialists] and market makers already work very hard to make sure customers get best execution of their orders," said Edward Provost, an executive vice president at the Chicago Board Options Exchange.
The biggest difference might be felt by professional traders, such as specialists and market makers, on trading floors and at the electronic International Securities Exchange.
"It gives the ability to electronically, and effectively, access their counterparts at other exchanges, without the normally labor intensive, and quite frankly costlier, procedures they go through today," Mr. Provost said.
While linkage won't change how option investors or brokerage firms route orders to exchanges, it might help ensure there are fewer "trade throughs," or orders that aren't filled at the market's best prices, traders said.
The launch of the linkage network is divided into two phases. The first involves briskly traded options on 14 stocks such as Apple Computer, Bank of America, Eastman Kodak, General Motors, Hewlett-Packard and Nokia. It covers option orders up to a certain size, which are eligible for electronic execution. Others will be added along the way, including heavily traded options such as Microsoft and the Nasdaq 100 Tracking Stock, or QQQ, by late February.
The second phase of the launch, scheduled from April 25 to early June, will cover larger option orders that now often are filled manually.
AOL Time Warner's options traded heavily after the media company reported the largest annual corporate loss in history. Traders noticed investors selling short-term calls to earn income while setting a target price beyond which they would be willing to sell stock.
With AOL stock falling 14%, or $1.96, to $12 each, an investor sold a March straddle -- selling March 12.50 calls and March 12.50 puts. Selling straddles can be profitable if the stock price doesn't budge much, though losses mount if the stock price moves sharply in either direction.
At the American Stock Exchange, the March 12.50 calls were at 75 cents as 13,297 contracts traded. The March 12.50 puts rose 70 cents to $1.25 as 15,143 contracts traded |
