CBOE Against Pennies For Options; BOX Grows
By Isabelle Clary, Markets Editor
August 12, 2004 - The Chicago Board Options Exchange has asked the Securities and Exchange Commission to ban trading in pennies in the options markets, based on Regulation NMS's proposal to end subpenny trading.
"CBOE strongly agrees with the SEC's proposal on subpenny quoting. Subpenny quoting has the potential to fragment the entire national market system, undermine the fairness and integrity of the markets by facilitating the stepping ahead of customer orders, and completely discard the notion of price priority," CBOE Chairman and CEO William Brodsky wrote to the SEC in a detailed comment letter on Reg NMS.
"Recently, the SEC approved the use of sub-increment quoting in the options market in a very limited context when it approved the Boston Options Exchange (BOX) proposal for a price improvement period (PIP)," Brodsky further wrote, noting that the electronic International Securities Exchange (ISE) wants to offer a similar service to its clients.
The options markets trade in nickel or dime increments. BOX's PIP allows firms to improve upon the national best bid/offer (NBBO), even when trading against their customers' orders, during a three-second electronic auction.
"The worries about stepping ahead of customer orders by substandard increments through subpennies in the equity markets is the exact modus operandi of the PIP through the use of substandard options increments," said Brodsky, who pointed out that the SEC does not allow CBOE to trade in nickels options that quote in 10-cent increments.
The CBOE chairman said this is "evidencing the anticompetitive effects of allowing some but not all markets to use substandard increments.... We urge the SEC to revisit its approval of the PIP and take the necessary steps to reverse its acceptance of sub-increment trading in the PIP."
Meanwhile, BOX, the second U.S. electronic options market, said it has captured a 4- to 5-percent market share in options on the QQQ, the exchange-traded fund that tracks the Nasdaq-100 index. BOX has listed the QQQs for only two months but it already is its most active listing, with a high of 37,215 contracts on Aug. 6.
"More importantly, our QQQ execution statistics are very good, 95 percent of the time at the NBBO," said BOX managing director William Easley, who added that his market is nearing the 100,000-contract mark as daily average on a monthly basis.
BOX averaged 93,115 contracts a day in July, in part due to a record session with 152,954 contracts on July 16, the expiration for that month. The exchange has rolled out 248 equity options classes and is planning to add another 200 in the second half. About 75 firms connected to BOX since it made its debut in February, and another 25 are ready to join.
Easley said more than 15 firms participate in the PIP, primarily Timber Hill, which is owned by Interactive Brokers Group, a co-founder of BOX along with the Boston Stock Exchange and the Montreal Stock Exchange. According to Easley, the PIP handles only about 8 to 10 percent of BOX's overall volume, which contradicts criticism that BOX would be a simple internalization machine.
Since its debut, BOX has attracted other investors, including Citigroup, Credit Suisse First Boston, J.P. Morgan, UBS and, lately, Morgan Stanley, the largest U.S. equity options trading firm.
"It's only once you go live that you really can evaluate where the problems are," Easley said, referring to several technical glitches the matching engine-cum-auction system experienced in its first months. "There was no major problem."
However, Easley was cautiously optimistic about BOX's future.
"The fact we are the only exchange not to offer payment for order flow could be a stumbling block. That's a real challenge," he said. "It's a pilot program for the SEC. It will be up to the marketplace to hand out its judgment." |
