Possible flash ban faces options market resistance
Wed Sep 23, 2009 7:29pm EDT
By Jonathan Spicer - Analysis
NEW YORK (Reuters) - Banning so-called flash orders will prove difficult in U.S. options markets, where the biggest exchanges are teaming up to defend the practice that has been roundly criticized in equities markets.
The U.S. Securities and Exchange Commission proposed last week to eliminate the orders, which some exchanges "flash" to specific market participants before rerouting them to the wider market, giving them a last chance to fill orders in-house.
The major cash equities exchanges have backed down from flashes. But in the smaller options market, leaders Chicago Board Options Exchange and International Securities Exchange are fighting to preserve the service that gives them a small but important edge.
The SEC -- under pressure from some politicians, and citing concerns over market fairness and efficiency -- opened a 60-day public comment period on flashes, asking in the 51-page document whether options markets should be evaluated differently than equities markets.
"Unless there are good reasons to treat options markets differently, the Commission is unlikely to do so," Elizabeth King, associate director in the SEC's market regulation division, told Reuters. "It's up to them (the exchanges) now in their comments to tell us why options are different."
A ban could boost smaller options venues, such as NYSE Euronext's (NYX.N) Amex and Arca exchanges, which do not use flashes. But CBOE and ISE, rivals that together accounted for 60 percent of the industry's volume last month, are mounting a defense.
"We believe there are ways to keep the positive attributes of flash, while removing the negatives," ISE Chief Executive Gary Katz told a conference here on Wednesday.
The exchange issued a white paper last month arguing flashes can give customers better prices and save them from paying fees at rival venues, where their orders may end up. It also suggested flash information could be given to all market participants, leveling the playing field.
The very fact that the SEC asked whether options exchanges should be excluded "recognizes that there are differences" from equities markets, Katz said in an interview on the sidelines of the Futures Industry Association conference.
Ed Tilly, executive vice president at CBOE, which intends to send the SEC a comment letter, said: "What we're doing is giving the order-sending firm the choice of where to route."
'TREMENDOUS ANGST'
The SEC regulates both equities and options.
"Regulation is the biggest issue in options, and it's causing tremendous angst," Andy Nybo, head of derivatives at research and advisory firm TABB Group, said last week of flashes and other possible rule changes.
Flashes, sometimes called "step-ups" in the options realm, have existed for years, but are a small portion of overall volume. Flashes represent a "high single-digit" percentage of ISE's overall volume, according to a source, while the Boston Options Exchange said they are up to 3 percent of its volume.
Defenders say flashes add liquidity and improve prices for long-term investors. Critics, including Democratic Senators Charles Schumer and Ted Kaufman, say flashes advantage those sophisticated firms that see the orders, creating a two-tiered market at the expense of smaller investors.
A flash ban would be "a precedent-setting that the traditional models are scared of" because it would allow transparent competition amongst the exchanges, Paul Finnegan, director of NYSE Arca Options, said.
"Some amount of volume would transfer across exchanges" if a ban were implemented, Finnegan said. "But I don't think it's a huge market share mover at this point."
Jeromee Johnson, VP of market development at BATS Exchange, which plans to launch an options platform early next year, said in an interview: "It may be a slower process, but I think the writing's on the wall" for options market flashes.
Four of the seven U.S. options markets use flashes, including Nasdaq OMX PHLX, one of Nasdaq OMX's (NDAQ.O) two options venues. PHLX President Thomas Wittman cautioned in an interview against "killing flash for the sake of killing flash, because there could be some benefit to what we do that is different than what's done in the cash equities market."
The SEC's King said there was no specific timeline for the regulator to take final action on flashes.
(Reporting by Jonathan Spicer) |
