SEC Urges Brokerage Firms To Scrutinize Options Prices
April 16, 1999
SEC Urges Brokerage Firms
To Scrutinize Options Prices
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
Amid growing scrutiny of how options investors are treated, the U.S.
Securities and Exchange Commission told the country's major brokerage
firms to pay more attention to the prices their customers get.
"In times of rapidly changing and technologically dynamic markets,
broker-dealers must redouble their efforts to see to it that customers'
orders receive the best available prices," SEC Chairman Arthur Levitt said
in a letter this week.
It is the latest in a series of government and private initiatives aimed at
determining whether the industry is systematically giving investors poor
prices.
The Justice Department is investigating whether an informal agreement
among the country's four options exchanges not to list certain options on
more than one exchange is anticompetitive. There is speculation it may also
be examining whether certain traders may be colluding to keep bid-ask
spreads wide.
Excessively wide bid-ask spreads would force investors to pay too-high
prices and receive too-low prices for options. The Justice Department,
according to one of its civil investigative demands, has asked for
documents relating to "any complaints, inquiries, questions or expressions
of concern about spreads for any option, inside spreads for any option, or
bid or ask prices for any option."
In particular, it wanted information on the Dell Computer option. That
option trades on the Philadelphia Stock Exchange, but for a temporary
period last year traded on the American Stock Exchange.
In its latest issue, Business Week says that "Amex options specialists and
traders are said to regularly engage in price-fixing" and cites sources as
saying that "trading improprieties are commonplace," chief among them
"illegal trading by floor brokers and specialists."
A spokesman for the National Association of Securities Dealers, which
now owns the Amex, declined to comment on the magazine article, but
said, "We take our regulatory responsibilities seriously."
About 60% of options are listed on a single exchange. Mr. Levitt's letter
appears motivated by worries that if more options are multiply listed, the
risk rises that a given order won't be executed at the best price available in
the country.
Even when an option is listed on more than one market, brokers will send
their orders to one primary market, said Michael Schwartz, chief options
strategist at CIBC Oppenheimer Corp.
But in his letter, Mr. Levitt warns, "Routing options orders to the primary
market for a particular option will not necessarily satisfy a broker-dealer's
best execution obligations." But he also notes that speed, order size and
transaction costs, not just price, go into determining best execution.
-- Steven M. Sears contributed to this article. |
