A controversial financial regulatory reform proposal that would have extended the oversight of the Commodity Futures Trading Commission over some equity options contracts has been withdrawn after lobbying by the US options industry.
Blanche Lincoln, head of the Senate agriculture committee, proposed this month that options contracts based on broad market gauges should be treated as swaps, a class of derivatives that can only be traded on futures exchanges.
The proposal would have prevented options exchanges from trading contracts such as options on the Standard & Poor’s 500 Index. These contracts have been considered securities by regulators since they were launched in the early 1980s and therefore come under the jurisdiction of the Securities and Exchange Commission rather than the CFTC, the US futures watchdog.
However, lobbying by the options industry successfully removed the Lincoln proposal from the financial regulatory reform bill which the Senate began to debate on Thursday, according to people familiar with the matter.
Mary Schapiro (Above), SEC chairman, also came out strongly against the Lincoln plan this week, calling it “a step backward” that would “unnecessarily complicate matters by creating an arbitrary line based on the number of securities in a swap”.
Synopsis: A proposal from Blanche Lincoln that would have moved certain options contracts from the jurisdiction of the SEC to the oversight of the CFTC has been successfully lobbied out of the financial regulatory reform bill.
(Bloomberg) -- The Securities and Exchange Commission backed proposals today that would assign identification codes to monitor the largest stock traders and impose a limit on fees for options transactions.
Commissioners voted 5-0 in favor of a program that would require firms that buy and sell at least 2 million shares a day to report their identity to regulators. The rule would also apply to companies that execute $20 million of equities a day or $200 million in a month.
The SEC is evaluating whether strategies used at high- frequency trading firms and hedge funds are hurting markets by increasing volatility and making it more difficult for investors to complete transactions. Lawmakers such as U.S. Senator Ted Kaufman question whether companies that trade thousands of shares in milliseconds and account for more than 60 percent of U.S. volume hurt returns for long-term investors.
“Today’s proposed rules are necessary to keep pace with our ever-changing securities markets -- markets that have undergone dynamic transformation in recent years,” Chairman Mary Schapiro said in a statement. “The fact is that rapid technological advances have had an impact on trading strategies and on the ways in which some broker-dealers carry out their trades.”
Under its proposal, the SEC would assign so-called large traders identification codes that would allow the agency to identify and analyze transactions. About 400 of the biggest firms would have to share codes with their brokerages, which would maintain records and provide data to the SEC.
Manipulative Transations
Data would be available to the SEC the day after trades are made, allowing the agency to promptly investigate manipulative and abusive practices, the agency said. The SEC will seek comment on its proposal before agency commissioners consider holding a second vote on it to make the requirements binding.
Commissioners also voted 5-0 to back a proposal capping fees for trading options at 30 cents a contract, a rule supported by brokerages who say getting the best bid or ask price for their customers sometimes costs too much.
Citadel Investment Group LLC petitioned in July 2008 to limit charges by exchanges to execute against orders on their books. SEC requirements that brokers buy and sell securities for clients at the best available quote in the marketplace may encourage venues to charge “excessive” fees to access their systems, masking the true cost of trading, it said.
Best Price
“Brokers have to get the best quoted price, which is good,” said Andrew Kolinsky, president of Citadel’s market- making unit. “If an exchange is allowed to charge unlimited access fees to get at the supposedly best price, then what’s disseminated as the best price is not really the best.”
Eight exchanges compete for business in the U.S. options market, where volume reached a record in 2009. The SEC under Schapiro has been studying ways of adding transparency to trading without hurting exchanges’ ability to tailor services for professionals, their biggest source of growth in revenue and market share.
Equity exchanges and some options platforms instituted fees and rebates in the last decade to attract brokerages whose traditional way of making money, capturing the spread between bid and ask quotes, was squeezed as price increments narrowed. The model, known as maker-taker pricing, rewards brokers and investors who put requests to buy and sell shares in an exchange’s book and charges those who execute against them.
Fee Structure
International Securities Exchange Holdings Inc. spokeswoman Molly McGregor, Gail Osten of Chicago Board Options Exchange and NYSE Euronext’s Eric Ryan declined to comment before the SEC meeting. Nasdaq OMX Group Inc. spokesman Robert Madden didn’t respond directly to a request for comment about a cap on access fees. The ISE, NYSE and Nasdaq are based in New York.
NYSE Euronext asked the SEC in September 2008 to reject Chicago-based Citadel’s petition because it “fails to take into consideration the fee structures of all options exchanges,” including inducements called payment for order flow used on venues such as CBOE and ISE. Exchanges that offer these programs typically don’t charge customers for executions.
Provides Real-Time Advanced Analytics for Options on U.S.-listed Equities and Indices(Reuters) — The parent of BATS Exchange, the third-largest U.S. stock exchange, said on Wednesday it plans to launch an options market with a competitive pricing model which could attract up to 5 percent of U.S. equity options market share.
BATS Global Markets all-electronic platform, scheduled to begin trading in early 2010, could bring to nine the number of venues battling for order flow in the crowded options arena. There are now seven U.S. options exchanges and two set to launch.
"We plan to employ the maker-taker model with a price time priority structure, meaning the first customer that enters an order" will have that order executed first, said Ken Conklin, global head of business development and marketing for BATS, in a phone interview.
The maker-taker model, used by the smaller options exchanges, rewards liquidity providers by crediting them with a rebate and assesses transaction fees on those removing liquidity.
Launching an equity options exchange would put BATS in competition with top players -- Chicago Board Options Exchange, which plans to launch an all-electronic exchange dubbed C2 this year and the International Securities Exchange.
Together they account for about 54 percent of total U.S. equity option trading during the first half of 2009, according to the Options Clearing Corp.
ISE, the largest U.S. equity mart, is owned by derivatives exchange Eurex, whose parent is Deutsche Boerse.
Currently, two market models exist in the options marketplace. ISE and CBOE use a traditional pro rata model, giving priority to customer orders and charge transaction fees to market makers and to firms trading for their own accounts.
Exchange operator NYSE Euronext and Nasdaq OMX Group Inc. also have options platforms offering two different models.
The BATS platform plans to capture 3 percent to 5 percent of equity options market share within a year of launch by leveraging its current customer base of stock traders. "Many of these members already trade options," Conklin said.
Reuters reported in May that BATS was preparing to launch an options market.
BATS has not yet announced its maker-taker pricing fees but plans to do so closer to launch. "We have been aggressive in pricing in U.S. equities and intend to do the same in U.S. equity options," Conklin said.
BATS launched its stock exchange platform, BATS Exchange Inc, in January 2006, and now has nearly 12 percent market share in U.S. equities. The New York Stock Exchange and the Nasdaq Stock Market, as well as alternative venue Direct Edge, compete with BATS in equities.
The changes in the options market are due to a number of factors, including the U.S. Securities and Exchange Commission's pilot program of quoting options in 1 cent increments, the greater use of technology and rising participation from high frequency quantitative trading strategies, said Andy Nybo, head of derivatives at market research firm TABB Group.
High frequency traders use computers to make thousands of trades a day and have redefined securities trading.
"The option maker-taker business model is expected to account for 21 percent of total trading option volume by 2011 as high frequency traders grab a growing share of the options market," Nybo said.
BATS said it is currently working to file the necessary requirements to trade options with the SEC.
| Volatility-Related Index | Underlying Index | Index Symbol | Settlement Symbol |
|---|---|---|---|
| CBOE Volatility Index® | S&P 500 (SPX) | VIX | VRO |
| CBOE NASDAQ-100 Volatility IndexSM | NASDAQ-100 (NDX) | VXN | VSX |
| CBOE Russell 2000 Volatility IndexSM | Russell 2000 (RUT) | RVX | RSL |
