Broker Group Raises Concerns About Options Penny Pilot
NEW YORK (Dow Jones)--With the options industry gearing up for a test of a sweeping change in the way options are traded, one group of options brokers raised a number of concerns about the plan Thursday.
The concerns of members of the Options Committee of the Securities Industry Association include questions on the impact of quoting options prices in penny increments on the ability of retail investors to obtain priority over professional traders in a penny-quoted market.
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The letter, obtained by Dow Jones Newswires, was signed by Christopher Nagy, who chairs the committee and is managing director at brokerage TD Ameritrade Holding Corp. (AMTD). Other members of the committee are executives at brokerage firms and options market makers of various sizes, including Goldman Sachs Group Inc. (GS), OptionsXPress Holdings Inc. (OXPS), Charles Schwab Corp. (SCHW) and Citadel Investment Group LLC.
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Supporters of the transition to penny quoting view it as a way to narrow the spread between the price buyers and sellers of options can offer - thus improving the price offered and benefitting options traders, they say.
It also is seen as a way to put an end to the practice of payment for order flow in the options industry. Payment for order flow is a system in which brokers are paid by options market makers for routing their options orders to one exchange over another. Penny quoting will eliminate the process, it is thought, because market maker profits - and therefore the payments - will diminish.
A number of options brokerage firms, though, including some that are on the SIA Options Committee, currently benefit from the payment for order flow system. Those firms stand to lose a notable percentage of their revenue from options trading - something they say allows them to keep trading costs low - if the practice of payment for order flow ends.
