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March 23, 2005

A Regulatory Eye on Options

By John A. Byrne

The white-hot equity options markets are the next target of U.S. regulators, predicts Matt Andresen, the Chicago-based hedge fund executive and industry legend.

The options marts will attract regulatory scrutiny because of the continuing growth in trading volume, which is the result of increased competition, investment opportunities and technological advances, according to Andresen, president of Citadel Execution Services, a unit of hedge fund giant Citadel.

"The options markets are the fastest growing segment of the retail community right now," Andresen told attendees at the annual conference of Security Traders Association of Chicago. "Equity volumes have been stagnant for the past four years while the options markets are growing at 15 percent annually."

Andresen said more retail investors are turning to options as a way to leverage and make money. He added it is now easier to trade thanks to electronic players, including the International Securities Exchange, the Boston Options Exchange as well as market linkages.

However, this expanding retail market will inevitably lead to renewed regulatory interest. "The next regulatory focus will be on the options markets, on suitability vis-a-vis the retail broker, right back to the way exchanges interact with each other," said Andresen, the former Island ECN leader and top Sanford C. Bernstein trading executive. He added that this regulatory scrutiny will trigger debate about the trade-through rule in the options markets. "Good news, everyone: We will be talking about the trade-through until 2009 and I can always have a gig," Andresen, half-jokingly, told the crowd.