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February 2, 2006

The Penny Debate in Options Continues

By Mark Longo

The debate over trading options in penny increments was a hot button at a recent industry confab.

"Going to pennies would be a disaster," Bill Brodsky, chairman and chief executive of the Chicago Board Options Exchange, said at the recent Futures Industry Association's Expo in Chicago.

The major complaint about penny pricing is the expected increase in quote traffic on networks that are already at maximum capacity.

The Securities and Exchange Commission, on the other hand, prefers to dwell on other issues. The regulator thinks trading options in pennies will eliminate or reduce payment for order flow.

The options industry is patiently awaiting word from the SEC regarding its investigation into the order routing practices of a number of options brokerage firms. The SEC is looking to determine if brokerages are using price-improvement systems to reduce their customers' transaction costs, sources said.

Industry participants disagree with the SEC over pennies. The industry has already gone through expensive technology upgrades and believes that penny increments would add unnecessary burdens on profitability.

Vendors, brokerage firms, liquidity providers and exchanges have spent millions implementing features like decimalization, electronic linkages and electronic market making.

Arca, which merged with the Pacific Stock Exchange, said earlier this year it planned to switch to pennies by the end of 2005. But that deadline was looking increasingly unlikely as Traders Magazine went to press. It is unclear, many options participants speculate, if Arca's merger with the New York Stock Exchange forced it to redirect its energies away from options or if it is getting cold feet about trading in penny increments.

Brodsky called for the SEC to be receptive to concerns within the options industry. "The SEC should bring all six exchanges into a room to discuss how pennies should be implemented," Brodsky said. "The exchanges can't do this on their own. The SEC has to provide leadership on this issue."