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In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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January 1, 2007

Options Broker Says Industry's Penny Pilot Not Enough

By Peter Chapman

The options industry's penny pilot doesn't go far enough for at least one trading house.

Interactive Brokers (IB) doesn't believe that trading options in pennies should be held back by technological constraints, so it has started a service that lets its customers trade all options in penny increments.

The exchange pilot that begins this month only allows trading in pennies in the options of 13 stocks.

"We got tired of the excuses so we created our own order book," Steve Sanders, an IB managing director, told Traders Magazine. "Technology should not be an excuse."

IB's philosophy is contrary to that of the options exchanges that are worried about unlimited trading in pennies leading to an explosion of quotes that will crash their systems. That's why they developed "quote mitigation" plans that, by and large, slow down or limit quoting by trading houses.

Sanders said his firm can work with the exchanges' quote reduction strategies but is determined to push the industry into full-blown penny trading. "We're afraid of this turning into a two- or three-year endeavor," he said of the pilot approach.

IB now operates an order book that permits traders to post quotes in between the spreads published by the exchanges. The book is accessible to its customers via IB's Web site, and also to market makers at sister company Timber Hill and elsewhere. Buy and sell orders that match are taken to the price-improvement auctions at the Boston Options Exchange, the International Securities Exchange or the Chicago Board Options Exchange. There they may execute against one another or other orders that come into the system.