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January 2, 2007

Dash 5 Stats May Come to Options Industry

By Nina Mehta

Options exchanges may soon have to provide statistical measures of execution quality, according to Erik Sirri, the Securities and Exchange Commission's director of market regulation.

Speaking at a recent Securities Industry and Financial Markets Association conference on options market structure, Sirri said the SEC is considering asking options exchanges to publish statistics along the lines of the "Dash 5" statistics required in the equities market.

The Dash 5 statistics are measures of execution quality required under Rule 605 (formerly Rule 11Ac1-5) of the Securities Exchange Act of 1934. The SEC has required market centers to disclose this information on a monthly basis since 2001. The SEC's accompanying Rule 606 (formerly Rule 11Ac1-6) requires broker-dealers to disclose information about how they route both equities and options orders to various market centers.

With pennies coming to the options industry, "it may be time to think about additional transparency," Sirri said.

The six U.S. options exchanges will commence a pilot that allows options to be quoted in penny increments on January 27, 2007. Options in the pilot that are under $3 can be quoted in penny increments, while those $3 or higher can be quoted in nickel increments. The current minimum price variation for quotes is either a nickel or dime, depending on the price of the option.

Sirri noted that Dash 5 statistics have had positive effects in the equities market and have facilitated discussions of best execution. Best execution is also a requirement for broker-dealers in the options industry.

"Best execution is mostly a process, it's a way of thinking about order flows," Sirri said.

According to Sirri, the SEC is considering how data could be "parsimoniously" produced so that broker-dealers could use that information to help them make routing decisions on behalf of their clients. Smart order routing is expected to become more important in the options industry in a penny-increment environment.

"We're by no means committed to it [requiring Dash 5 statistics in the options industry], but we're thinking about it," Sirri said.