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May 16, 2007

NYSE Arca Comes Up a Winner in Penny Trading

By Peter Chapman

About 200 options classes out of a total 2,000 see the most trading. If all of those started trading in pennies, the impact on exchange market share could be considerable, sources maintain.

"You are absolutely going to see an expansion," NYSE Arca's Werts says. "The pilot has been a huge success. The industry did a good job. There will be heated debates when the pilot ends, but the benefits [of penny trading] to the customers and the industry cannot be ignored."

Size Declines

Based on NYSE Arca's performance to date in the 13 penny options, an expansion of the pilot could lead to an expansion of NYSE Arca's market share.

Yet factors besides the decline in spreads give other market participants pause. Quoted size dropped about 80 percent at the inside market in the 13 penny options, a troubling bit of news for some.

"The magnitude of the decline in liquidity is worrisome," says optionsXpress' Fisher. "If that level holds, there is a concern that volume will decrease. Certainly, from an institutional standpoint, they get very scared when they see such a decrease in liquidity."

Fisher believes the drop in depth at the inside warrants a cautious approach to expanding the pilot. He also notes that overall volume did not pick up in the 13 penny classes. "There has been zero increase in volume," he says. "That is not the best thing you would hope for."

NYSE Arca Levels Playing Field

For many options traders, the playing field is stacked against them. That's the view of Nitin Gambhir, chief executive of Tethys Technologies, a vendor that has been monitoring the penny pilot.

Gambhir believes NYSE Arca's maker-taker pricing model is an improvement over traditional exchange models and will give players such as non-member broker-dealers more opportunities.

"The NYSE Arca model is extremely intuitive," Gambhir says. "Most exchange models are extremely complex. They are especially cumbersome for non-member broker-dealers. They have these onerous charges to trade at most exchanges."

He says the simpler structure at NYSE Arca combined with its low latency will make it an attractive venue for non-member broker-dealers to post liquidity.

For many options traders, the playing field is stacked against them. That's the view of Nitin Gambhir, chief executive of Tethys Technologies, a vendor that has been monitoring the penny pilot.

Gambhir believes NYSE Arca's maker-taker pricing model is an improvement over traditional exchange models and will give players such as non-member broker-dealers more opportunities.

"The NYSE Arca model is extremely intuitive," Gambhir says. "Most exchange models are extremely complex. They are especially cumbersome for non-member broker-dealers. They have these onerous charges to trade at most exchanges."

He says the simpler structure at NYSE Arca combined with its low latency will make it an attractive venue for non-member broker-dealers to post liquidity.