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November 13, 2007

Options Industry Awaits Disclosure

By Peter Chapman

The options industry is taking steps to better disclose the quality of its executions, but the progress may not be enough to forestall action by the Securities and Exchange Commission.

In conjunction with the Securities Industry and Financial Markets Association, the nation's options exchanges are working to produce standard reports detailing the quality of their executions. Executives expect that effort to be taken up by broker-dealers as well.

The exchanges already produce execution-quality reports, but industry executives complain they are too different from one another to be useful for comparison purposes. "The industry is moving toward a standard report," Peter Bottini, a vice president at retail brokerage optionsXpress, said at a recent industry conference, "and I assume that report would flow down to the broker-dealers."

One broker-dealer has already moved to providing periodic reports. This summer Interactive Brokers commissioned industry number-crunching firm Transaction Auditing Group (TAG) to take its trading data and produce execution-quality reports. The move follows a similar deal between TAG and the Boston Options Exchange.

So far, the SEC has not required the options industry to produce regular execution-quality reports. That is not the case with the cash equities industry. Exchanges and broker-dealers have been required under SEC Rule 605 to report quarterly on their executions since 2001.

Some sources predict the SEC will require the same data from the options exchanges and broker-dealers, despite an upbeat report from the SEC's Office of Compliance Inspections and Examinations. Earlier this year, the OCIE reported that broker-dealers were effectively using smart routing technology to send their customers' orders to the markets displaying the best prices.

However, Elizabeth King, an associate director with the SEC in the Office of Market Supervision in the Division of Market Regulation, responsible for the options industry, noted at a recent conference that the "national best bid or offer may not be the best price" and that while price "is the most important component of best execution, it is not the only one. Speed is an obvious one." King would not say whether the regulator was planning to propose disclosure rules.