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July 1, 2008

Options Stats to Have Minor Impact

By Peter Chapman

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  • Options Stats to Have Minor Impact

Exchanges and brokers are split over the impact of an initiative by options exchanges to publish statistics about the quality of their trades. Sometime this quarter, the seven options exchanges will begin publishing monthly execution-quality statistics intended to help brokers make better decisions about routing their orders.

The data series was devised by the Securities Industry and Financial Markets Association (SIFMA) in conjunction with the exchanges at the behest of the Securities and Exchange Commission. The regulator is driving the initiative in the hopes that brokers will base their routing decisions more on execution quality and less on the receipt of payment for order flow.

An SEC report last year noted that while there has been improvement in brokers' order-routing processes, "factors as payment for order flow and other inducements continue to play a substantial role in broker-dealers' order-routing decisions."

This is the second go-round for the SEC. In 2001, it approved Rule 605, which forced the cash equities industry to publish execution-quality statistics. Those reports have had a dramatic impact in reshaping the wholesaler business. Under SIFMA's options plan, the data categories are similar to those produced by market centers under SEC Rule 605.

Most industry executives Traders Magazine spoke with say the statistics are a good thing. "It's a strain on resources," said Ed Boyle, head of NYSE Arca's options mart, "but it is necessary to give the customer a metric that he can use to measure quality across all exchanges. It's a positive for the industry."

Boyle believes the numbers will affect broker routing decisions, but some brokers aren't so sure. "It will have a minimal impact," said Rich Hagen, president and chief operating officer of discount brokerage TradeKing. "We already get these reports from our market centers. We use them on a daily basis to monitor the orders we are sending." The exec added that TradeKing's use of smart order routing coupled with pre-trade analysis helps ensure the firm is getting his clients the best executions possible.

All exchanges supply their customers with some execution-quality statistics today. Typically, they only send their customers data about their own trades and not all trades executed by the exchange. Under the SIFMA plan, however, the data will be universal. It will also be uniform and thus make it easier for brokers to compare one exchange against another.

Peter Bottini, an executive at brokerage optionsXpress, was on the SIFMA subcommittee that devised the reports. He says the stats will help brokers compare apples with apples, but will not be the sole criterion. "Broker routing committees take into account a multitude of factors," Bottini said. "Besides execution-quality statistics there are fees, relationships, order types-many factors."

As an example, Bottini noted, the Chicago Board Options Exchange and the International Securities Exchange are the two exchanges that support complicated orders such as spreads. "We do a lot of spread business," Bottini said. "So we send a lot of that business to them, and we appreciate the fact that they do it."

Kevin Fischer, manager of block execution services at Interactive Brokers, is also skeptical the new stats will have much impact. He also said that other factors are likely to outweigh any execution-quality data in decision-makers' minds.