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July 1, 2008

Access Fees For Options Get Blasted

By Peter Chapman

An old foe of ECN pricing has found a new forum. From the earliest days of ECNs a decade ago, Bloomberg Tradebook was vocal in its opposition to the practice of ECNs paying traders to supply liquidity and charging them to take it. Now, as more options exchanges adopt the practice of paying liquidity providers and charging liquidity takers, Tradebook is back on the warpath.

And that's despite the fact the institutional brokerage operates an ECN itself.

In a letter to the Securities and Exchange Commission, Tradebook's director of research and strategy Gary Stone petitioned the regulator to abrogate its decision to approve Nasdaq's fee schedule for its newly launched options market.

"What do we want our options markets to look like?" Stone asked. "Nasdaq has based its fee proposal on the pricing model currently in place for the trading of equities. Why should that be the model?"

Tradebook, which began offering its customers options trading a few years ago, believes it is inappropriate for options exchanges to mimic the maker-taker policies of equities exchanges.

It claims the SEC's sanction of maker-taker pricing in the equities markets in the late 1990s was a compromise borne of necessity. But, Bloomberg asserts, the situation in the options industry does not compel the SEC to come to the same conclusion.

Tradebook, despite operating a maker-taker ECN of its own, has always publicly criticized the practice. "There is no good reason why market participants entering limit orders should receive a subsidy from participants entering marketable limit or market orders," former Tradebook chief executive Kevin Foley testified before a House subcommittee in October 2003, "and plenty of good reasons why they should not."

Tradebook has always defended its own use of maker-taker pricing as necessary to remain competitive against other ECNs and exchanges.

In its recent letter to the SEC, Bloomberg's criticism was mostly aimed at the liquidity taker fees and not the provider rebates. The broker-dealer found fault on two counts.

First, Bloomberg is concerned take fees will distort market pricing. Second, it believes Nasdaq has not provided enough cost justification for the fees as required under Section 6(b)(4) of the Securities Exchange Act of 1934.

Nasdaq declined to comment, but Tradebook's first point is not lost on the SEC. Erik Sirri, director of the Division of Market Regulation, speaking at this year's Options Industry Conference in Las Vegas, said the SEC was not opposed to maker-taker pricing. But, he said, "displayed prices should reliably represent the true prices that are actually available to investors." His concern was that if different exchanges charged different take fees, then the usefulness and accuracy of the prices would suffer.

Bloomberg is not the first brokerage to blast access fees in the options industry. Order-sending brokers have traditionally paid nothing when routing orders to exchanges, and most retail brokers are not happy with the growing trend.

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