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January 21, 2010

Philly Options Changes Its Stripes

By Peter Chapman

Nasdaq OMX PHLX is experimenting with maker-taker pricing.

As of Jan. 4, the options exchange began paying specialists to quote SPY options if their quotes result in trades. It also started charging exchange customers who hit or take those quotes.

Specialists will receive 25 cents per contract. Customers will pay 25 cents per contract. PHLX will make zero on those trades.

The move represents a fundamental shift for PHLX, which has typically charged specialists 21 cents per contract and customers nothing.

If the move is successful, PHLX may extend it to other options contracts, a Nasdaq spokesperson said.

In paying specialists for providing liquidity, and charging customers who take liquidity, PHLX is instituting so-called "maker-taker" pricing.

That pricing model is used by two exchanges, NYSE Arca and Nasdaq Options Market, which combined control about 20 percent of all options trading.

Besides maker-taker pricing, Arca and NOM also employ a trade allocation model based on time and price. The PHLX will not incorporate this first-come, first-serve model into the trading of SPYs. It will retain its pro rata model whereby specialists are allocated trades based on the size of their quotes, not their position in the queue.

By paying specialists to supply liquidity, the PHLX is betting specialists will quote more aggressively. That will help PHLX build up market share. The options exchange has a 6 percent share of SPY volume. That compares to an 11 percent share in SPYs held by sister marketplace NOM.

SPY is an option on the popular State Street SPDR S&P 500 exchange-traded fund. It is one of the most liquid options and accounts for about 10 percent of all contracts traded.

Maker-taker pricing will become the dominant market model in certain series and names, Eric Noll, the company's head of transaction services in the U.S., said at this year's Security Traders Association conference.

At the time, he told Traders Magazine, "At-the-money SPDR options will naturally become a maker-taker product. Market makers would tell you they don't make any money trading at-the-money SPDRs. It's too competitive."


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