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Flash Orders in Options Now Face Greater Scrutiny
Traders Magazine Online News, August 7, 2009
The tide could turn against flash orders in the options industry in the wake of tremendous public pressure to banish these order types in equities. Flash orders have existed in options since 2004.
The Securities and Exchange Commission has not ruled out any action. "Market developments could cause us to seek rule changes across all markets," an SEC spokesman told Traders Magazine this week. Nasdaq OMX Group and BATS Exchange said yesterday they would eliminate flash orders on their equities markets by September, after Senator Charles Schumer of New York argued that the SEC should ban these order types.
Boris Ilyevsky, ISE
A number of options exchange executives support flash orders. They make the case that these orders save customers money by enabling those customers to avoid higher access fees at another exchange. Flash orders are not believed to account for a significant amount of market share, although statistics are not available. Flashed orders that execute match the national best bid or offer available when the order is flashed. The flash period for exchanges that offer these orders is one second.
All exchange executives, however, may not fight efforts to eliminate flash orders in options. "Philosophically, if the SEC wants to get rid of it, we don't have a big issue with that," said Will Easley, vice chairman of the Boston Options Exchange, which was the first exchange to offer flash orders in options. "This does good things for customers--that's why we do it. A customer might otherwise have to pay an away market's fees that could be higher than ours." BOX has maker-taker pricing for options in the penny pilot, but not for non-penny options classes.
Ed Boyle, who runs NYSE Euronext's U.S. options business, said his company doesn't approve of flashing orders in options and doesn't do it at NYSE Arca Options or NYSE Amex Options. "We don't agree with flash," he said. "We route out immediately if we're not the best market. We don't slow the order down and disclose it to participants."
Flash orders, in his view, run counter to the goal of transparency in the markets. "Flash orders disclose customer information to a select group of market participants, which effectively creates a two-tiered market," Boyle said.
The International Securities Exchange and the Chicago Board Options Exchange argue that flash orders benefit customers. "Customers like this functionality," said Boris Ilyevsky, managing director of the ISE Options Exchange. "They see a direct economic benefit."
He notes that flash order types in options are technically similar to those in equities, although the benefits are different. "Our market makers and members can match the away price through a flash auction," Ilyevsky said. "That gives the customer the away price without paying a take fee that could, on some markets, be 45 cents per contract. The customer fee on the ISE is zero." If there's no response, the ISE's primary market maker in that symbol seeks the best price through a linkage order.
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