By Joanna Fields, CEO, Aplomb Strategies
Why is unbundling of option orders causing such a stir?
Imagine it’s 1999, and the options market is a local dirt track race. The cars are mostly stock or individual medallions, the drivers are shifting gears manually, remember doing math in your head, and there’s plenty of room to see who’s coming around the bend, e.g., floor brokers. If you wanted to pass, you just needed a decent engine and a steady hand. Now, flash forward to 2026. The market has transformed into a Formula 1 night race in a thunderstorm. The “stir” around unbundling has happened because the track—once a single loop of singly listed products—has fragmented into 18 different high-speed lanes (the exchanges). To even get on the grid, a market maker can’t just bring a fast car; they have to bring a $4 billion pit crew (their OCC collateral) to be allowed to start the engine.
But here’s where it gets wild: most of today’s drivers aren’t even behind the wheel. They’ve outsourced the driving to 3rd-party “autopilot” systems (algorithmic routers, and wholesalers ). These AI drivers are calculating tire grip and fuel loads at a million miles ($) an hour, trying to find a fraction of an inch of space (the NBBO) in a pack of 1.5 million other cars (the listed series).
The “stir” is the constant vibration and volatility of it all, and having the correct regulatory framework and governance processes in place allows you to shift through the noise and protect your investment, as well as your registered option principals. In 1999, you could hear a single car backfire. In 2026, the roar of trillions of data points is so loud that if your autopilot lags for even a micro-second, you’re not just out of the race—you’ve been lapped 100 times before you can even hit the brakes.
Background: The Inspection
Nasdaq, FINRA, and the SEC, in this analogy are merely the track marshals trying to lay down rules of the road before a pile up occurs. In this instance, the Nasdaq published an options regulatory alert #2026-4 to provide clarity for options order shredding. Just as a
refresher, trade shredding for any security is a prohibited practice where a broker-dealer splits a single, large customer order into multiple smaller orders to maximize monetary rebates, fees or particularly for listed options, payment for order flow. Regulatory focus on order manipulation and trade shredding is not a new concept, FINRA officially banned this practice in 2006 under Rule 3380 (ret), and now covered by FINRA Rule 5310, 5290, 3110 and 6151.
On its face, this seems pretty straight forward; so why is unbundling causing such a stir? In today’s market it comes down to three things: 1) the sheer cost of the engine specs, rule changes and maintenance which have resulted in fewer market makers and liquidity at the NBBO; 2) each car still needs to make a pit stop (clearing) and the cost of capital requirements for over 8000 races has greatly reduced the number of market participants able to enter; and 3) reliance on leasing the chassis and the engine from a 3rd party factor, external parties’ algorithms for routing.
History: Grand Prix vs Formula 1
When I first entered the option markets on the CBOE trading floor, there were over 60 different market making firms, and many of them solo drivers. Most active options were only listed on a single option exchange, and there were only 4 option exchanges, and there were less than 1000 underlying securities with listed options that cleared at the OCC. Today there are only a handful of listed options market makers that have the liquidity available to provide two-sided quotes. There are only a few remaining juggernauts like SPX and VIX that are singly listed. There are 18 different listed options exchanges, grouped into 6 families of option exchanges, and there are over 8000 underlying securities with listed options that clear at the OCC. The entry fee or OCC clearing fund minimums in 1999 were as low as $150,000, and collateral was $1 billion.
Today the average clearing member holds $3.9 billion in collateral. In 2025, the OCC cleared $414.9 billion across 106 clearing members. In 1999 the number of entrants was set around 80,000 series of options listed and cleared by OCC and 1 billion contracts cleared for the entire year. In 2026, there were 1.5 million active option series, and 1.5 billion contracts cleared in March.
In 2026, the racing lines have shifted dramatically. The main straightaway has only the top 20 names, like SPY and Apple, which carry massive momentum and have more liquidity divided across the 18 option exchanges with hundreds or thousands of contracts available. Penny Pilot names still have some torque with typically 20 to 100 contracts available. Trailing the top 400 names, the track thins out significantly. There are as low as 1 to 10 contracts available. In 1999, the trading floors like CBOE had 50 contract minimums for a single market maker. Today market makers, to survive high speed fragmentation, may have only a 1 contract minimum.
Today the race is running at a blistering pace with an average of 61 million contracts traded daily. Of those 61 million daily contracts, nearly 28 million are customer orders. Customer orders in listed option markets are categorized as retail, institutional, professional and omnibus account flow through origin codes. The oversized load, roughly 10 million (35%) of daily customer activity significantly outsizes the available exchange NBBO, and approximately 18 million (64%) of the daily trade activity is in only the top 20 most liquid names. The remaining 8,419 underlying securities are driving on a crumbling surface and share the balance, with thinner books, wider spreads, and a significant widening of the quoted spread in both percentage and dollars across nearly all options underliers between 2012 and 2025. And yes, market makers’ pit crews remain on standby, ready to step up and provide a two-sided market for all categories of listed option customer orders every day.
In a complete departure from the 1999 circuit, over 90% of customer orders are routed algorithmically, and I estimate 75% of all listed option orders are routed through leased third-party engines or algorithms of which the majority of that order flow is concentrated into three main wholesalers to provide horsepower for order execution. To stay in the race, the cost of developing, maintaining, testing algorithms, market data fees, connectivity charges, exchange fees, complexity of NMS requirements have all contributed to relying on a few remaining market makers.
The SEC has done a remarkable job marshalling these changes over the past 30 years and based on technical inspection has had many reasons for approving self-regulatory rules. These rules have provided members and member organization many benefits including enabling:
● Order routing to the Lead Market Maker (LMM) or Preferred Market Maker (PMM)
● Allocation preference for orders of 5 contracts or fewer
● Exchange quote risk mitigation functionality
● Market access rules
● Payment for order flow and marketing fees;
These regulatory changes have helped keep the listed options markets lit and transparent, helped to maintain fair, orderly and efficient markets to facilitate capital formation and protect investors. But also to enable market makers to meet capital requirements and not get run over in volatile markets. As discussed in the recent SEC Options Forum, more still needs to be done.
Holistic Solutions: The Podium Strategy
First, the industry needs to work with the Commission to design the track layout holistically—ensuring the regulatory market structure across all 18 option exchanges provides a fair and stable surface for every origin code of customer execution. Second, firms must collaborate with the Commission, the exchanges, and the OCC to calculate the true weight of the ‘entry fee’ (the cost of capital). Making markets in this environment requires so much ‘fuel’ that we must potentially reopen discussions around quote mitigation to ensure the track doesn’t become too crowded for anyone to move. Finally, because so many teams now lease their engines from third-party factories, firms must implement a rigorous technical inspection and governance framework. You cannot simply trust the leased car; you need the telemetry tools, real-time monitoring, and ‘pit-boss’ escalation procedures to identify a mechanical failure or “engine tampering” (malfeasance) the moment a third-party vendor routes an order onto the track, backed by a permanent ‘black box’ record of every lap. If I was betting on this race, I would predict market participants will need a telemetry inspection report and governance framework for vendor execution platforms and algorithms.
