The Boston Options Exchange, in what could be a preemptive strike, has engaged an independent auditor to produce a statistical series that measures the quality of its executions.
The decision to gather and make public the data comes as expectations in the industry rise that the Securities and Exchange Commission will mandate monthly execution quality reports.
Under Rule 605, the SEC has required the cash equities industry to make execution quality reports available for years. Market centers such as exchanges and broker-dealers produce monthly such data as price improvement levels, execution speeds and effective spreads.
The SEC has been talking about a similar rule for the options industry for at least two years. Most of the six options exchanges already make available some execution quality statistics on their websites. But these reports have been criticized for being difficult to compare with one another.
“The SEC is certainly in favor of this,” Scott Morris, BOX chief executive, told Traders Magazine. “And now that the penny pilot is underway and is successful, it would not be surprising for them to turn their attention toward execution quality.”
According to Morris, the penny pilot (whereby 13 options classes are trading in smaller increments) and execution quality are the top items on the SEC’s agenda for the options industry.
That the BOX decided to preempt any regulatory mandate ahead of its competitors may not be too surprising. The small exchange is dead last in the market share sweepstakes. It also boasts the highest percentage of price improvement of the six exchanges.
Its “Price Improvement Period,” or PIP auction, an innovation it brought to the industry when it launched in 2004, has resulted in over 20 percent of all contracts receiving fills at prices better than the market’s best prevailing quotes.
“BOX feels it brings to the marketplace significant price improvement,” Richard Porzio, head of sales at Transaction Auditing Group, BOX’s trade stats auditor, says. “And our analysis substantiates exactly what they purport.”
TAG was brought in partly because of its neutrality. BOX believed that its data would be seen as more credible if parsed by a respected outside auditor. TAG has been crunching execution quality data for the equities industry ever since the Rule 5 mandate came into effect.
TAG’s data covers the percentage of fills done at, better than and worse than the NBBO; the percentage of contracts filled; execution speeds; and effective spreads. It is broken down into six “buckets” based on number of contracts in an order.
Morris says BOX took the lead of the Securities Industry and Financial Markets Association (SIFMA) in deciding on the size of the buckets. SIFMA has a committee that was formed to deal with the possibility that execution quality regs may be coming down the pike.
Will other exchanges follow BOX’s lead? The Chicago Board Options Exchange, for one, won’t comment. But Morris believes it is inevitable.
“I don’t think anyone is overly excited about it,” he said. “Certainly our competitors aren’t. But the writing is on the wall. And everyone is going to have to do it. So we might as well go ahead and get it done.”
