A Securities and Exchange Commission proposal requiring options exchanges to cap the fees they charge their members to access their markets is getting mixed reviews by exchange operators.
Operators of six of the nation’s eight options exchanges gave their views on the proposal at this year’s Sandler O’Neill + Partners’ "Global Exchange and Electronic Trading Conference."
Of them, Nasdaq OMX and NYSE Euronext shot down the proposal, while the International Securities Exchange and BATS Exchange voiced their support. Nasdaq and NYSE Euronext each operate two options exchanges.
"We are fully supportive and applaud what the Commission has done," Gary Katz, the ISE’s president and chief executive, told the assembled analysts and investors. "The fees that are 45 cents and higher are used to subsidize certain markets and ultimately the firms or the customers directly are paying for it. This has gone on for far too long."
Ed Boyle, an executive vice president at NYSE Euronext, disagreed. "I do think there is room for a fee cap of some kind," Boyle said, "but to put out some arbitrary number is the wrong way to do it."
The SEC has proposed that all options exchanges cap their access fees at 30 cents per contract. Boyle, whose Arca exchange charges 45 cents, told the crowd any fee should be a percentage of the minimum trading increment.
The SEC’s proposal is intended to prevent an exchange from abusing rules that require exchanges to route away any orders they can’t fill. The fear is that the recipient exchange will charge the routing exchange an exorbitant access fee.
The proposal is also intended to bring some uniformity to quotes across the eight exchanges as well as narrow any gap between the quoted price and the final price to the trader.
The proposed rule mirrors a similar rule in force in the equities market.
The rule has simmered on the SEC’s backburner for two years after Citadel Securities lobbied the regulator for a fee cap. The issue was pushed to the front of the SEC’s agenda late last year when the SEC proposed banning step-up orders on the exchanges.
Exchanges that employ step-ups argued they were necessary because the access fees at so-called maker-taker exchanges were too onerous. The step-up process allows exchanges to avoid routing out orders by giving members a last chance to step up and fill the order.
Nasdaq also dislikes the SEC proposal. "I think 30 cents is arbitrary," Tom Wittman, Nasdaq’s executive in charge of options, said. "There’s so much competition that the SEC probably shouldn’t try to put a cap on fees yet. But if they do cap them, the cap should be higher."
Wittman believes competition will drive down rebates and take fees at exchanges that employ maker-taker pricing. Exchanges will squeeze their spreads in a battle for order flow. "Competition will take care of it," Wittman argued.
Jeromee Johnson, in charge of BATS’ brand new options exchange, told conference-goers he supports a cap, but that the appropriate level might not be 30 cents. "There’s a lot of room to tighten things up and compete," he said, "whether that fee cap is 30 cents or 45 cents or 50 cents." BATS charges a 30-cent take, or access, fee.
The Chicago Board Options Exchange was not in attendance at the conference, but has stated publicly it objects to certain aspects of the proposal.
Because the proposed cap would take into account all fees, including licensing fees, it could severely damage CBOE’s index business. The exchange operator currently pays a license fee to Standard & Poors, for example, for every trade in the options based on the S&P 500 Index. To recoup that cost, the CBOE adds the royalty to its access fee.
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