Now that Nasdaq’s Options Market is up and running, its competitors are making plans to copy one of the market center’s signature–and controversial–order types. In doing so, they may be pushing the industry into full-fledged penny quoting.
A week ago, the Chicago Board Options Exchange won approval from the Securities and Exchange Commission to permit its customers to submit options orders in penny increments even if the option is not included in the penny pilot. These quotes will be displayed at the nearest nickel or dime increment, but tradable at the price the trader chooses.
The CBOE’s move replicates what Nasdaq received permission from the SEC to do in its new exchange. The CBOE has about one-third of the options industry’s volume.
Now, the International Securities Exchange plans to follow suit. “We’re going to file as well,” Gary Katz, CEO of the exchange, told Traders Magazine. “We have to.”
Nasdaq calls its hidden orders “price-improving” orders. It has compared them to the mini-auctions of other exchanges, which can provide price improvement to investors in non-penny-quoted names.
Prior to Nasdaq’s launch, no exchange had an order type that does what Nasdaq’s allows. The only non-displayed order type in options was reserve orders, which NYSE Arca Options first introduced.
Ed Boyle, senior vice president at NYSE Arca Options, said his exchange has the ability to offer “dark pennies,” but hasn’t applied to the SEC to offer this to customers. “We’re gauging what the industry wants,” he said.
The Boston Options Exchange is also considering a rollout of this order type. “We’re evaluating it–mimicking that order type,” said R. Scott Morris, chief executive of BOX. “We’ll see how it plays out.”
The potential shift to dark pennies, however, isn’t a welcome development by many in the industry. Among exchange execs, the ISE’s Katz has been outspoken about the harm dark pennies introduces to the options industry.
As a result of Nasdaq’s approval, Katz said at an options conference last week, the industry is now on the path toward quoting and trading all products in pennies, “but unfortunately it’s hidden pennies. It’s a non-transparent market structure.” One of the traditional benefits of options, compared to equities, he said, is that options is a more transparent market.
Given Nasdaq’s new order type, Katz said, the industry should now move to pennies across the board. The ISE and other quote-driven markets have resisted this effort, but now, according to Katz, the issue is moot. In his view, pennies are preferable to nontransparent markets. “At this point, we might as well open it up and just [quote and] trade everything in pennies,” he said.
In the meantime, the ISE is watching how well Nasdaq’s hidden orders do. While the ISE will ensure it has the ability to compete with Nasdaq and others, Katz said, the exchange hasn’t decided whether it will implement the order type.