Spreads are down. Exchange payments for order flow have been reduced or eliminated. A surge in quotes has not crippled industry systems.
From the standpoint of the Securities and Exchange Commission, the options industry’s penny pilot appears to be a success. Will it be expanded?
“No one will be surprised if the SEC wants us to expand the pilot,” Ed Tilly, Chicago Board Options Exchange executive vice chairman, says. “I think that is where we are going.”
The pilot, undertaken by the industry’s six exchanges, required trading in 13 options classes to take place in pennies or nickels, depending on their strike prices. The pilot began in late January and will end in late July.
The SEC appears to be pleased with the results. Elizabeth King, an associate director in the SEC’s division of market regulation, told attendees at this year’s Options Industry Conference that “the reports so far are positive.”
King added that she saw no reason to end the pilot and revert back to nickels and dimes in the 13 classes. In fact, she wondered aloud if those pilot classes now trading in nickels would be better traded in pennies.
“My goal,” King said, “would be to expand the pilot so that the benefits our preliminary analysis show could be realized in more products.”
The regulator cautioned her observations were based on preliminary reports and that she was looking forward to reading upcoming reports by the exchanges. The exchanges were to have delivered their observations to the SEC last month.
One outcome of the penny pilot that was expected but not welcomed by some was a decline in the number of market makers in the 13 classes.
Tilly noted that the “average number of market makers is down in the penny classes. Some of the smaller guys have given up the names.”