SEC to Consider New Options Linkage Arrangement

A proposal to revamp the rules and systems that link the options exchanges is at the top of the Securities and Exchange Commission’s agenda.

Dan Gray, the market structure counsel in the SEC’s division of trading and markets, said recently a proposal from NYSE Arca and the International Securities Exchange to revamp the options market linkage plan to reflect Regulation NMS principles is “an important market structure issue on the Commission’s agenda for 2008.”

Speaking at the Security Traders Association of Chicago’s annual conference last month, Gray noted that the proposal was driven by the penny pilot now underway in the options market. The pilot, which permits quoting in penny increments, has exposed some weaknesses in the existing options plan, Gray said.

The ISE and NYSE Arca want to replace the existing plan with a new one, based on three principles of Reg NMS–trade-through protection, private linkages and intermarket sweep orders.

Unlike the equities markets, the current options linkage plan does not provide market participants with an effective means to trade in large size by efficiently sweeping multiple price levels at multiple exchanges, the exchanges argue.

“For institutional investors that need to trade in large sizes beyond what may be displayed at the NBBO in penny markets,” Gray noted, “the inability to obtain ready executions at multiple price levels could be a serious issue.”

Gray wouldn’t comment on the direction the SEC will take, but emphasized that there are differences between the structures of the equities and options markets. One cannot assume, Gray said, that what works in the equities market is applicable to the options world.