The Securities and Exchange Commission, in the wake of concerns raised by options exchanges and traders, won’t permit options exchanges to charge access fees over a certain limit.
“We’re certainly not fond of take fees that cross the increment,” said Erik Sirri, director of the SEC’s Division of Trading and Markets, referring to the minimum allowable quoting increment for options. If the fee crosses the increment, Sirri added, “that would be an issue.”
That puts the limit, effectively, at $1 per contract for options quoted in pennies. The minimum increment for options in the penny pilot that are quoted under $3 is now 1 cent. Since execution fees are charged on a per-contract basis, while premiums are quoted on a per-share basis, that equates to a $1 transaction fee.
Access fees are charges levied on traders for taking liquidity, as opposed to providing it, by exchanges that have introduced a maker-taker pricing model. Common in the equities market, the maker-taker model is a relatively recent innovation in the options industry. The focus on take fees has arisen with the introduction of these new market models.
From the SEC’s perspective, the issue is ensuring that investors get access to the best price. “Excessively high take fees potentially bring up access questions,” Sirri said. “A market may have a high bid, but the access fees mean people don’t access it.” With some exchanges charging customers take fees and others not charging, the concern is that investors may not know which market offers them better executions for specific orders.
The three so-called “maker-taker” exchanges that charge customers transaction fees are NYSE Arca Options, Boston Options Exchange and Nasdaq Options Market. The liquidity-taker fee for options in the penny pilot is 45 cents per contract at those exchanges.
The four traditional options exchanges–the Chicago Board Options Exchange, the International Securities Exchanges, the Philadelphia Stock Exchange and the American Stock Exchange–don’t charge fees for taking liquidity. However, they do reward their main suppliers of liquidity. But instead of paying a rebate, as the maker-taker exchanges do, they give market makers quoting at the best price allocation guarantees against incoming marketable orders.
The CBOE has considered raising the issue of access fees with the SEC, according to Ed Provost, the exchange’s executive vice president for business development. The 30-cent cap per 100 shares in the equities markets means that the maker-taker markets’ options take fee of 45 cents per contract is 15 cents higher. At a recent Securities Industry and Financial Markets Association conference, Provost said: “Whether that 15-cent spread is a reason for access caps to come in, I’m not sure. But clearly there is a point at which the same logic that has held in the equities market should apply to options.”
Anthony Saliba, CEO of BNY ConvergEx LiquidPoint, put it this way: “The issue is, what is the real price when some exchanges don’t charge anything and others charge take fees? The take fee is already half the trading increment. So a customer can go through two pricing increments [on a traditional exchange] to get the liquidity needed before matching the overall price on a maker-taker exchange.”
Matt Andresen, president of Citadel Execution Services, believes there should be an SEC-mandated access-fee cap in options, as there is in equities. “Exchanges’ access fees are a factor in determining best execution,” he said. “Unfortunately, the options market currently has no cap on access fees, but does have a hard trade-through rule.”
In Andresen’s view, since the options market historically hasn’t charged customers transaction fees, an options cap “should necessarily be significantly lower than the equity cap of 30 cents, perhaps somewhere in the 15-cent range.”
The Citadel exec also raised another argument for an access-fee cap: internalization. “The equity world allows for internalization, which protects retail customers from the impact of access fees,” Andresen said. In options, he added, “the end customer is at the mercy of the market with rogue access fees.” In addition to a cap, Andresen suggested that the SEC allow internalization to enable customers to avoid exchange access fees altogether.
R. Scott Morris, CEO of the Boston Options Exchange, accepts the idea of a cap or limit of some sort. The SEC “was supporting maker-taker pricing but putting an upper limit on it,” he said. “If a market has a high take fee, even if the market is better, the customer might not be better off [at that exchange].” Morris agreed that having a high take fee for an option quoted in a small increment “would be a confusing and dishonest form of incentive.”
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