CBOE Scores Victory in QCC Skirmish

Round Two goes to the Chicago Board Options Exchange.

The exchange won a victory over arch-rival International Securities Exchange last week when the Securities and Exchange Commission agreed to reconsider a controversial new ISE rule the regulator had approved in August.

At the same time, the regulator denied a motion by the ISE to lift a stay on its use of the new rule.

At issue is a rule change by the ISE that permits traders to cross orders at the ISE without exposing them to other traders at the ISE. The exchange calls the orders "qualified contingent crosses." They are designed to be used by institutional brokers, trading orders of 500 contracts or more.

Critics of the new rule, including the CBOE, contend the rule represents a drastic change in the way options contracts are traded as it effectively allows brokers to "internalize" their orders.

In denying the ISE’s motion to lift the automatic stay, the SEC noted that the QCC order type was likely to spread to other exchanges. It stated the CBOE had "raised important policy issues that warrant Commission consideration."

Neither the CBOE nor the ISE would comment on the SEC’s move. An ISE spokesperson did note however that the SEC, in approving the rule in August, did offer "very clear reasons why it was approved." The spokesperson added: "They went to great lengths in explaining their thinking for the approval."

Gary Katz, ISE chief executive, has said previously that the order type did not represent a big change in the way business is done at options exchanges. (See Traders Magazine article dated October 8 for more details.)

Despite the SEC’s decision of last week, the comment period covering the CBOE’s petition is open until December 3. Several industry players have already offered their views on the issue. Most side with the CBOE.