Sorry; I didn't mean it the way you took it. I was responding to: Quote from mskl: Tony is RIGHT!! If the guy bidding (outside liquidity provider) is constantly pennied (shut out at $1.50), then he will no longer bid 1.50 and used your name in the context of what mskl was saying. Didn't mean to be snippy at all to anyone ...
Options Report:Exchanges To Take Step To Linking Mkts By Kopin Tan Dow Jones Newswires NEW YORK -- You have heard the drumroll for years. Now, get ready for the curtain to rise. U.S. option exchanges today are scheduled to begin the long-anticipated process of linking their markets, when they begin trading 14 option classes on an electronic network connecting the five exchanges. Despite the buildup, the impact on option investors might be muted, traders and exchange officials said. For years, the Securities and Exchange Commission pushed for the linkage, arguing it would allow trades to be executed at the best possible prices. But trading rules put in place since the SEC began its push ensure that. Current "best execution" rules require option orders at any exchange to be filled at the market's best prices, or traders will be called on to explain the lapses. "And [specialists] and market makers already work very hard to make sure customers get best execution of their orders," said Edward Provost, an executive vice president at the Chicago Board Options Exchange. The biggest difference might be felt by professional traders, such as specialists and market makers, on trading floors and at the electronic International Securities Exchange. "It gives [traders] the ability to electronically, and effectively, access their counterparts at other exchanges, without the normally labor intensive, and quite frankly costlier, procedures they go through today," Mr. Provost said. While linkage won't change how option investors or brokerage firms route orders to exchanges, it might help ensure there are fewer "trade throughs," or orders that aren't filled at the market's best prices, traders said. The launch of the linkage network is divided into two phases. The first involves briskly traded options on 14 stocks such as Apple Computer, Bank of America, Eastman Kodak, General Motors, Hewlett-Packard and Nokia. It covers option orders up to a certain size, which are eligible for electronic execution. Others will be added along the way, including heavily traded options such as Microsoft and the Nasdaq 100 Tracking Stock, or QQQ, by late February. The second phase of the launch, scheduled from April 25 to early June, will cover larger option orders that now often are filled manually.
Article on the Box, Click here For this news section we have decided that, as there has not been anything earth shattering happening over the last two weeks and given that the exchanges have not reported on last month's volume as we go to press, we should concentrate on a couple of issues of note during this period. The first one of these is the responses to the Boston Options Exchange's (BOX) SEC filing, whereby the Boston Stock Exchange (BSE) has submitted a rule change application to the SEC, rather than filing for a new exchange status, allowing the BSE to extend its regulatory status to include an options market. BOX will be a joint collaboration of the BSE, Bourse de Montreal, Interactive Brokers and at least four investment banks (Credit Suisse First Boston, JP Morgan, Salomon Smith Barney (part of Citigroup) and UBS) to date. Of course at least one existing options exchange has suggested that using the BSE's current exchange status as a way to circumvent the more lengthy new exchange status filing is somehow bending the rules and will encourage other exchanges/interested market participants to do likewise. Now given that the SEC has already approved the regulatory status of the BSE one would suggest that this is tantamount to suggesting that the SEC has not done its job properly in the first place in recognising the BSE. No doubt some of the other existing options exchanges would not agree if, as suggested, they may be subject to some form of merger or takeover activity themselves from the next potential entrant, namely Eurex. Given that Eurex have been linked with the American Stock Exchange, the Pacific Exchange and the Philadelphia Exchange with respect to their plans to form a new options exchange, they would also require use of the existing SEC status of these exchanges rather than file for new exchange status, if they were to choose this route. Quite frankly we agree that there are too many options exchanges in the US already but given that there are new entrants that appear to be receiving significant interest in their market models (not least the already successful ISE which probably in hindsight got a clearer run than the new potential exchanges as the existing exchanges did not believe they could be so successful in supplanting their business) that suggests that there is something wrong with the existing exchanges rather than the potentially new ones! To imagine that some "bucket shop" would seriously manage to set up in competition to such venerable exchange bodies is "pushing the envelope" and all the new players are backed by entities which, dare one suggest, have greater experience and knowledge of how these markets work than the current exchange incumbents.  The other part of the BOX market model that has generated negative comment from particularly exchange entities is the three second Price Improvement Period (PIP), whereby BOX participants are effectively allowed to "cross" customer orders against internal market maker prices as long as they improve on the National Best Bid/ Offer (NBBO) price within a three second window. Of course the exchanges have referred to the potential for internalization that such a rule would facilitate and cited recent letters from Harvey Pitt (the outgoing SEC Chairman) on the potential for "serious conflicts of interest". Now far be it from us to suggest that quoting Pitt with respect to conflicts of interest is something of an oxymoron but regardless of that these exchange entities that suggest that there is no hint of internalization within their own august organisations are either at best naïve or worst seriously misinformed. Are they seriously suggesting that in a world of payment for order flow that there is no hint of internalization on their own markets - perhaps if they dug a bit deeper they would recognize that there are a number of relationships that are tantamount to internalization, both across firms and within the same firm.  As suggested by one group that responded to the BOX filing (Interactive Brokers, who are well known as both a floor and screen based participant), "the "custom and practice" of the floor is often at odds with the written rules or not even addressed in the written rules, as the Commission has observed in recent years". What is interesting is that a number of specialist market making firms, that do not have access to the type of internal order flow that broker-dealers might enjoy, have come out in support of the BOX model. Now doesn't this seem somewhat contradictory - surely the other market group that would suffer from internalization other than the end customer would be the "specialist" market maker that under BOX rules has no right to a guaranteed share of the customer flow coming on to the market? Therein lays the crux of the issue. In fact, the specialist role that guarantees a percentage share of a particular market contributes toward a "false" NBBO. There does not appear to be any real incentive for other market participants to improve on the specialist's price if the specialist can just join any improved price and still guarantee his share. In addition, if the NBBO was a truly competitive price across competing exchanges there would be little room to come inside the price and therefore internalize the order.
This general comment is also evident in the next proposed SEC filing, that of Eurex, reportedly the largest futures and options exchange in the world (although the Korean Stock Exchange may refute that claim). On Eurex's website is an outline of the market model that they intend to use when they introduce their options exchange (although it is unclear at this time as to whether they will attempt a "go-it-alone" strategy or collaborate with other partners) - http://www.eurexchange.com/new/index.html. Now this is not dissimilar to the BOX model, given that it has stood Eurex in good stead in becoming one of the largest stock and index options exchanges in Europe (the largest if you base it on a nominal value basis). Therefore, given that the US exchanges are newcomers to the electronic environment, while European exchanges have generally been providing them with their own trading platforms, they may rightly claim to know a bit more about the dynamics of the electronic market place than their US counterparts? However, given that some US exchanges are still discussing the merits of floor based trading where they provide their membership with preferential transaction fees, access rights and execution privileges they would prefer to focus on other issues that "disadvantage" the end customer! On this note we will finish with our favorite hobby horse, the CBOT. We have been watching their volumes with interest this month and noticed the usual switch away from the a/c/e screen back to floor as the rollover took place from March to June. One newsletter (John Lothian) even suggested that a group called the BRATs (Bond Rollover Action Team or something similar) only visit the exchange from their Florida bases to trade the roll each quarter! Now of course that can only be possible if there is a difference in the way the roll is traded on the floor than that on screen. And of course this is true, giving floor based members an advantage over those trading off the floor, not only in terms of exchange fees but also the increments in which the roll can be traded. Now, given that the CBOT have consistently suggested that they operate a laissez faire approach to volumes moving from floor to a/c/e, it is interesting to see how that does not work in reverse! Surely any suggestion that a group of traders can enjoy semi-retirement for most for the year and only come back to an exchange for a few weeks a year raises some question marks about the "integrity, transparency, openness and innovation" of such an entity! The following gem was also found within the petitions for election as the AM (covering the financial futures area) Board member from Mr. Harold Lavender: "Membership Values: I believe the CBOT must continue to uncover and correct improper use of member privileges by so-called "trading arcades", where one membership is used by a group of electronic traders under a "proprietary agreement" to get member rates when in fact the "agreement" is really a sham used for the purpose of getting the member rates for all. Regardless of form, the traders who trade their money for their own accounts must have a membership to get the member rate." One would have thought that an exchange's role was to create as much liquidity as possible in order to facilitate customer business. It is precisely this type of differentiation on pricing for both "electronic traders" and end customers v. members that creates an opportunity to disenfranchise this market - let battle commence! Â
http://bostonoptions.com/pdf/ImplementationScheduleParticipants20030714v1.0.pdf October 3rd launch pending approval.
http://www.wallstreetandtech.com/story/electronicTrading/WST20030717S0005 I guess I'm not the only one who thinks that the BOX's original PIP rules were anti competitive. Oh and as predicted, there already is at least one other Exchange waiting to implement these same internalization rules. http://www.iseoptions.com/legal/pending_rule_filings.asp (Price Improvement Mechanism) But the good news is that the BOX may be altering these PIP rules so that all participants can see when one is taking place.
BOX Update from IB September 2, 2003 Dear Interactive Brokers Customer: As you are probably aware, Interactive Brokers Group has been a major sponsor of the Boston Options Exchange (BOX). In addition to being a pure electronic exchange, BOX's major distinguishing feature is the Price Improvement Period (PIP). By using the PIP, an order flow provider such as Interactive Brokers may designate a marketable order for price improvement, which means that the order will be auctioned off among market participants, in pennies, to generate the best price for the order. The execution price will be guaranteed to be better than the best price available at all the other exchanges at that moment (i.e., better than the prevailing "NBBO"). In addition, customers may also participate in the PIP, in direct competition with market makers. You could, for example, tell us that you are bidding $2.20 for a particular option but are willing to go up to $2.22 if a PIP of a sell order in that option takes place. In this case, IB would bid $2.20 and if a PIP started we would match the initial PIP bid price of $2.21. If the bid for the PIP order is raised to $2.22, we would match that bid on your behalf. Alternatively, you could tell us to bid $2.22 in a PIP right from the start, so as to give you time priority. The end result is that you have a chance, for the first time in the U.S. options market, to trade against other orders between the quotes. We think that the introduction of BOX will be of great benefit to public customers because there will be price improvement over NBBO. Also, because customers may participate on both sides of a PIP, there will be more customer-to-customer trades. We believe that all of this will make the effective spread you pay, and with that your total transaction cost for trading, diminish. The proposed BOX rules have been published on the SEC website for a 21-day comment period ending on September 12. For more information on BOX, or to read the BOX rules, go to www.bostonoptions.com or go to the "SRO Rulemaking" section of the SEC website at http://www.sec.gov/rules/sro.shtml Chapter V, Section 18 of the rules describes the PIP process. We have received indications that the existing option exchanges, in their effort to protect their franchise, are planning to fight the introduction of BOX. We would like to ask you to read about BOX or to read the relevant parts of the proposed rules. If you agree with us, as we hope you will, please send a simple letter to the SEC telling them what you like about the proposed exchange and asking them to approve it promptly. You can send an e-mail to rule-comments@sec.gov or if you prefer, you can send a hard copy letter. Letters and e-mails should reference "BOX - SR-BSE-2002-15" and should be sent to: Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0609 We appreciate your consideration of this issue. Our goal remains to provide you with the best possible market access at the lowest possible trading cost. Sincerely, Thomas Peterffy, Chairman
The Securities and Exchange Commission (SEC) approved the BOX trading rules as proposed by the Boston Stock Exchange (BSE) on January 14, 2004. BOX presently plans to commence trading on its first five options classes at the opening on Friday morning, January 30, 2004. (...) The first five classes to be listed are INTC, GE, ERICY, HON and AZN which together represent roughly 8% of overall US equity options trading. The first two classes will have twelve market makers competing while the remaining three classes will have five market makers each. It is expected that these numbers will double during the second phase of the market maker roll-out (four months after initial launch). (...) Following the listing of the first five options classes on the first Friday of trading, the remaining 242 options classes to be listed will commence trading on a rolling schedule over the following nine Mondays such that BOX expects to have nearly 250 classes trading before the end of April, 2004. During the first ten weeks of trading, as BOX deploys its technical infrastructure, there will be from five to twelve market makers per options class. Shortly afterwards, additional market maker appointments will be added, bringing the total number of market makers per class to an average of roughly twelve, varying from nine to 25. Source: www.bostonoptions.com/newslet3.html