BOX has reversed how it charges for proving and taking liquidity in options market. It now pays for providing and charges the taker: http://www.futuresmag.com/Issues/2009/October2009/Pages/No-more-maker-taker.aspx It is amazing to me that this is not the model used on all exchanges. The small market maker has a chance again if this propogates to other exchanges. Now, for gawds sake, don't give the PFOF to the clearing firm or the broker, enforce that the rebate go to the person sticking his friggin neck out!!! Now, BOX, allow ANYONE to provide liquidity, even two sided markets without exuberant seat leases, and perhaps give some sort of perk to the firms/MMs that _MUST_ provide liquidity. For example, maybe the PFOF only go to those that must provide two sided markets. But there is absolutely no reason that anyone that wants to stream quotes should be stopped from doing so, as long as when they are streaming, they need to be no worse than a dime from the NBBO, or better, and perhaps limit the strikes they can stream to the ATM and say the 90% put and the 90% call (the call and put on either side of the ATM). More than three strikes you're out (no pun intended ) Or maybe it should be anything but the ATMs, since these alrady have the most liquidity. You get the drift. POWER TO THE MASSES!
I would love to respond to your interesting suppositions, but I try to avoid interesting conversations as that would result in me being less productive at this very crucial time for me. I hope you understand.
Nitro - I am curious why you think payment for order flow is bad. Do you think this is true in general? I would think if a market can increase volume by getting more market orders they should pay for order flow. If they need more limit orders they should give a rebate for providing liquidity. Why shouldn't the exchange determine what they need more of and pay for it? And if one market wants my order flow more than another why shouldn't they pay me for it? I do agree with you that the restrictions on providing liquidity seem weird though. I understand the argument that they are paying some designated MM's by giving them pseudo monopoly powers so they will be there when others aren't but that seems extreme unless they have some really heavy duty obligations.