Discussion in 'Options' started by deepitm, Mar 21, 2002.
This may be a dumb question but why are option commissions so high as compared to stock commissions?
If you are short an in the money call at expiry and the stock is called from you, you do not pay another commission with IB. That may account for the commission being higher. In the uk, in the same situation, you have to pay a second commission which are percentage based and much higher than IB. I am moving all my trading to us stocks and options with ib to avoid the high commisssions here.
Option Commissions are higher than stock for several reasons:
1-Options may require the handling of the order by a floor broker, this is especially true with spread or large orders. True Auto-Ex in options has restrictions as to order size and customers.
2-There are no true Option ECN's. The closet example of an option
ECN is the ISE(Int. Sec. Exchange), which is a true electronic marketplace. If Options could trade on a true ECN, costs would go down.
3-Many small option players have limited funds and that is why they buy calls or puts. Investors or traders with less capital will often pay for for extra commissions to get the leverage of option contracts.
4-Options require the sophistication of experienced professionals to monitor(firm to risk manage). Firms need to have qualified Brokers to run an option desk or liason with floor brokers. The
extra risk management may add more fees to transaction costs.
If anyone creates a true option ECN , costs would probably go down.
Lieber & Weissman Sec., L.L.C.
Gene, thanks for your post.
Do you think the new exchange called BOX would be as close to an option ECN and do you think the older exchanges would be forced to adopt an ECN model due to this new kid on the block?
I know nothing about BOX or any proposal for a new ECN or exchange for options . Perhaps Don Bright or Def( from IB) have some information .If there is an exchange that will allow true ECN's for options(and improved software that accepts spread orders and complex strategies), we may see some decrease in option commissions. The clearing of options & order handling is not as efficient as stocks at this time. As I said before, options(derivatives) require extra risk management so I believe the pricing well never be as low as stocks.
Lieber & Weissman Sec., L.L.C.
BOX will be a fully automated exchange which should help reduce costs.
Gene mentions a bunch of reasons why options cost more but i'll add a few more (or paraphrase a few).
- leverage: 1 option = 100 shares.
- volume: less volume for options
- exchange fees: tend to be higher with options than the cash (many firms include exchange fees in their quotes)
- membership: many of the firms broking options are not members of the various exchanges and thus must pay commissions to the execution broker and clearer;
- infrastructure: floor traders, phone lines, reporting, clearing, exercise/assignment, splits are more complicated, etc
many of the overseas exchanges charge option commissions based upon a % of the premium. These exchanges tend to be completely electronic and are charing a boat load. Thus i'm not entirely optimistic that an electronic exchange in the US will lead to lower option fees. Time will tell....
The ISE is great for options trading, like the stock ECNs - you see a quote, if you are willing to hit that price - you know you will get filled.
My problem is more the spreads than the commisions (1.95 per contact equivilant to 100 shares = .0195 per share - not too bad)
Alot of smaller names .20-.50 spread on the contracts, makes option trading very costly.
Before there was multiple listed options, you needed to get a membership for each option exchange to trade options.
In the old days:
(1) the CBOE would let you trade the SPX and OEX
(2) the Philly would let you trade DELL
(3) the AMEX would let you trade INTC and MO
(4) the P-Coast would let you trade MSFT
Obviously, there were more issues at each exchange, but I am using this as an example.
So, assume that you needed to purchase a membership at each exchange. These numbers are all fictional.
(1) CBOE = $700,000 for a seat
(2) AMEX = $600,000 for a seat
(3) Philly = $200,000 for a seat
(4) P-Coast = $300,000 for a seat
Then you add 2 clerks for each exchange at $30,000 per year. Add telephone, quotes, etc. and this adds up to a bunch of money.
Today, although options are multiply listed, there is still no linkage program for every option at every exchange. Thus, there are still a lot of trade throughs and too much fragmentation. This is unlike the stock side where the Chicago ITS or Philly ITS can hit a NYSE bid or take out an offer instantaneously.
Thus, as you can see, it is very expensive to do business in the options market and it still is. The ISE does help because it eliminates clerks on the floor, but until there is a genuine market linkage similiar to the ITS on the equity side, it is going to be difficult to get costs down.
They used to use the same arguments about stocks and futures, now imagine where the price can go.
But the difference is that there is an ITS (intermarket trading system) which allows any stock exchange to hit out a bid or take out an offer. As of today in the US options markets there is no mechanism which allows this.
In the futures market, crude oil still trades on the NYMEX and not on the Merc or CBOT. Likewise, Eurodollars trade on the Merc and not the NYMEX or CBOT. Thus, since each exchange trades a different product, your argument doesn't really affect or impact the futures market. It would be different if each futures exchange traded the same product.
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