"Wasn't this about the time they instituted the whole Pro Customer fee schedule? Basically now if you put too many orders in (390 average per day) you pay much more in exchange fees." Nope - almost two decades earlier with the RAEs bandits. They look to achieve the same result and the Feds never allowed it so the last iteration was the institution of the cancel fees and the firms were never OK with it so when they'd get hit they would change primaries. You also had the beginning of fragmentation to a high level when the ISE kicked off in 2000. For a while, the ISE had a "third market" that allowed the customer to make two-sided markets in a number of less liquid names. Nobody came to that party. Generally, people want to make markets in the most liquid names and then lift when it gets volatile. They are generally paired orders and you just slow down the network and make it difficult to enforce NBBO. Schwab had a customer in NJ who was making seven figures a week doing exchange arb in Leaps. The problem got really ugly when they got busts days after the trade. Great way to win friends. In his heyday, he had six or seven Schwab support people on his account.
The biggest complaint that option customers have is there isn't enough liquidity in the options markets. It is topic #1 every year when the Exchanges have their annual conference. (that and too many strikes) Well, I could provide more liquidity/trading if there wasn't the 390 orders/month rule. I keep track of my orders and will trade other products so I don't go over. The 390 rule is laughable in so many ways. I have requested from the CBOE a clarification of the rule and its been two + years and they still have not made a ruling and there is an obvious reason for this! If one can't clarify a rule then the rule should not exist (as per SEC). The bottom line is that no one could possibly be making markets in anything and be near that number (390). You likely would be over in the first 10 minutes of trading so the rule isn't in place to prevent market making. The rule is in place to "prevent" secondary competition. And I'm not even sure if I am competition to these guys?? Net net they should like my business. No other business would increase their fees to you (via Professional Customer status) if you do "too much" business with them. Brokers already have orders/execution numbers that they monitor to detect the "bandwidth hogs". All of my orders are manually entered - (no electronic market making) and it is easy to get to that 390 number. Anyone who truly understands today's option markets would know that your best fills in terms of a "fair price" are often associated with many CFOs.
There are some good documents on the internet about this (explanation, Q&A). Google sentence: Subject: Priority Customer Orders and Professional Orders (FAQ) This circular is a follow-up to Regulatory Circular RG09-123.
I think the 390 rule is not by definition a blocking rule for a retail guy to do some market making (i.e. it is not black and white). Some nuances: 1) Some options exchanges (like the quite popular PSE where relatively much options are listed) charge (almost) the same exchange fee for retail and pro. As a RMM you can direct to those exchanges. 2) For expensive options (let's say premium > $10) I would say the exchange fee becomes almost negligible. 3) In case of illiquid options (i.e options that effectively aren't quoted (i.e. 50% of all options)) you are the only one there so as a RMM you can eventually price in the extra exchange fee. So I would say you can work your way around it. Interested to hear if you agree or not.