June 1, 2006
The cancellation fee policy proposed by the International Securities Exchange is anticompetitive and should be abrogated.
Option prices fluctuate constantly due to changes in volatility, movements in the underlying security, and time until expiration. In order to get a fair price a trader must be allowed to adjust his or her bid and offer accordingly. To charge such an exorbitant fee to customers for cancels tends to lock orders in at a particular price. Market makers could then just wait to trade against an order that is moving against the customer while declining to execute when the price moves in the customers favor. Exchange members will not be affected and thus will be able to adjust to the market or simply pick off customer orders. To apply this cost to customers but not to the exchange members is unfair and anticompetitive. Allowing this rule to pass would chase away public investors, and the liquidity that their participation brings to the market.
Further, I have seen little evidence to justify the costs claimed by the ISE, which make these fees necessary. In fact I think their proposal supplies evidence to the contrary the ISE claims that some firms have begun to execute small orders to offset the cancellation of larger orders, which likely increases message traffic. Supposedly the demands have gone even higher yet they experience none of the slowness or problems seen on many of the other exchanges lately. The ISE seems to have the infrastructure in place to handle the order flow they just need an excuse to gain more control over the market. Before the ISE is allowed to impose this substantial burden on competition they should be compelled to justify the necessity of the fee.
Thank you for your time,
Daniel F. Levey