Subject: File No. S7-07-04
From: Brad Corbin
January 7, 2005
Thank you for the reference provided.
This is a very large and complex document so I will comment on my specific concerns and what I would like to see from the perspective of a retail investor.
It is very encouraging indeed that the issue of option spreads is being investigated in such detail. There is definitely a great need for reform in this area.
I have concerns in the following 4 areas:
1. Minimum Trading increments
Moving to lower minimum increments would certainly result in narrower spreads and more fair and efficient pricing of options.
The current increment of $.05 is not at all reasonable for lower priced options especially those trading at less than $1
The main problem I see here would be the concern of increased quote traffic as noted in Sec V Part B:
> "At the same time, however, penny pricing in the options markets could greatly increase quote traffic, which could diminish the quality and timeliness of options quotation information"
If the issue of increased quote traffic were to become a serious problem then I would suggest the following compromise.
Rather than making all options quote in pennies, I would suggest simply reducing the increments of the current system where options trading at more than $3 would price at increments of $.05 and only options trading at less than $3 would trade in pennies. Lower priced options are less sensitive to movements in the underlying stock and will result in less quote activity as the underlying stock
I would also suggest going a step further and allow very low priced options trading at less than $.05 to trade in tenths of a penny. Under the current system no market at all is possible for options worth less than $.05
2. It is not permitted to place both a buy and a sell order at the same time for the same option.
As a retail investor I find this rule very unfair and it makes the trading of certain option strategies very difficult.
3. Cancellation fees
Cancellation fees have been introduced to cancel or change an option order. Again this is very unfair to the retail investor and makes certain trading strategies very difficult and prohibitive.
These rules are obviously only in existence to protect the market makers. This kind of thing is not necessary in the stock market and I don't see why it should be necessary in the option market. Why not let free and fair markets prevail.
Option commissions for retail investors are very high when compared to commissions for trading stocks. There is generally a per contract charge of anywhere from $1 or more regardless of the number of contracts traded. For low priced options the commissions can be very high in comparison to the value of the trade since large numbers of contracts are traded for a low value. I do not
know if commissions are under the jurisdiction of the SEC or whether brokers are freely allowed to compete. Maybe it is the exchanges that are responsible for the high commissions. No brokers that I am familiar with offer any kind of cap on commission for larger orders. I think more reasonable commissions are very important if more active trading in options by the investing public is desired.
I hope these comments and suggestions are helpful. I would be very interested in keeping in touch with developments in this area.