Subject: File No. SR-BSE-2007-41
From: Abraham Kohen
Affiliation: Algorthmic Trading Engineer. (Former professional derivatives trader.)

September 21, 2007

Some exchanges would like to switch some options back from pennies to nickles. But the penny is the MINIMUM increment. They are free to quote a 10 cent or 15 cent or 100 cent spread. Their second argument is that there is less liquidity at the new penny price points and in a volatile market, while the spread is 7 cents, there is only a 10 lot on each side, and perhaps nothing below. But truth be told in volatile markets even in none-penny-pilots, say dime increments, the bids and offers are often not there when the market begins to shake.

My favorite anecdote is that when I was a derivatives trader in the 90s, I tried to buy OEX combos (buy call, sell put) in a falling market, and NO ONE would sell to me. The SP 500 futures went 12 points limit down and still no one would sell to me. Finally when the futures went 20 points limit down was I able to buy calls and sell puts. Indeed a profitable trade. But then the options were quoted in 1/16 and 1/8 and there was no liquidity in a falling market. A penny MINIMUM increment does NOT OBLIGATE any one to quote a one cent spread, although it ALLOWS them to do so.

It is time for the options markets to catch up with the equity markets.

After retiring from professional trading, I have not traded a single option until after the penny pilot went into effect. Only then was I comfortable buying 100 garbage (deep out-of-the money) puts to hedge my long stock. Why should I pay 10 cents for insurance when in a penny market I can buy it for 6 cents and save $400 on insurance? I know that I bought a wasting asset, but I felt comfortable with the price I paid.