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U.S. Securities and Exchange Commission

SEC Proposes New Measures to Protect Investors in Options Markets


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Washington, D.C., April 14, 2010 — The Securities and Exchange Commission today proposed to put in place two investor protection measures in options markets that currently exist in stock markets.

The SEC's proposal would prohibit an options exchange from unfairly impeding access to displayed quotations, and would limit the fees that an options exchange can charge investors and others wishing to access a quote on an exchange.

"This rule is designed to increase transparency in the markets and promote greater fairness and efficiency," said SEC Chairman Mary L. Schapiro. "It is important that investors have the ability to access the best prices available regardless of the exchange that is posting the quotation. And, those investors should have a better understanding of the true cost of executing a transaction."

The SEC's proposal is designed to address these issues by extending the same measures to listed options that currently apply only to transactions involving exchange-listed stocks. By expanding the protections that are available in the options markets, the SEC's proposal would help provide investors with the ability to achieve best execution for their orders, and remove barriers that an exchange might erect to keep non-members from accessing a quotation on the exchange.

Public comments on the proposal should be received by the Commission within 60 days after its publication in the Federal Register.

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An option is an agreement in which an investor pays for the right, but not an obligation, to buy or sell a stock — or other asset — at a particular price, up to a particular date. If the investor decides not to go through with the sale or purchase, the investor only loses the amount of money he or she paid to buy the option.

When investors seek to buy an option that is listed on an exchange, they need to be able to readily determine the total cost of executing a particular transaction.

In practice, the displayed quotation on an options exchange, however, may not reflect the actual amount a person will pay to buy or sell the option. Instead, the person often incurs additional costs to conduct the transaction, including the cost of accessing the exchange's quotation.

Currently, there are many different fees across options exchanges, across different categories of options participants, and across different product types. As such, it is difficult for anyone to estimate the total cost of executing against a quotation for a particular transaction.
In recent years, several of the options exchanges have introduced a "Make or Take" fee model for certain classes of options. Under this model, a market participant who displays a quotation on an exchange is entitled to receive a rebate from the exchange if another market participant executes against that quotation — that is, if someone chooses to buy or sell at the quoted price. At the same time, under this model, the exchange can charge a "Take" fee to the individual who executes against such displayed quotations.

This fee, which is a type of access fee, is not a part of the displayed quotation so investors are not able to determine the actual cost of conducting the transaction.

In July 2008 the Commission received a Petition for Rulemaking to Address Excessive Access Fees in the Options Markets from Citadel Investment Group, L.L.C. In the petition, the Commission was asked to create a rule that would limit the "Take" fees that options exchanges may charge non-members to obtain access to quotations. In response to this petition, the Commission received comment on the issue of access fees, as well as other proposals concerning access fees from a self-regulatory organization.

In addition, the Commission received several related comment letters in response to a proposal to amend Rule 602 of Regulation NMS to effectively ban marketable "flash orders" in NMS securities. Those letters discussed the issue of access fees in listed options in the context of flash orders. The Commission has considered these comments in developing its options access proposal.

Extending Standards for Indirect Access

In an effort to promote fair and efficient access to quotations, the SEC previously adopted Rule 610(a) to prohibit exchanges from imposing unfairly discriminatory terms. This anti-discrimination rule is designed to remove barriers that an exchange might erect to keep non-members from accessing a quotation on the exchange.

However, this rule does not apply to quotations in listed options. As such, the proposed changes would extend the application of Rule 610(a) to listed options, to further the objective of fair and efficient access to an option exchange's quotations.

Limits on Access Fees

In addition to extending the non-discriminatory standard to listed options, the Commission also is considering a proposal that would set limits on the fees that can be charged for accessing an exchange's best bid or offer in a listed option. In particular, the proposed access fee limit seeks to:

  • Facilitate displayed quotations that are fair and useful.
  • Create more transparency in the cost of accessing quoted prices in listed options.
  • Preclude an exchange from taking improper advantage of the requirement to protect displayed quotations by charging high access fees.

The proposed access fee limit for options is consistent with the maximum access fee limit currently in place for exchange-listed stocks under Rule 610.

Under the proposed rule, the Commission would prohibit a national securities exchange from imposing, or permitting to be imposed, any access fees that exceeds $0.30 per contract for the execution of an order.

The proposed rule would apply to any fee based on the execution of an incoming order against an exchange's best bid or offer. Conversely, fees not triggered by the execution of orders against such quotations would not be included.

Recent SEC Actions on Market Structure

Today's actions are part of a larger effort by the Commission to ensure that the markets are fair, transparent and efficient. Among other things, the Commission already has proposed rules that would:

  • Effectively prohibit all markets from displaying marketable flash orders.
  • Generally require that information about an investor's interest in buying or selling a stock be made publicly available, instead of just to a select group operating with a dark pool.
  • Effectively prohibit broker-dealers from providing their customers with unfiltered access to exchanges and alternative trading systems — and that would assure broker-dealers implement appropriate risk controls.

The Commission also has sought public comment about a concept release on a wide range of topics concerning the equity markets to help facilitate the SEC's ongoing review of market structure issues.

What's Next?

The proposal seeks public comment and data on a broad range of issues relating to access to quotations in listed options and the proposed fee cap, including the costs and benefits associated with the proposal. After careful review of comments, the Commission will consider any further action to take on the proposal.

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Modified: 04/14/2010