Speech by SEC Commissioner:
Opening Remarks Regarding Amendments to Rule 610 With Respect to Listed Options
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
SEC Open Meeting
April 14, 2010
Thank you, Chairman Schapiro. Again, I would like to thank the individuals in the Office of Market Supervision for their hard work in preparing for today's open meeting. I would also like to thank the staff in the other divisions and offices who also worked on the proposal.
I am happy to support your recommendation.
This recommendation may seem technical, but, from my perspective, the issue is relatively simple—investors should have access to the best displayed prices in the markets. I believe the proposal at hand will help ensure that investors, in fact, specifically obtain such access in the options markets. The provisions of current Rule 610 of Reg NMS already further the goal of fair and efficient access to quotations with respect to NMS stocks. That rule prohibits exchanges and associations from imposing unfairly discriminatory terms that prevent or inhibit any person from obtaining efficient access to displayed quotations in an NMS stock through a member and establishes a limit on access fees that an exchange is permitted to charge for access to its best bid and offer.
Institutional investors are increasingly trading in options, and the options markets are changing, taking on characteristics more typical of the equities market through, for example, the quoting of options in penny increments, the use of maker-taker fee schedules, and price-time priority matching at the exchanges. Using the logic currently applied in the equities market, the staff recommends today that we propose to extend those anti-discrimination and access fee limitations to listed options. On the other hand, some continue to emphasize the distinctions between the options and equities markets. I look forward to the comments on this significant issue.
There currently exist several provisions in the Exchange Act which address access to both equity and options exchanges such as Section 6(b)(5) of the Exchange Act, which requires that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The proposal to extend Rule 610 to apply the anti-discrimination standard to listed options is a specific application of the same principle to a person’s indirect access to quotations through a member of the options exchange. This proposed extension would support a non-member’s ability to fairly and efficiently access exchange options quotations. I agree with the staff that this is crucial to a non-member’s ability to fully comply with the trade-through rules and to carry out its duty of best execution.
For similar reasons, I also support the proposal to limit the fees that options exchanges could charge for accessing their quotations, like the cap currently applicable to access fees in the equities market. Although securities regulators traditionally are reluctant to dictate prices and fees in the face of free-market competition, at times competitive forces standing alone do not ensure that investors have fair access to quotations. I believe that an exchange’s access fees can be a very important factor, for instance, in a broker-dealer determining best execution. It could be difficult for the broker-dealer to fully meet its duty of best execution in a trading environment in which there is no cap on access fees, but yet there is a hard trade-through rule.
In this respect, I am happy to see that we are proposing to apply the fee cap broadly to any fee, no matter what it is called, that is being charged to any person for the execution of an incoming order against an options exchange’s best bid or offer.
The release before us this morning would not propose a specific cap on payment for order flow, or the exchange fees used to fund members’ payment for order flow, as part of the proposed limitation on access fees. This is an important issue to explore. While the Citadel petition blames excessive “take” fees as the cause of price distortions in the options markets, some market participants believe that any cap on taker fees must be accompanied by a comparable limit on payments and fees associated with exchange payment for order flow programs. I am interested in hearing from commenters whether payment for order flow is another cause and whether both maker-taker and payment for order flow programs contribute to price distortions in the options markets and thus should be limited in some manner.
I am happy to see that the proposing release asks a series of specific questions about the relationship between access fees and payment for order flow fees and the relationship of those fees in each market model to price before the Commission makes any final decision about capping fees in a single market structure. Not surprisingly, I do not favor regulation that will provide an advantage to one set of market participants rather than promoting and increasing competition amongst options exchanges. Therefore, I really urge interested parties to comment extensively on this matter so as to better inform the Commission and its staff once we do reach the adoption stage for this proposal.
Once again, my thanks go to all the individuals of the staff involved in this proposing release.