Speech by SEC Commissioner:
Ensuring Fair, Transparent, and Efficient Options Markets
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
April 14, 2010
On January 14th of this year, the Commission issued a Concept Release on Equity Market Structure to initiate a broad review of our country’s equity markets. Given the size and growth of trading in listed options, it is appropriate for us also to examine and address potential structural issues in the options markets. I am pleased to support this proposal, and I join my colleagues in thanking the staff for the analysis and the hard work that went into this release.
This release addresses the interplay between displayed prices, trade-through protection, order routing, and access fees – all of which are central elements in the operation of our options markets. When the Commission voted to publish its Concept Release on Equity Market Structure, I spoke of three principles that should govern our evaluation of market structure: fairness, transparency, and efficiency. These principles apply equally to the options markets. The Commission should ensure that options investors receive fair access to quotes, transparent pricing, and efficient routing of orders for execution.
In addition to requiring fair access to quotations, the aim of today’s proposal is to limit access fees so that what looks like the best quoted price in the market actually is the best quoted price after fees are taken into account. This is critical, because the best priced quotations are protected against “trade-throughs”1 and affect executions and order routing on all exchanges. If access fees were to reach a level that distorted displayed quotes, price competition would be distorted as well.
The Commission’s experience in regulating the options markets has amply demonstrated that facilitating competition has resulted in substantial benefits for investors. The advent of multiple listing of options in 1999 began a trend of increasing competition that narrowed spreads, lowered costs, and led to the enhanced ability of investors to obtain automatic execution of their orders.2 The markets have continued to evolve, and we need to ensure that new developments benefit investors.
Accordingly, while today’s proposal focuses on a particular type of fee, I’m pleased to see that the release asks a broad range of questions about the economics and incentives affecting order routing and price competition in the options markets, including both “maker-taker” exchanges and those that use payment for order flow. As the release acknowledges, the issues raised by today’s proposal also touch upon another pending Commission rulemaking – the proposed ban on “flash orders.” As we consider both of these proposals, it will be important for the Commission to take a holistic view of the options markets and to be certain that we understand the context in which we act.
Today’s release raises many important issues, and I encourage commenters to share their perspectives, especially their empirical data. I look forward to the responses we will receive.
1 A “trade-through” is a transaction in an option series, either as principal or agent, at a price that is lower than the best displayed bid or higher than the best displayed offer. See Order Approving the National Market System Plan Relating to Options Order Protection and Locked/Crossed Markets Submitted by the Chicago Board Options Exchange, Incorporated, International Securities Exchange, LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc., Exchange Act Release No. 60405 (July 30, 2009).
2 See Competitive Developments in the Options Markets, Exchange Act Release No. 34-49175 (Feb. 3, 2004) (Concept Release).