December 21, 2004
December 21, 2004
My name is William R. Power. I am a member of the Chicago Board Options Exchange in Chicago. I am also a director. The views expressed here are my personal views and may not express the official views of the CBOE.
If the NYSE completes their Hybrid trading plan as proposed, The CBOE would have the ability to facilitate a far greater number of public options orders on the CBOE than is now the case.
The NYSE maintains the largest equity liquidity pool in the US. In order for CBOE liquidity providers to facilitate public and institutional options orders it is necessary for us to have immediate access to this liquidity pool. Although other markets in the US have electronic access, none approaches the NYSE in terms of depth or liquidity. The auction market without electronic access at NYSE is not rapid enough for CBOE liquidity providers to respond to large orders. There is only electronic access for up to 1100 shares per order on the NYSE. This is not large enough for us to hedge our public options orders.
Under the hybrid system, as proposed by NYSE, we would have access electronically for an unlimited size electronically. Using this facility will allow CBOE to handle a far greater number and size of incoming options orders. This can only benefit the public. This could increase the level of stock option activity on the CBOE alone by anywhere from 25 to 50.
Under the proposed CLOB the NYSE would have to go back to the drawing board to redo their hybrid trading rules. This is completely unacceptable to liquidity providers on CBOE. They need immediate access to the NYSE liquidity pool. It is long overdue. It is not in the public interest at all to delay trading rules which will benefit the public as greatly as the hybrid rules.
I have been watching the NMS debate with some interest. Up until very, very recently a CLOB was never mentioned. There is good reason for this. As was pointed out to SEC a number of years ago, the effects of a CLOB are anti competitive, give no incentive for an SRO to innovate and offer no incentive to increase computer capacity. At that time, the SEC wisely junked the concept as an unworkable academic pipedream.
It would lead to Payment for Order Flow, an unhealthy thing for markets which the SEC after issuing a Concept Release, has refused to deal with.
It would require every equity SRO in the US to alter their rules so the rules are the same across the country. If this were not done it is difficult to understand how to harmonize a trade when one exchange says the order is entitled to certain entitlements yet another exchanges rules do not recognize the same entitlements under the same circumstances.
It is very unclear who would have the agency liability for orders as they whizzed about the country hither and yon to be told because of system problems? that a market was not there yet it was posted and the market shifted against the order when it was returned.
It is the SECs obligation to regulate the competition not to mandate a system of trading. The SEC will be eliminating competition and becoming the manager of a vast government run utility that has no place for innovation, no place for competition and no place investors seeking unique services.
Yours truly,
William R. Power