From: Mike [ianni@rogers.com]
Sent: Sunday, July 21, 2002 1:56 PM
To: rule-comments@sec.gov
Subject: File no: S7-18-02 (Repeal of Options Trade-Through Disclosure Rule)

It seems from the way the "repeal of Options Trade-Through Disclosure Rule" 
is written that it is unwarranted because trade-throughs will be eliminated 
as a result of the proposed linkage.  However, in no place have I read that 
Exchanges will be forced to honor their quotes with auto executions.  And 
until this happens then trade-throughs will become a regular event in the 
marketplace.

Currently there are many markets that are NOT honored with auto executions.  
And in fact, in many cases the NBBO in question is neither locked nor crossed.  
One example of this is that there are two Exchanges (PHLX AND AMEX) that DO 
NOT allow customers to trade against their respective customer order books 
via their auto-x systems.  This will result in many trade-throughs each day.  
For example, let's say that a particular option has the following NBBO:

 $5.50 BID (AMEX), $5.60 ASK (ISE)

If an investor attempts to sell at $5.50 to the AMEX then his order will be 
handled manually which could take a couple of minutes.  As a result, more 
often then not, a customer will be shut out.  Now, lets assume that linkage 
has taken place and this same customer sends a market order to sell to the 
CBOE.  The CBOE will then send the order to the AMEX to sell at $5.50 and 
because no auto execution takes place the order will come back to the CBOE 
unfilled (several minutes later) where the CBOE will fill the order at a 
lower price.  In my opinion this is a Trade-Through.  When the customer sent 
the order to sell at the market the NBB was $5.50 but got filled at something 
less.  If you want to eliminate these trade-throughs then you should simply 
force all five exchanges to honor their posted quotes with auto executions.
 
I can understand that the Exchanges may not want to honor ALL their quotes 
with auto executions in certain situations (crossed/inverted markets) and 
can respect this.  And that is why they should all have "obvious error" rules 
that would cancel fills ONLY if the trade took place at certain inferior 
price levels.

Currently, I believe the ISE is the only Exchange that has an "obvious error" 
rule.  This is a great rule for investors because one generally knows if a 
trade may be cancelled.  However, on the other four Exchanges, trades can be 
busted even if the investor received an auto execution.  I recently had a trade 
busted on the PHLX when attempting to sell some calls.  The market in question 
was neither locked nor crossed and was actually bid by three Exchanges and my 
order was routed to the PHLX where I got an auto execution.  I got a call 30 minutes 
later informing me of a bust because the PHLX had technical problems.  There was 
no way I could have expected this trade to be busted and an obvious error rule 
would have forced the market makers to take the trade.  And this kind of obvious 
error rule would then force Option Exchanges to identify if/when technical issues 
take place in their markets and then they could immediately change their quotes 
(perhaps to fast market status or even just to leave them blank).  And if Exchanges 
really wanted to be safe (protect themselves) then they could program their systems 
so that their respective "market maker" quotes go blank if they cross another 
marketplace or there could be many other possible solutions.  The point is, if 
the quote is no good, then get rid of it.  But if you post the quote then it 
should be executable immediately and just to protect the Exchanges they would 
still have an "obvious error" to fall back on.

The one fact you have to understand is that all quotes should be honored with 
auto executions and until this happens the mishandling of orders will continue to 
take place.  Currently, many Exchanges use their inferior technology as an excuse 
to screw the customer.  Now is the time, before linkage takes place, to ensure that 
the Options market will be a fair place for the investor.  Until that takes place, 
in my opinion, the trade-through rule should continue.

 

Sincerely,

 
Mike Ianni
Private Investor