By Jessica Titlebaum
Evolving business models, controversial exchange fees and new entrants to the market have made the Options space a dynamic one to participate in. From standardizing exchange fees to justifying a fragmented marketplace, Boston Options Exchange’s Senior Vice President of Business Development, Alan Grigoletto, discusses the changing Options landscape and what to expect in 2011.
Options, Regulations and Fees
One of the more controversial topics looming over the Options space is what was once a fee paid by registered representatives to cover costs associated with market surveillance, investigations and rule making. Known as the Registered Representative Fee, the number of people with Series 7 licenses varied at each firm causing a disparity in payments.
“There was an inequality regarding whom was paying the fee,” said Grigoletto. “A company like Merrill Lynch was paying more in fees because they had more registered reps.”
With the Chicago Board Options Exchange championing the way, a new fee structure was launched to cover these costs. Evolving into the Options Regulatory Fees or ORFs, exchanges started charging customers a fee for every transaction executed at an Options Clearing Corporation (OCC) member firm.
“There is still a disparity in how the fees are assessed because each exchange calculates their fees differently,” said Grigoletto. “For example, BOX is not a Designated Options Examining Authority like CBOE. While BOX conducts Participant exams, BOX does not have primary examination authority over any one member firm.”
Survival of the Fittest
Another hot topic in the Options markets is the number of new entrants and players in the space. The Chicago Board Options Exchange (CBOE) launched their second options exchange earlier this year along with Nasdaq OMX who re-launched their PHLX platform.
The Securities and Exchange Commission (SEC), who regulates the Options markets, have taken a Darwinian approach to the expanding Options space.
While some market participants have concerns about fragmentation, Grigoletto believes that there has been good reason for these multiple market models.
“There is no single exchange model that could meet all the needs of its clients,” said Grigoletto. “That’s why we have so many options platforms. Competition has been good thus far, in lowering costs and narrowing spreads.”
One of the reasons Grigoletto’s competitors might be launching additional exchanges is because of the different model types. Exchanges with pro-rata business models may be missing out on order flow they have to direct outside to maker-taker mechanisms.
“These exchanges may have been initially established to catch that business that would normally be routed to a competitor’s alternative model,” he said. “Ultimately these secondary exchanges will want to go toe to toe with the more established exchanges in this space,” Grigoletto continued.
An Inverted Model
Speaking of business models, the Boston Options Exchange recently changed their business model to a taker-maker approach. The new method of options trading makes BOX the first exchange to launch an inverted model.
Rolled out at the end of last year and covering Price Improvement (PIP) and the taker maker model, BOX began paying market participants for taking liquidity.
The move has proved a successful one. The Exchange saw $8 million in customer price improvement savings via the PIP in the month of October, which is twice as the average amount.
Will other exchanges follow suit and go with an inverted model? How many more exchanges will launch in the Options space before there are too many? Will someone come up with a way to standardize Options Regulatory Fees? For this and other pressing matters, stay tuned...