The Securities and Exchange Commission is looking at several proposals on how to implement penny trading in the US options market - a move that would help investors get the best prices, an SEC official said on May 05.
"It is not a question of whether options will be quoted in pennies, but how pennies will be introduced into the marketplace," said Elizabeth King, associate director of the US Securities and Exchange Commission's Division of Market Regulation.
Penny trading would bring options in line with how their underlying stocks have been traded since the end of prices quoted in fractions in 2001. Stocks went immediately to moving in pennies with the introduction of decimalization, but options moves were kept at five and 10 cents, partly out of concern about the sharp increase in data that would follow. Options trading produces a vast amount of quotes and computer systems have had to improve to keep up.
King noted the move toward penny trading narrows the bid and ask spreads, a factor that could substantially reduce or eliminate payment for order flow.
Payment for order flow occurs when brokerages are paid by trading specialists or exchanges to steer orders their way. The practice raises questions about brokers' obligation to get the best price for clients, according to critics of the system.
Unlike the stock market where payment for order flow has virtually disappeared, King said the practice has become more "pervasive" in the options market.
Addressing the data capacity issue, NYSE Arca, a subsidiary of the NYSE Group Inc, said it has been talking with the SEC about its plan. NYSE Arca, formerly the Pacific Exchange, said its proposal includes trading pennies in options on five exchange traded funds or ETFs.
King added it would be up to each exchange to participate in a program for penny trading.