US listed equity option competition set for increase

The Chicago Board Options Exchange (CBOE), the International Securities Exchange (ISE), the American Stock Exchange, the Pacific Exchange and the Philadelphia Stock Exchange today began electronically routing orders between each other for execution at the best available price.

The first phase of the linkage involves routing the orders of 14 individual stocks. New York-based ISE said in a statement that this number will increase within the next several months. Hewlett Packard, Nokia and Pepsi are among the stocks now routed between the exchanges.

“The electronic linkage of the options markets should benefit investors and help ensure that customer orders have every opportunity to receive the very best order executions,” said David Krell, ISE chief executive. “The ISE has consistently supported the creation of an options linkage and is proud to have contributed to making linkage a reality and to extending the principles of best execution across the options industry.”

The move to implement a more competitive environment is believed to be the result of pressure from the Securities and Exchange Commission when Arthur Levitt was its chairman. “Linkages, designed and implemented to facilitate best execution, must be these exchanges’ foremost priority,” said Levitt in a speech made in 1999 to the Securities Industry Association. “Rest assured, we will guard the promise of a competitive, free and fair options marketplace,” he said.

The Options Clearing Corporation, the US equity derivatives clearing organisation, will operate the new technology links. Three order types will be involved. ‘Principal acting as agent’ orders will be routed from one exchange to another for price improvement. ‘Principal’ orders will allow market makers to access better quotes on other markets and ‘satisfaction’ orders - to be added later - will be used to remedy orders considered to be inferior to a standard best bid or offer.

A spokesman for the ISE said he believes the exchange has most to benefit from the new links. “We expect to be a net importer of order flow because our prices are so competitive. Our statistical analysis of our markets compared to other markets indicates that the ISE is as good as, or better than, away markets 93% of the time, so we’re quite comfortable.”

A spokesman for the CBOE played down the possibility of hightened competition. “The US options markets, with the 5 exchanges, are probably the most competitive in the world. I think that with linkage, it’s just trying to create efficiencies among the exchanges.”

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