Crunch Time for Options Market Structure Reform


Time is short for the US options industry to address its nuanced market-structure with the US Securities and Exchange Commission, according to industry participants.

Although more SROs operate equities and options exchanges, their market structures are not interchangeable, according to Gregg Berman, director of research, market integrity, monitoring and surveillance at Citadel Securities and who keynoted SIFMA’s Listed Options Symposium in lower Manhattan.

Unlike the equities market, which has adopted floor-less trading over the past decade, the options market supports four trading floors and soon will gain a fifth if the SEC approves Boston Options Exchange’s request.

The options trading floor addresses the same functions that off-exchange trading has in the equities markets, said Berman.

“When you have off-exchange trading, market markets can be more aggressive with their pricing in ways that do not show their hands,” he added. “That is not possible with on-exchange trading since everyone is plugged in.”

If the SEC is left uneducated about the subtleties of the options market structure, it likely will result in uninformed policy making, according to Berman.

However, it will not be a simple task since there are far more academic studies and research on equities market structure than on options market structure, he added. “In an anecdotal search on Google Scholar resulted in 479 papers on equities market structure and only eight on options market structure.”

Berman also cites the current tick-size pilot as a prime example of uninformed policy making.

“Somebody thought that if the SEC had not reduced the tick size to a penny then 8 million people would not have lost their jobs,” he said. “Then they showed congressmen a paper that said that. Now we have one of the most complicated pilots ever undertaken from a regulatory standpoint.”

Berman suggests that the options industry have a dedicated dialog with the SEC to address options-specific issues and, maybe, lobby the regulator to establish an Options Market Structure Advisory Committee, which would function similarly to the SEC’s Equities Market Structure Advisory Committee.

However, the clock is ticking on this subject as the SEC plans to vote whether to accept or reject the proposed Consolidated Audit Trail plan on November 10.

“Within two to three years, regulators will have to most unprecedented view of the equities and options market using an amazing set of tools to aggregate and organize data,” he said. “The last thing you want in two to three years is for regulators telling you what your business is.”


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