Exchange Leader Jeopardy, Part One

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Here is part one of The Options Insider's recap of the FIA Options Exchange Leaders Panel.

Moderator:
Chris Nagy, TD Ameritrade

Panelists:
Ed Boyle, NYSE Euronext
Bill Brodsky, CBOE
Jeromee Johnson, BATS
Gary Katz, ISE
Tony McCormick, BOX
Tom Whitman, NASDAQ OMX

The FIA exchange leader's panel is always useful, if not a little predictable, but Chris Nagy is a pro, and he decided to mix things up a bit with Exchange Jeopardy.

The categories were:

• Maker / Taker
• Options Products
• Market Structure
• Flash Crash
• Exchanges & Government

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Tom Whitman kicked it off with Maker / Taker for $50.  The question was: "Isn't the real problem that PFOF (payment for order flow) collection needs to change according to some senators?"

Tom passed, to much laughter from the audience.  Bill Brodsky picked up Whtiman's points saying that this perfectly demonstrates why senators don't understand the options business.

Gary Katz said that banning PFOF isn't realistic, as there are many ways to share profitability with the entities sending orders (exchange-sponsored, from market makers, soft dollars, etc.)

Chris asked if exchanges are looking for it to go away.  Brodsky answered that it's like pushing a finger into a balloon; it will just come out somewhere else. Tony McCormick added that order flow has value and that value should be shared.

Jeopardy answer: Who is senator Kaufman?

Katz picked next and went for Market Structure for $20.  The question was: "Which fee was intended to partially subsidize an exchange's regulatory costs, but with no means to prove what those costs, could actually be viewed as a revenue source?"

Obviously for Katz, that was a lay-up, responding "What is ORF?" He added that when ISE implemented ORF, it went through a detailed analysis, which it shared with the board and the SEC.  They were asked to prove that the calculation did cover the costs and was not arbitrary.

Nagy asked that if one of the problems with ORF is that fees can apply to members who execute trades on other exchanges?  Brodsky responded that that line of thinking wasn't rationalized properly.  Exchanges can't all charge the same fees because they're not all doing the same amount volume.  Brodsky said that CBOE worked with the SEC to make sure that each exchange is justifying its fee, but the breakdown is on the side of the SEC. They're not doing what they're supposed to do. He wondered if the SEC is capable of understanding and imposing fees without doing the necessary analysis.

McCormick said that the SEC should vet what exchanges want to charge, and not pay attention to who is a member or not.  Ed Boyle said that they're working with the SEC and The OCC on an industry-wide fee, analyzing how much is spent on regulation, but doesn't foresee something that can be spread over all market participants.  Brodsky added that there must be a direct relationship between fees that go to exchanges, and how much work they do.

Nagy then asked Brodsky why CBOE will charge a transaction fee if a trade occurs at another exchange.  Brodsky noted that when the fees were created, they were being called by large firms that were paying a rate per representative, which led to discount firms being undercharged.  They worked with the SEC to create a fee structure that spread the costs across where the business was being done, and not just by how many representatives a firm has.  He added that the SEC approved the fees for CBOE, but that each exchange needs to justify their own fee structure.

Next up, Brodsky chooses Exchanges & Government for $30. Jeromee Johnson chooses Exchanges & Government for $40 and Tony McCormick chooses Flash Crash for $40.


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