Breaking Down The Options Market: Payment For Order Flow - Part Three
....continued from Part Two
JUST ONE MORE BLACK EYE
The continuing debate over payment for order flow has tarnished thereputation of the entire options industry:
ìThe finger gets pointed atthe options industry as though it were the only one that does paymentfor order flow and that it has been eliminated by pennies in the equityindustry,î says Frucher. ìThatís just not true. Virtually every orderthat is sent to NASDAQ is an order that is paid for in oneform or another.î
Whether you agree with payment or not, brokerage firms accepting cash payments in return for orders has become ablack eye for the entire industry.
The options industry has long been depicted asan arcane shadow market by the mainstream financial media. The last thingthat this industry needs is another embarrassing scandal that shakesthe trust of the investing public.
THE SEC, MAKER-TAKER & PENNY PRICING
The onus is on the SEC to clarify this ongoing debate. Unfortunately,the Commission has repeatedly refused to step into the payment fray.
Instead of issuing a ruling on payment, the SEC has thrown itsformidable weight behind the Penny Pilot. The hope is that pennypricing will reduce bid/ask spreads, finally eliminating payment fromthe options market.
While that hasn't come to pass, the law of unintended consequences maybe acting in the SEC's favor. The shrinking spreads in Penny Pilotclasses haven't had a dramatic impact on payment rates.
However, themaker-taker pricing structure, which the NYSE introduced as a directresponse to the Penny Pilot, has definitely thrown a wrench into the works(read "Breaking Down Maker-Taker" for more information on maker-taker and its impact on the options market).
As more exchanges embrace maker-taker, it will force brokers, exchangesand liquidity providers to rethink their incentive arrangements.Whether that will ultimately reduce payment remains to be seen, but itis the first glimmer of hope on the horizon.
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About Mark S. Longo
Mark S. Longo is the founder of The Options Insider Inc. - a firm dedicated to providing free options information, education, news and analysis for options users. Whether it's on TheOptionsInsider.com, a leading online options destination; through Options Insider Radio, the world's only radio network for options users; or through a growing number of newsletters and live events, Mr. Longo continues to provide new ways to spread the word about options.Mr. Longo's analysis of the options market has appeared in a wide variety of domestic and international publications, including The Wall Street Journal, Financial Times, Reuters, Futures Magazine, and more. As one of the few industry commentators with practical options experience, he has developed a substantial following among industry veterans and newcomers looking for insight into this complex market.Mr. Longo began his career as an options trader on the floor of the Chicago Board Options Exchange.
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