NYSE Arca’s decision last week to raise the fee for taking liquidity in its tier-one penny pilot options has prompted a negative reaction from options traders, according to Tony Saliba, president and CEO of LiquidPoint, the options division of agency broker BNY ConvergEx.
“With Arca’s new rule filing, taker fees are now half of the minimum trading increment,” said Saliba. There are no fees for buying and selling options on rival exchanges such as the Chicago Board Options Exchange or the International Securities Exchange, which do not use the maker-taker pricing model introduced by NYSE Arca. “Now if I go to Arca I give half of the trading increment to the exchange,” said Saliba. “That is a significant difference, and our clients are completely up in arms. There is a concerted campaign to let the SEC (US Securities and Exchange Commission) know how they feel about it.”
Although the minimum trading increment on tier-one penny pilot options is one US cent, the contracts are for 100 shares in the underlying stock. Thus, a penny increment in the option price corresponds to a dollar in the total underlying securities it represents. Penny pilot options are those which are allowed to trade with one-cent price increments, as opposed to the usual five-cent increments, under the SEC’s penny pilot
On 16 July, NYSE Arca, the electronic options trading venue operated by exchange group NYSE Euronext, announced that it would be hiking its taker fee by 10 cents to $0.55 a contract from $0.45 for customers, broker-dealers and market makers for tier-one penny pilot options. The exchange also announced it would be increasing the rebate for posting liquidity – the maker rebate – by 10 cents to $0.35 a contract from $0.25 for customers and broker-dealers, and to $0.40 from $0.30 for market makers. The changes are subject to approval from the SEC.
The planned increase to the taker fee follows a reduction in April to $0.45 from $0.50 a contract.
When making the announcement, NYSE Arca focused on the fact that the maker rebate was the industry’s highest for tier-one penny pilot securities. But according to LiquidPoint’s Saliba the majority of client orders in the options market are taker orders. “We handle a significant portion of the US market on a daily basis, and between 85% and 95% of every day’s orders are take orders. So not a lot of our clients are considering rebate fees,” he said. “When people who are not involved intimately in the industry hear the terms ‘rebate’ and ‘higher incentive fees’, they are not thinking about higher taker fees too.”
LiquidPoint is a broker-dealer in the US futures and options markets that provides order management and execution services to institutional traders, prime brokers and their buy-side customers.
According to Saliba, the maker-taker model is fundamentally unsuited to a quote-driven market such as options because of the reduced incentive to quote for market makers.
Firms that post liquidity on a maker-taker options exchange stand less chance of getting their orders filled, compared to other exchanges, because liquidity takers typically avoid paying taker fees by routing orders first to exchanges that do not charge them, said Saliba.
He added the new NYSE Arca pricing makes what he sees as a bad model even worse. “It is a variation on an ugly theme in my mind,” he said. “If the maker-taker fees were at one or two cents, it’s negligible. The higher the maker-taker fee package rises, the bigger problem I have with it.”
According to data from the Options Clearing Corporation, more than 2.8 billion options contracts were traded in the US in 2007, most of them equity options. This represents a compound annual growth rate of 21% over the past 12 years.