1-cent quotes for options to expand
A six-month test to quote the prices of some stock options in 1-cent increments may triple in size after the Securities and Exchange Commission said the plan reduced trading costs for investors.
The program has increased competition among the six U.S. option markets and spurred fee reductions for brokers as the markets try to attract trades.
The pilot, which began in January and covered 13 option classes, was scheduled to expire Thursday. The SEC planned to extend the program in its current form and add 50 more option classes by next March, according to letters sent to brokerages by the Chicago Board Options Exchange and the NYSE Arca option market.
SEC Chairman Christopher Cox said last month that the test reduced costs for investors in the $4-trillion options market by narrowing the spread between the highest price being offered to buy an option and the lowest price being offered to sell the same. Before the pilot, options were quoted in increments of nickels and dimes.
The expansion comes six years after stocks started trading in 1-cent increments. It also comes amid record option trading as investors increasingly turn to derivatives to boost returns.
“For short-term traders or people who do a lot of volume, the smaller spreads work in their favor,” said Frederic Ruffy, an analyst at Redwood City, Calif.-based Optionetics Inc.
New contracts will be added to the trial on Sept. 28 and again in March, eventually covering about 58% of option trading in the U.S., NYSE Arca said in the letter. Contracts may be added this year giving investors the right to buy or sell shares of companies such as Apple Inc. and exchange-traded funds tracking the Standard & Poor’s 500 index and the Dow Jones industrial average, the letters said.
The pilot has primarily spurred trading in options for tracking exchange-traded funds that follow the Nasdaq-100 and Russell 2000 stock indexes. Daily trading in the U.S. increased 18% in the second quarter to a record 10.2 million contracts, according to Options Clearing Corp.
The exchanges have had to spend money to bolster their trading systems to handle a surge in quotes for the penny-quoted classes.
International Securities Exchanges Holdings Inc., the No. 2 option exchange operator by trading, had asked regulators for a six-month notice before they broadened the plan so trading systems could accommodate the increased volume of quotes.
