Earlier this week, Citadel, one of the largest options traders in the United States, asked the Securities and Exchange Commission (SEC) to remove several single stock options from its pilot program of quoting prices in pennies, rather than five cent and 10¢ increments, because of a sharp decline in liquidity.
An informal survey of its readers conducted by InvestorBrain.com supports that there’s a decline in liquidity and it states, “Recent studies show that the number of contracts available to trade at a particular price is significantly lower than it was before the [pilot period].”
The pilot program began in January and encompasses six U.S. options exchanges. It was designed to reduce spreads on options pricing. It started with 13 options, including three options based on indices and 10 on individual stocks.
John Nagel, director and associate general counsel for Citadel argues in a letter to the SEC that the SEC should analyze the relative trading volumes of the 13 options in the pilot both before and after it started to determine which options have suffered the least from penny pricing.
He notes that analysis shows eight of the 10 single stock options in the pilot, including Microsoft, Intel and Texas Instruments, have endured declines in relative trading volumes of 27% to 35% since the program began in January. Liquidity at the national best bid/offer in these names is down an average of 85%.
Citadel has asked the SEC to remove the worst performing names and avoid adding similar single stock names to the pilot in the second phase.
Nagel probably brings this up because at the end of September the second phase begins when 22 more of the most actively traded options will be added to the program, and next March another 28 securities will be added.
I remember when penny pricing for options was first announced and supporters were going on about how this meant better pricing for the end-user, but how helpful is this if there are fewer options to select from at the price you want. Sure you can go up or down a few cents in bids and asks, but then, doesn’t that defeat the purpose?
