The battle for order flow among options exchanges is in full swing as reflected by the International Securities Exchange’s (ISE) recent challenge to rival exchanges’ fee practices. In response to a rule filing by the Boston Options Exchange (BOX) to the Securities and Exchange Commission (SEC) to amend its fee schedule, ISE submitted a comment to the SEC on Aug. 13 recommending a review of what it calls “anticompetitive and discriminatory” fee practices at BOX, CBOE and Nasdaq OMX PHLX.
In its letter, ISE said that BOX’s fee change on its price improvement period and CBOE’s automated improvement mechanism discourage competition for order flow. It also said that PHLX’s facilitation order fees were “inequitable and discriminatory.” In its letter to the SEC, CBOE called ISE’s comments about its fee structure “completely baseless. We can only surmise that ISE is attempting to improve its competitive footing."
“[ISE] lost a significant amount of volume and market share to its competitors over the past twelve months. So it’s easy to see how a competitor might view these actions as merely an attemptÊto use the SEC to improve the ISE’s competitive standing,” Mark Longo, founder of TheOptionsInsider.com, says.
Peter Bottini, EVP of trading at optionsXpress, says ISE’s complaints are an attempt to set boundaries on fee changes, which happen on a daily basis in options. “Volumes are a little bit lower than a year ago and exchanges are scrapping for every piece of flow they can get,” he says. “If the SEC is going to weigh in, we hope they encourage a transparent marketplace where fees are up front and easy to track.”
Longo doesn’t expect any significant regulatory action as a result. “The SEC has proven to be reluctant to take significant action in the options market, even when there is clear evidence of customer harm. The evidence in this situation is relatively opaque,” he says.