Source: The Pacific Exchange
The Pacific Exchange (PCX) announced today that it will begin quoting and trading all listed options in penny increments.
Currently, all options exchanges are required to quote in nickels and dimes. The change requires approval by the Securities and Exchange Commission. The Exchange will submit the necessary rule filing soon, and hopes to receive expedited approval from the SEC so that it can begin trading options in pennies in the fourth quarter of 2005.
"Quoting and trading options in pennies will benefit investors enormously," said PCX Chairman and CEO Philip D. DeFeo. "It will make the options markets more efficient and more transparent. We believe spreads should narrow in many issues, more closely aligning the best execution interests of liquidity providers and customers. More orders will be directed to markets with the most aggressive quotes. Penny quotes prepare the markets for the future -- for the time when investors will trade multiple products on a single electronic platform, clearing and settling all trades in pennies on comprehensive risk-management systems. When all instruments are traded in pennies, it will be easier to develop better integrated risk management products."
When the equity and options markets converted from fractions to decimals in 2001, stocks were quoted in pennies but options were limited to nickels and dimes, out of concern that additional quotation traffic would overwhelm the industry's systems and infrastructure. "That was the prudent approach at the time," said DeFeo. "We wanted investors to be the beneficiaries of decimalization, not its victims. But all of the exchanges, firms, and utilities have greatly expanded capacity in the past several years, with additional upgrades planned for this year and next."
"Our rule filing will include provisions to discourage frivolous quoting, and we will implement additional quote mitigation measures to prevent gridlock," DeFeo continued. "The bottom line: this is the right thing to do for public investors. If it takes additional capacity, it is our obligation as marketplace providers to ensure that it is available."
In January, the PCX announced plans to be acquired by Archipelago Holdings, Inc. The shareholders of PCX Holdings, Inc., parent company of the Pacific Exchange, will review that proposal in the third quarter of 2005. Archipelago subsequently announced plans to merge with the New York Stock Exchange.