Options-Exchange Leaders Lash Out At SEC's Proposed Fee Cap

Leaders of the biggest U.S. stock-options exchanges on Friday stepped up opposition to proposed regulations that could limit trading fees for the contracts.

Executives of the Chicago Board Options Exchange and Nasdaq OMX Group Inc. (NDAQ) lashed out at the proposed rule, arguing that the market does a better job of determining what's right to charge traders.

"We always prefer competitive forces," said Ed Tilly, executive vice chairman at CBOE, speaking Friday at an industry event. "Those are the forces that should change the fees."

The Securities and Exchange Commission earlier this month proposed a rule that would cap the fees that options exchanges can charge to access quotes, setting the limit at 30 cents per contract.

The idea, similar to an existing rule for stock markets, is to more closely align the displayed quote on an options exchange with the actual amount that an investor would pay to buy or sell an option.

Such a fee cap would limit the access fees charged by options exchanges like Nasdaq OMX's PHLX platform and NYSE Euronext's (NYX) Arca, where customers pay to interact with the markets' liquidity.

It could also affect licensing and regulatory fees carried by some proprietary options products, such as the CBOE's exclusive contracts linked to the S&P 500 stock index or the VIX volatility measure.

Bob Greifeld, chief executive of Nasdaq OMX, said Friday that while the PHLX platform has enough "room to maneuver" on fees that it can accommodate such a fee cap, the move raises questions about the SEC's jurisdiction.

"We think it's wrong for the SEC to get into rate-setting in a competitive marketplace," Greifeld said in an interview.

"The options marketplace is a hypercompetitive world, and the fee capture available to exchanges has gone down sharply last couple of years," he said. "Once that proper competitive environment has been set up, I don't think that calls for rate-setting."

Nasdaq OMX PHLX has much at stake with the new rule, having in January introduced a new pricing program that has helped lift its market share from 10% to 25% in the affected options classes. Overall, the PHLX had about 21.7% of the U.S. options business in April to date.

The CBOE, the largest U.S. options market by volume with 30.8% of the market in April, is also vexed by the proposed rule. Exclusive index options contracts make up a key source of revenue for the company, which is pursuing a long-delayed initial public offering slated for June.

According to estimates by the SEC issued this week, the proposed rule could see the CBOE's annual revenue reduced by $23.9 million. The CBOE has contested that figure, putting its own estimate at $14.2 million. The company brought in about $426 million in operating revenue last year.

CBOE's Tilly stressed the costly process of developing products like the VIX, an oft-quoted barometer measuring potential turbulence in the stock market.

Exchanges also incur expenses associated with licensing other companies' indexes, such as the benchmark S&P 500.

"You just can't ignore those costs," Tilly said.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

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