Chicago Board Options Exchange Delays C2 Launch Until 2010
September 15 2009 - 11:53AM
Dow Jones News
The Chicago Board Options Exchange has delayed the launch of a
new platform targeting high-frequency traders until early next year
as regulators weigh reform of the U.S. options market, according to
a senior executive.
Ed Tilly, vice chairman of the CBOE, said the final design of
its new C2 system remains in flux while the Securities and Exchange
Commission considers how options are priced and the way orders are
routed between exchanges.
"Market structure issues in this industry are changing so fast,"
Tilly said in an interview with Dow Jones Newswires.
The CBOE is the largest U.S. options exchange in terms of
trading volume, but has seen some high-frequency business migrate
to rival platforms with so-called "maker-taker" models operated by
NYSE Euronex (NYX) and Nasdaq OMX Group Inc. (NDAQ).
CBOE started work on C2 last year and had hoped to launch it
this month. Tilly said that part of the delay comes down to C2's
exchange application, which still needs approval from the SEC.
Tilly still hopes to secure regulatory approval by year-end,
though some observers said it may take longer for the SEC to
resolve issues surrounding around step-up order types and expanded
penny pricing for options contracts.
The SEC is scrutinizing step-up orders, which are similar to
controversial flash orders in cash equities markets. Options orders
that cannot be filled on an exchange's main order book are
"flashed" to exchange members, who can act before it is routed out
to another exchange.
The CBOE and rival International Securities Exchange want the
SEC to continue allowing exchanges to step-up customer orders. They
argue that by keeping customer orders on pro-rata exchanges like
CBOE and ISE, those customers are protected from additional fees
charged by other venues.
Critics have charged the practice could give some in the market
an unfair advantage.
"The ability to do step-up functionality...will guide us as the
matching engine is developed for C2," Tilly said. "It's a factor in
determining what the algorithm looks like."
The SEC is expected to lay out its proposal for dealing with
flash orders on Thursday.
Tilly said that C2's structure also depends upon whether the SEC
expands a program for pricing options contracts in penny
increments, first introduced in 2007 as a means to tighten the
spread between buy and sell prices.
The CBOE has warned regulators that penny pricing has reduced
liquidity in some names on its market. But other markets operating
so-called "maker taker" models have seen more trade thanks to penny
pricing, which generally prompts faster trading.
Maker-taker exchanges pay rebates to firms supplying liquidity,
as opposed to the traditional market model operated by the CBOE and
ISE, charging transaction fees to market makers and firms trading
their own accounts.
While Tilly said the CBOE has not yet decided on a model for C2,
observers have speculated that it will be a maker-taker
platform.
Tilly said that when the SEC approves C2's application, the CBOE
will hook up its existing customers and look to attract new clients
to the exchange - specifically, users of the maker-taker Nasdaq
Options Market and NYSE Arca Options platforms.
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117;
jacob.bunge@dowjones.com