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