The Securities and Exchange Commission has approved a six-month trial of a program proposed by BATS Global Markets through would allow buy and sell orders on options contracts to be directed to particular market makers.
The regulator gave accelerated approval for BATS to create two new order types of options traders: the directed order and a "market maker price improving order."
The directed order would allow a member of the BATS Options exchange to direct a particular order to one or more BATS Options market makers. In BATS’ original proposal, the order would be directed to just one market maker. But BATS amended that to one or more market markers, as comments came in on its proposal.
The plan would require that the market maker to whom the directed order is directed is quoting a Market Maker Price Improving Order with a displayed price equal to the best bid or offer nationally on the option involved, at the time the order is entered.
The order, according to BATS, would provide "any member the ability to submit orders with a nondisplayed amount of price improvement that can be ranked and executed at the midpoint" of the best bid and offer; and would "require Market Maker Price Improving Orders to cede priority to any other interest on the BATS Options Book, displayed or nondisplayed, at the same or better price as the nondisplayed price of the Market Maker Price Improving Order, regardless of time priority."
The directed order type has been opposed by other options exchanges. NYSE Euronext said, "in particular, we are very concerned that the proposal may result in customers receiving inferior executions. In addition, we continue to believe that the Directed Order Program would foster excessive internalization with the strong potential for unfair discrimination between different categories of market participants."
The Boston Options Exchange said, "without those Directed Orders first being exposed to all market participants (this) will result in less competition and less price improvement, and will negatively impact customers."
Nasdaq OMX Group’s PHLX options exchange said the tack "will make trading standardized options incrementally darker and less transparent by enabling market makers to trade exclusively against orders directed to them without exposing the orders to other market participants. "
And the Chicago Board Options Exchange said, "While the displayed price would be accessible to all market participants, the non-displayed price would only be accessible to order entry firms that send "directed orders-‘ that designate the particular directed market maker."
The SEC said BATS’ amendment to its proposal was "designed to respond to certain of the commenters’ concerns regarding competition in the Directed Order program" and that the " proposed revisions may encourage an Options Member to submit a Directed Order to more than one BATS Options market maker, thereby potentially encouraging such market makers to compete with respect to the amount of price improvement they provide."
The commission, in a June 30 filing, said that it approved the proposal "on an accelerated basis, for a pilot period ending January 30, 2012.
Last week, BATS said its options exchange achieved market share of 4.3 percent in June 2011, up from 0.6% in June 2010.
