SEC Considers Options Market Structure Today
SEC Commissioners described an options market that has experienced enormous growth and increased retail participation since the last time the SEC considered structural concerns.
At a roundtable on options market structure, Jaimie Selway, SEC Director, Division of Trading and Markets, said the Commission's last deep dive into the options markets was in 2004. He highlighted that some of the same structural concerns persist but "in a landscape that is profoundly more automated, interconnected, and complex than ever before." He raised concerns stemming from "the sharp increase in the number of options classes and series and exploding quote traffic [which have necessitated] higher levels of technological investment and capital commitment." He said that "despite these transformative changes, liquidity is even more concentrated [than in 2004] in a limited set of the most active symbols, wide spreads are common in less liquid symbols, large market makers occupy a significant number of specialist appointments, and consolidators control the vast majority of retail flow."
Commissioner Hester M. Peirce explained that the Commission was not convening because the options market was broken, but rather "because it is succeeding." Her concerns centered on whether that success can be sustained. She identified several pressure points worth examining, including the proliferation of exchanges—soon to number twenty—and whether that growth reflects genuine competition or merely added fragmentation, cost, and complexity. She also flagged the declining number of clearing firms as a resilience concern, the concentration of activity among a handful of large market makers, the explosion of options strikes with limited interest in many of them and calls from industry participants for greater execution transparency. She also credited the recent reform of the Options Regulatory Fee ("ORF") as a model for what is possible. (Under the prior methodology, exchanges could charge regulatory fees on transactions occurring on rival venues—a structure she likened to Maryland charging a toll on a Texas bridge.) She said that all exchanges have now amended their rules to limit ORF fees to transactions executed on their own platforms, effective July 1.She said that solutions should be industry-led, with the Commission in a supporting role—in contrast to the equity markets, where she characterized Reg NMS as having caused damage requiring repair.
Commissioner Mark Uyeda argued that many of the structural concerns extensively studied in equity markets exist in options to an even greater degree. He pointed to fifteen exchanges each holding more than one percent market share as evidence of fragmentation and questioned whether the market maker entitlements and floor auction rules designed for an earlier era of the market remain appropriate. The rapid growth of short-dated and ultra-short-dated retail strategies, he argued, has materially reshaped order flow dynamics and the economics of liquidity provision in ways that existing regulations did not anticipate. He called for thoughtful, measured reform and suggested the Commission should re-examine the assumptions underlying its current rules.
SEC Chair Paul Atkins reported that the Options Price Reporting Authority now disseminates over 3,200 times more messages than it did in 2000 and that retail participation has expanded significantly. He also highlighted the work of the Listed Options Market Structure Working Group, a SIFMA and Security Traders Association initiative, as an example of the kind of industry-led engagement the Commission hopes to encourage. He added that the roundtable was not a precursor to near-term rulemaking, but rather an opportunity to take stock of a market that has grown enormously.