Tags: Options

Talking Points – December 2019

Talking Points

Who We Are The Security Traders Association, “STA” 1 is comprised of 24 affiliate organizations covering the US and Canada. The STA national board of governors is comprised of past presidents and industry specific leaders. Our membership represents INDIVIDUALS from varying business models – buy-side, sell-side, hedge funds, exchange traders and market makers- dealing in equity and derivative trading.

Issues

  • SEC Transaction Fee Pilot for NMS Securities
  • Order Protection Rule
  • FINRA Regulatory Notice 18-26; Continuing Education Program
  • Listed Options Working Group, “LOMSWG”
  • Thinly Traded Securities – UTP

Specific Comments

SEC Transaction Fee Pilot for NMS Securities

  • *STA believes that the impact access fees have on our market structure has evolved since they were originally allowed and then capped. We therefore support a study that includes a pilot.

Order Protection Rule

  • *In 2008 STA wrote “STA is of the opinion that a marketplace without this order protection rule will be superior to enforcing the current OPR. While this opinion would appear “anti-investor”, it is not. While the OPR was well intended, its many complex exemptions complicate compliance and dilute its effectiveness.”
  • *As STA reviews its existing opinion, we will take into consideration OPR’s impact on solutions which seek to improve the trading of Thinly Traded securities and its need in the trading of liquid securities.

FINRA Regulatory Notice 18-26; Continuing Education Program Maintaining Qualification Status Post-Termination

  • *STA believes that FINRA has taken meaningful steps to address what we view as two (2) unreasonable barriers to re-enter the financial services industry exists for individuals with a prolonged absence. Specifically, effective October 8, 2018, FINRA instituted the Securities Industry Essential (“SIE”) Exam. STA believes that the next contributing factor which needs to be addressed is continuing education requirements for individuals away from the industry for a prolonged period of time.

Listed Options Working Group, “LOMSWG”

  • *LOMSWG was formed to address issues regarding the current state of the U.S. options market structure. Formed in Q3’2018, LOMSWG is comprised of representatives from the options Exchange parent organizations; Options Clearing Corporation and the Options Committees of SIFMA and STA.
  • *Since exchanges must ensure that any collective activity on their part conforms to applicable laws, in particular— because the exchanges are competitors—participation by SEC staff is provided.
  • *Among the issues which LOMSWG is currently addressing include: Smarter Strikes ; Exchange Give Ups and Obvious Error RFP Process.

Thinly Traded Securities – UTP

  • *While STA understands and appreciates that the goal of suspending UTP is to enable “innovative market structure solutions”, we have concerns regarding an exchange regime which allows for the suspension of UTP as part of its construct.
  • *As the Commission conducts analysis on UTP suspension filings, it should take into consideration impacts to operational capability and the conditions which encourage enhanced liquidity provision.
  • *Fostering greater operational capability should be the foremost consideration of any regulatory or legislative entity that has oversight or influence on our financial markets. The Commission should consider if one market structure serves operational capability better than another for different types of securities. General areas for consideration could include limiting single points of failure.
  • *Enhanced liquidity is liquidity that exceeds what is publicly displayed and available in the marketplace. A contributing factor in the amount of overall liquidity available is the capital commitment which comes from a subsector of trading centers: market makers, both electronic and traditional; and block traders. Exchanges, by their regulatory requirements are not allowed to commit capital in facilitating liquidity.
  • *While the factors in enhanced liquidity provision are numerous, the Commission should consider the effects of filings which seek to suspend UTP has on certain core ones including:
  • • Quote quality. Displayed liquidity matters, however efforts which seek to increase its levels need to ensure that what is publicly displayed is accessible in a fair and reasonable way.
  • • Volatility. Providers of enhanced liquidity are more inclined to commit capital and more able to conduct block trading if the prices of the security the provider transacts in remains reasonably stable.
  • • Reduction in costs. The withdrawal of market makers and block traders is partially related to the increased costs of trading securities, in particular those of Thinly Traded securities where recouping such costs are difficult.

PDF version here

Killing Our Frankensteins

CEO's Desk

More than two centuries ago, the gothic novel, Frankenstein, also known as The Modern Prometheus, was anonymously published in Britain. A few years later in 1823, readers would discover that the gifted author was Mary Shelley, who at the age of 18 began writing the novel in a competition among peers about who could write the best horror story. The character of the monster, brought to life by Dr. Victor Frankenstein, remains one of the most recognized icons in horror fiction. It is also one of the few fictional characters who have managed to find a place in the Merriam-Webster dictionary. According to Merriam-Webster, Frankenstein is “a monstrous creation, especially: a work or agency that ruins its originator.”

Our industry, at times, creates its own Frankensteins. We promulgate rules, policies and practices that when introduced into this hypercompetitive and highly-technological marketplace, may result in unintended negative consequences that seem to take on a life of their own. Thankfully our markets possess a natural ability to self-correct in such situations; however, this self-correction process can itself be costly and highly disruptive.

A Frankenstein Around the Corner

The listed options market is a highly competitive, quote-driven marketplace. From a technology perspective, it is extremely efficient as proven by its ability to manage the risk and quoting activity associated with the more than 900,000 strikes on approximately 4,000 underlying, or root, securities. The technological requirements, particularly during periods of high volatility, are massive and costly to maintain. Those costs are about to increase with the impending industry-wide implementation of the Consolidated Audit Trail (CAT).

While official data is not yet publicly available, figures being mentioned in the public domain are that of the 100 billion data points being captured on daily basis, more than 40% are related to options activity. If these figures are correct, then a 40% allocation of CAT expenses to the listed options markets would be a Frankensteinian event.

The most simplistic description of the CAT is that it is a giant data warehouse, one that will store information on quote updates and trades that occur in the equity and listed derivatives markets. The cost of building the CAT warehouse will be determined by how much data it needs to store. The cost allocation per firm will be related to how much data is sent to the CAT. This reality presents issues for options market participants because the ratio of quote updates to actual trades, which normally have revenue associated with them, is several times higher compared to equities. Industry experts estimate there are more than 17,000 quote updates for every trade that occurs in listed options. In equities, the ratio is less than 40:1.

This past summer, the exchanges began reporting listed option quotes on the 900,000 strikes to FINRA CAT. While official data is not yet publicly available, figures being mentioned in the public domain are that of the 100 billion data points being captured on daily basis, more than 40% are related to options activity. If these figures are correct, then a 40% allocation of CAT expenses to the listed options market could be a Frankensteinian event.

Options Listings Participant Plan

With its implementation approaching, a clear first benefit of CAT would be a rationalization of how strikes are listed. The benefits associated with strike rationalization go beyond the cost implications of CAT. These benefits include reducing costs tied to monitoring risk, enhanced allocations of capital and creating a more simplistic market for investors.

The proliferation of strikes is primarily attributed to the absence of a coordinated process for determining the appropriate number of strikes per underlying issue, exacerbated by the growing popularity of short-term options commonly referred to as “Weeklies.” The Options Listing Procedures Plan, or OLPP, is a national market system plan that defines procedures for introducing new options series into the listed marketplace. Unfortunately, OLPP is silent on certain key aspects which prevent it from making modifications or adjustments.

In our letter to the Securities and Exchange Commission earlier this year, STA expressed our belief that the listed options industry can resolve the excessive proliferation of strikes; however, doing so requires an initial dialogue among and between interested parties. Due to antitrust laws, the options exchanges are prohibited from engaging in any collective activity without proper authorization from the SEC. Given the importance of this issue and the potential Frankenstein it would create in a CAT reporting regime, STA continues to recommend that the Commission take whatever action is needed to provide the necessary authorization to the exchanges. Our industry is better off avoiding such types of creations because eradicating them after they have been created is both difficult and costly.

Other article of interest: “Measuring the Influence of Regulation“

STA Conference First 15 Speakers and DC Meeting Recaps

Newsletter

FINRA holds July 2019 Board of Governors Meeting.

FINRA CEO Robert Cook, Chairman Bill Heyman, Board members and FINRA staff provided updates from the meeting in a video report . 

Emily Westerberg Russell Named Chief Counsel of Division of Trading and Markets

The Securities and Exchange Commission today announced that Emily Westerberg Russell has been named Chief Counsel of the Division of Trading and Markets. Ms. Russell has been a member of the division’s Office of Chief Counsel for a decade, and since 2011 has served as a Senior Special Counsel in the Office of Sales Practices.

Chairman Tarbert Announces CFTC Executive Leadership Appointments

U.S. Commodity Futures Trading Commission Chairman Heath P. Tarbert announced six appointments to key executive leadership positions at the CFTC.

Read July newsletter here

Talking Points – July 2019

Talking Points

Who We Are

STA is comprised of 24 affiliate organizations covering the entire US and Canada. The STA national board of governors is comprised of past presidents and industry specific leaders. Our membership represents INDIVIDUALS from varying business models – buy-side, sell-side, hedge funds, exchange traders and market makers- dealing in equity and derivative trading.

Consolidated Audit Trail – Recent Developments

*There have been a number of positive developments since the SRO’s decision to terminate the contract with Thesys’ CAT.

SEC no-action letter under the Investment Advisers Act of 1940 on MiFID II

*STA believes that a meaningful number of market participants anticipate the Commission granting an extension and/or expansion on the existing “no-action” relief. A decision to allow the relief to expire in July 2020 risks to be highly disruptive if firms are not provided adequate time to adjust to the regulatory regime.

*Expiration would have a particular impact on those broker-dealers who may decide to register their research departments as investment advisers to accommodate cash payments. *Additionally, we believe that the demands on SEC resources to process an initial influx of RIA registrations and to facilitate ongoing audit and supervision reporting would be meaningful.

March 8th Chairman Clayton & Brett Redfearn, Director T&M Fordham Presentation

Thinly Traded Securities – UTP

*It remains STA’s view that shareholders in small to mid-size securities which lack a robust secondary market benefit from the presence of market makers and block traders who can, among other things, provide enhanced liquidity to increase the depth of the market. While the factors in enhanced liquidity provision are numerous, there are certain core ones which could be improved through regulatory actions: quote quality; volatility; and reduction in costs.

*While, STA understands and appreciates that the goal of suspending UTP is to enable “innovative market structure solutions” we still have concerns regarding a venture or thinly traded exchange regime which allows for the suspension of UTP as part of its construct.

STA letter to SEC on proliferation of strikes in option market place

*In a April 5, 2019 letter to the SEC, STA relayed its view that the proliferation of series of options for quoting and trading has overly complicated the options markets and necessitated excessive (and thus inefficient) consummations of technology.

*We noted the Options Listing Procedures Plan (“OLPP”), a national market system plan which defines procedures for introducing new options series into the marketplace is either silent or requires additional guidance in areas instrumental to its overall effectiveness.

PDF version here

Talking Points – June 2019

Talking Points

Who We Are
STA is comprised of 24 affiliate organizations covering the entire US and Canada. The STA national board of governors is comprised of past presidents and industry specific leaders. Our membership represents INDIVIDUALS from varying business models – buy-side, sell-side, hedge funds, exchange traders and market makers- dealing in equity and derivative trading.

Issues
Regulatory Capital Rule: New Standardized Approach for Calculating the Exposure Amount of Derivative Contracts:
*STA believes that Basel III Standardized Risk Weighted Assets, “RWA” calculations on capital requirements are having an unnecessary & detrimental impact on market maker liquidity. We are supportive of a new approach for calculating the exposure amount for derivative contracts.

SEC Rule 606, aka, “Order Handling Disclosure Rule”
*As with any large scale industry project, regulatory guidance prior to implementation is often needed. As the Oct 1, 2019 compliance date for data collection approaches, the industry seeks SEC guidance on a range of areas, including but not limited to options calculations.
*STA believes that any guidance – even that which is simplistic in nature – at this stage will not allow segments of the industry to meet the Oct 1st deadline. STA therefore believes it is reasonable to request that should the SEC maintain the Oct 1st deadline it consider issuing “no-action” letters.

STA letter to SEC on proliferation of strikes in options markets
*In a April 5, 2019 letter to the SEC, STA relayed its view that the proliferation of series of options for quoting and trading has overly complicated the options markets and necessitated excessive (and thus inefficient) consummations of technology.
*We noted the Options Listing Procedures Plan (“OLPP”), a national market system plan which defines procedures for introducing new options series into the marketplace, is either silent or requires additional guidance in areas instrumental to its overall effectiveness.
*We requested the SEC “expressly authorize and direct the exchanges to participate in a working group to discuss and determine if the strike listing process should be improved and if so, what recommendations should be considered.”
*STA expects to file a supplemental letter with specific recommendations on changes to the OLPP which would improve its functionality and formalize certain core actions, such as regular meetings among the administrators and a means for industry participants to provide input.

Consolidated Audit Trail – Reporting Issues Specific to Options.
*Specific areas where guidance is requested include:
• Option Market Maker quote submission to the CAT will be performed by the exchanges. What happens if an exchange fails to submit the MM quotes?
• What are the reporting obligations and exemptions in Open Outcry Markets?

PDF version here

Comment Letter: Options Listing Procedures Plan

Comment Letters

The Security Traders Association (“STA”), feels it imperative to relay its view that the proliferation of series of options for quoting and trading (“strikes”, or “strike prices”) has overly complicated the options markets and necessitated excessive (and thus inefficient) consummations of technology. If left unabated, this condition may degrade market quality as measured by spreads; liquidity – both displayed and total available per strike. STA writes to both inform you of its concern and to request that the Securities and Exchange Commission, (“SEC”, or “Commission”) direct the exchanges to create a working group to propose unified strike listing rules that would provide efficiencies that would foster market growth; better ensure investor protections; and ultimately improve the liquidity of the market. The listed options markets serve an important role for a broad base of investor types and the STA’s concern, although focused on strikes, is not exclusive to the listed options markets. As the Commission is well aware, the listed options and equity markets are highly interconnected and factors impacting one of these markets necessarily impacts the other.

Read full letter here

Talking Points – August 2018

Talking Points

Talking Points – August 22, 2018

 

Who We Are

STA is comprised of 24 affiliate organizations covering the entire US and Canada. The STA national board of governors is comprised of past presidents and industry specific leaders. Our membership represents INDIVIDUALS from varying business models – buy-side, sell-side, hedge funds, exchange traders and market makers- dealing in equity and derivative trading.

STA Issues:

*Consolidated Audit Trail, (“CAT”): Industry Reliance on Vendors; Testing Timelines; Proposed Regulatory Conformance Period and FINRA autonomy on decisions affecting OTC securities.

*Access Fee Pilot: Treatment of ETFs; Coordination with the Canadian Securities Administrators

*Exchange and Industry Working Group on Listed Options

*Tick Size Pilot Assessment Report

 

Specific Comments:

Consolidated Audit Trail, (“CAT”):

Industry Reliance on Vendors; Testing Timelines & Proposed Regulatory Conformance Period.

*It is reasonable to expect that a majority of firms will rely on third party vendors for their data capture and reporting obligations under CAT.

*Data capture falls into broad categories: expansion of existing data capture and new data capture. The former is less complex but both require vendors to have all the data requirements and formats in place prior to any work/testing being done by firms they service.

*As it pertains to testing for CAT, this two-step work flow of; vendors testing followed by testing with firms is a sequential and not parallel process. Firms cannot begin work on delivering data to their vendors until they have received the specifications from them.

*STA is supportive of the remarks and recommendations made by the Financial Information Forum in their letter to the Commission, dated August 20, 2018, in particular,

“…FIF supports the proposed Regulatory Conformance Period, which should allow Members the necessary 6-month test period to test their systems, work to reduce reporting errors and perform additional data validation checks prior to regulatory scrutiny while meeting the Industry Member CAT Reporting implementation dates.”

FINRA autonomy on decisions effecting OTC securities and CAT

*CAT Requirements for OTC Securities are currently driven by the NMS plan which is primarily dominated by exchange SROs.  OTC Securities trading activities historically have been (and for the foreseeable future) will continue to be primarily overseen and monitored by FINRA and not by the SROs of exchanges.

*It is clear that the rules applicable to the trading OTC Securities are unlike the rules associated with trading NMS securities.  It is therefore likely that there will be certain surveillance requirements for NMS securities that are not requirements for OTC Securities and visa-versa.

*FINRA is in the best position to make the determination as to the oversight requirements for OTC securities and the corresponding CAT reporting obligations.  Under current CAT governance FINRA’s interest for OTC securities surveillance may have to compete with the interests of the SRO exchanges.

*We believe that FINRA should be able to do this autonomously through their rule promulgation process rather than through debates with the NMS plan participants.

Access Fee Pilot

Exchange Traded Funds and Products (“ETPs”)

*ETPs are unique investment vehicles which offer investors exposure to the performance of indices or desired exposures. While the equity market structure generally works well for ETPs, unique characteristics of ETPs merit consideration in equity trading rules.

*As it pertains to the Access Fee Pilot, industry feedback which expresses concern on competitive dynamics of ETPs which offer similar exposures offers recommendations which fall into two broad categories:

  • ETPs should not be included in the Pilot
  • ETPs should only be included if an elegant solution to the competitive dynamics of ETPs which offer similar exposure can be devised.

*STA believes evidence exists that when liquidity provision is encumbered, ETPs become less efficient, therefore STA believes that special consideration, perhaps even exemptions, be considered for them.

Canadian Securities Administrators (“CSA”) Initiative to Study Marketplace Rebates

*In a letter to Chair White, dated November 13, 2014, Canadian STA, (“CSTA”) brings to the attention of the Commission the opportunity to conduct a cross border study of the effect of market place rebates on market quality in dually-listed securities.

*Many respondents to the CSA’s proposal expressed concerns that without U.S. involvement, a pilot would lead to dramatic differences in the trading economics on inter-listed stocks between Canadian and U.S. markets. For this and other reasons, the CSA did not move forward with its proposed pilot study.

*STA recommends that the Commission approach the Canadian Securities Administrator to determine if an opportunity exists to coordinate efforts on an access fee pilot.

 

Exchange and Industry Group letter requesting committee on the options markets

*In a letter to Mr. Brett Redfearn, Director, Division of Trading & Markets, SEC, dated June 4, 2018, Cboe, SIFMA and STA requested the formation of a working group with the purpose of making recommendations towards improving to enhance displayed liquidity in all options classes, including greater size and smaller spreads.

*This working group was formed to address concerns regarding the current state of the U.S. options market structure generally. This working group is comprised of one representative from each the options Exchange parent organizations; SIFMA; Options Clearing Corporation, “OCC” and STA.

*Exchanges must ensure that any collective activity on their part conforms with all applicable laws, in particular with the antitrust laws.

Tick Size Pilot Assessment Report

*Section VIII of the Tick Size Pilot Plan requires the Plan Participants to submit to the Commission and make publicly available a joint assessment of the impact of the Pilot. The Participants submitted the joint assessment to the Commission on Tuesday, July 3, 2018 and a revised version on August 3, 2018. STA and many of its members are only recently aware that this report was made public.

PDF version here

Auction Mechanisms in Listed Options

Comment Letters

Re: File No. SR-NYSE MKT-2016-45 – Proceedings to Determine Whether to Approve or Disapprove a Proposed Rule Change to Modify the NYSE Amex Options Fee Schedule with Respect to Fees, Rebates, and Credits for Transactions in the Customer Best Execution Auction.

Read full comment letter (PDF) >