A Penny for Your (Options) Business

 

A Penny Earned

The price improvement period was the BOX's way of giving its market-makers a way to win business based on merit and providing a better market, not making payments. Like any business, the market-makers and specialists try to make up those costs that may be subsidized by the exchanges but basically come from their pockets in some way; this is often accomplished by posting wider bid/ask spreads. This hurts the customer, often giving back much of the savings that managed to get passed along.

The PIP process basically streamlines the PFOF, making the customer the direct beneficiary. The net effect to the market-maker should be minimal, and the benefit to the customer is measurable. The only loser seems to be the largest of the online brokers, which will lose PFOF receipts and likely have a hard time raising commission fees to replace that revenue.

The exchanges have complained about and have been trying to do away with payment for flow for years, and the PIP process is the only alternative currently being put into practice. It offers a reasonable remedy for finally kicking what had become a bad and costly habit.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to steve.smith@thestreet.com.

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