Penny Pricing Comes to Options Market

While the major options exchanges and the brokerage firms that service options traders, such as Schwab's (SCHW Quote) CyberTrader, OptionsXpress (OXPS Quote) and ThinkorSwim, which is now owned by Investools (IEDU Quote), all say their systems are ready to handle the increased load, they also acknowledge that they're glad the program has a very controlled rollout.

Trading begins today in just one issue: Whole Foods Market (WFMI Quote). The reason for choosing the upscale supermarket for the launch was mainly because its measurements, such as market capitalization and daily volume in both the underlying stock and its options, give it the profile of the "average" equity option listing.

The penny-trading program's profile and technological demands will increase when Microsoft (MSFT Quote) and General Electric (GE Quote) are added next week.

But the real test will come in the second week of February when another 10 names, including two exchange-traded funds, the Nasdaq 100 Trust (QQQQ Quote) and the Russell 2000 iShares (IWM Quote) will be added. That will complete the 13 names that make up the penny pilot program, which will be on trial for a three-month period.

Liquidity, Transparency and Fragmentation

The experimental program will have some important ramifications and cause some changes in market behavior -- not all which might be for the better.

"There will be tighter market quotes in terms of the bid/offer spread, and while the liquidity will be there, it might not be as visible," says Scott Morris, CEO of the Boston Options Exchange. By not being able to see the true "depth" of the market -- that is, just how many contracts are for bid or sale within a price span of, say, a 10-cent range -- professionals and institutions might be reluctant to enter large market orders because of uncertainty about the price at which it will be filled.