Penny Pricing Comes to Options Market

Peter Bottini, executive vice president of trading at OptionsXpress, agrees, adding, "There may be an increase in liquidity, but without the transparency to see, that may make it difficult to take advantage of tighter markets."

One solution might be to add something similar to Level II quotes, which show several layers of orders at ascending and descending prices. But that adds another technological strain. In addition, traders may not be willing to let their resting limit orders be shown to the public.

The Boston Options Exchange hopes to encourage tighter market quotes and to prevent the fragmentation of too little depth spread across too many price points by reducing the transaction fees it charges market makers to execute trades in penny increments.

On the other hand, both Bottini and Morris think tighter quotes created by penny trading will allow retail customers who trade fewer than 20 contracts to enter market orders -- that is, without a firm price limit -- more frequently and comfortably.

"This will be the big behavioral shift for retail customers who have been taught and conditioned to use limit orders when trading options so as not to be burned by wide price spreads," says Bottini. "It will now be safe and, in many cases, smarter to use market orders."