CBOE Opens QQQ Options Trading: Let the Games Begin

Options trading on the popular Nasdaq 100 unit trust (QQQ), whose exclusive residence has been the American Stock Exchange since 1999, has another home today and will add some more dwellings soon.

Today the Chicago Board Options Exchange, the nation's largest options exchange, began trading options on the QQQ, competing directly for orders with the Amex, the second-largest options exchange. The Philadelphia Stock Exchange, Pacific Exchange and electronic International Securities Exchange are seeking to list the QQQ options soon.

The battle for QQQ volume is likely to force specialists and market makers to narrow spreads between the bid and ask prices, which is good for investors, and pay brokerage firms to send orders to their respective exchanges. The Nasdaq 100 unit trust became wildly popular as investors sought a one-stop investment to play the Nasdaq's strength in 1999 and early 2000. Despite the Nasdaq's weakness, the QQQ has stayed a vibrant product, in both its equity and options forms. Specialists and market makers are responsible for maintaining orderly markets.

These competing exchanges have been envious of the Amex's success with the QQQ -- the second-most active option traded among the nation's five options exchanges in 2000. More than 100,000 QQQ contracts trade daily, based on a 21-day average volume, according to Joe Sunderman, an analyst at Schaeffer's Investment Research.

The multiple listing of options on the gilded QQQ echoes the tumult in the options market that began in 1999 with the multiple listing of options on individual stocks. The advent of multiple listing ushered in massive changes for options exchanges, trading firms, brokerage houses and investors.

The questionable side of multiple listing is the proliferation of payment for order flow, a controversial practice in the options market that had not existed before. Payment for order flow is the practice of options specialists and market makers paying brokerage and order routing firms for their orders. It typically prompts concerns that brokerage firms will route orders to the exchange that paid them instead of trying to improve their customers' execution prices.

Citing multiple listing of stock options, and the narrowing of markets that sprouted from that, "I would expect it to happen here as well," says Gary Katz, chief operating officer of the all-electronic International Securities Exchange. He also says payment for order flow, now that options on the QQQ will be multiply listed, "seems like a natural course of events."

The CBOE already trades two option products based on the Nasdaq 100, the Nasdaq 100 and the Mini-NDX Index, although neither approaches the volume that options on the QQQ do. The QQQ options will trade in the MNX trading crowd at the CBOE, and have the same designated primary market maker, Wolverine Trading.

Wolverine saw big order flow on the CBOE this morning as more than 8,300 of the out-of-the-money March 55 calls have changed hands. At midday, it was the most active option QQQ contract trading at either exchange.

Dale Carlson, vice president of corporate affairs at the Pacific Exchange says the P-Coast will begin listing options on the QQQ soon and that "could be as early as next week."

Meanwhile, the Philadelphia Stock Exchange says it has reached a deal with the Nasdaq to list QQQ options. "We reached an agreement with the Nasdaq last Thursday and the contract was executed on Friday," says PHLX Chairman Meyer "Sandy" Frucher, in a statement read by a spokeswoman. "This is consistent with our belief that all option products should be multiply listed."

The ISE's Katz says the exchange is "actively looking to obtain a license for the product." News of the CBOE move was first reported by Dow Jones.

The underlying QQQ trades in more places than the Amex, however, including the PHLX, which also trades options, and the Chicago Stock Exchange.

So far in 2001, average daily volume in the underlying QQQ has totaled around 60 million shares. Susquehanna is the specialist on the underlying QQQ at the Amex. To stave off competition in that area, the exchange is considering paying brokers for order flow, as TheStreet.com reported last week.

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