Changes in Exchanges Mean New Options for Trading Options

When it comes to trading options online, customers clearly want lower commissions, but they also point to another key aspect: trade execution. Listen to Ray Berg, a 39-year-old online options trader from New York City.

"The big thing is execution and spreads," Berg says.

Earlier this year, Berg placed an order online to buy 50 Cisco (CSCO) option contracts. He says 20 contracts of his order got filled at one price and the remaining 30 were filled 3/8 of a point higher.

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Bruce MacAlpine, Fidelity Online Brokerage's senior vice president, says investors' orders often get filled at different prices if part of the order is automatically executed while the rest is filled by hand.

Then there's the fact that some options contracts trade at slightly different prices on different exhanges. This actually resulted from an effort by the Securities and Exchange Commission and Justice Department to create more competition within the options market and to improve prices. Last year they forced a major overhaul on the options industry, requiring exchanges to start listing options products that previously had been listed on only one exchange.

Now, regulators are trying to sort all this out. The SEC is pushing the existing options exchanges to create links that will enable orders to be sent from one exchange to another in search of the best price.

This ability to see the best prices could help make the options market more accessible to individual investors, says MacAlpine. Improving this so-called transparency of the markets, the links and the liquidity should help answer many of the questions that online brokers are getting from confused customers.

For instance, Wade Cooperman, E*Trade's (EGRP) vice president of trading, says customers often call asking about quotes that they see on different exchanges, asking whether their orders have been executed, and if so, at what price. "If there's more linkage it would be a better market for everyone concerned, similar to what you see on the equity side," Cooperman says.

Apparently that's what colleague William Porter, an E*Trade founder, also believes. Now he's the chairman of the International Securities Exchange, the new and only all-electronic options exchange whose presence could help force a final resolution on this issue.

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