Penny Pricing Comes to Options Market

Today may not go down as the most revolutionary day in the history of the options industry, but it's an important one in terms of the ongoing technological evolution. This marks the first day of the Penny Trading Pilot Program, which will allow options to be quoted and entered in 1-cent increments.

Options already trade in penny increments, but this is limited to various price-improvement mechanisms offered by the exchanges, which only let market makers trade in pennies and only if it gives a customer order a better execution price. (For more discussion on price improvement, check out this article.) This pilot program, however, will let market quotes be made and disseminated in pennies and, more importantly, allow retail customers to enter orders in penny increments.

This change comes some six years after stocks began trading in pennies, and options are tracking a similar path with the transition from fractions to decimals and ultimately to pennies. While of many of the questions and issues have already been covered by the underlying equity forbearers, options do have some unique obstacles and elements.

While technological and liquidity issues top the list of concerns, the general feeling is that trading in pennies will ultimate improve market efficiency and lower customer costs. ...