In the wake of the
Chicago Board Options Exchange's
announcement last week that it was embarking on a payment-for-order-flow program, the
American Stock Exchange
is reluctantly following suit.
"This is not something we believe in, but we will actively engage in payment for order flow," said Salvatore F. Sodano, Amex chairman and CEO. "We have had a program prepared for quite some time in anticipation of this, knowing that this would come to pass, and we're ready to go."
Sodano said the Amex program will "be competitive with the other program that's out there," referring to the CBOE plan. He said the Amex is not out to outspend the CBOE program, but he said the exchange will be competitive. He said the floor will provide the funds for payment and the exchange "will engage in administration and distribution of those funds."
The CBOE Thursday unveiled its payment-for-order flow program to members. Under the plan, the CBOE will collect a 40-cents-a-contract fee from designated primary market makers and market makers in all equity options.
The CBOE plan came in response to a loss of market share in certain options to other exchanges, where market makers or specialists at those exchanges pay for order flow. The practice of specialists and market makers paying brokerage firms rebates to direct orders to them is a tradition in the equities business but didn't become widespread in the options market until earlier this year.
The practice has become such an intense competitive issue that the exchanges are moving to manage it in whatever way possible.
Critics of the practice argue that it provides incentives against finding the best price for execution and price improvement on orders because the final repository of the order is determined by the payment arrangement.