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Market Waiting on SEC Options Payment Study

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July, the SEC announced it would conduct a study on the impact of payment for order flow and internalization on the options market and make public its findings in November.

November, of course, has come and gone as trading firms and brokerages await the study's results.

An SEC spokesman said only that the agency is in the process of completing the study.

Payment for order flow, the practice of options specialists and market markers paying brokerage firms for their orders, has become a volatile issue in the market community. This year, options exchanges have begun payment-for-order-flow programs, levying fees on market makers to pay for orders.

With the advent of multiple listing of options beginning in 1999, competition among market makers for order flow has increased. Also, because of multiple listings, spreads have narrowed, helping to squeeze profits for market makers. To make up the difference, market makers and specialists want more order flow to come their way. And because of that intensified competition for volume, the practice of payment for order flow sprouted and became relatively widespread.

Many in the options industry abhor the practice of payment for order flow because they feel brokerage firms may consider a payment arrangement more heavily than an execution at the best possible price for the customer.

The SEC, in its July announcement, said it is trying to figure out the "nature, scope, and prevalence of these arrangements and their influence on order routing patterns" and "attempt to determine the effect of these practices on quote competition, spreads and execution quality."

Gilead Sciences

(GILD) - Get Free Report

stock was getting hammered Monday after a recent rally.

The prices of the stock's options have been unusually high at times recently, making Gilead worth noting, according to some options market analysts.

Shares of Gilead, a biopharmaceutical company based in Foster City, Calif., were down $7.25, or 8.2%, to $80.75 at midday.

Gilead's stock has had a nice run lately. The stock recently traded as low as $60.94 on Nov. 20.

Despite the downdraft Monday, the stock has had a 33% run up in a matter of a couple weeks from that Nov. 20 low. Gilead has had some good news lately related to its influenza drug Tamiflu, which it co-markets with



On Nov. 20, Gilead and Roche announced they won

Food and Drug Administration

approval to sell the Tamiflu drug to prevent the flu, notably broadening its market. And just in time for the cold and flu season. That approval adds to the 1999 approval for Tamiflu as a treatment for people who have the common winter virus.

And according to news reports out of last week's

Robertson Stephens Medical Conference

, the company expects Tamiflu to obtain FDA approval this month for use in children.

Implied volatility, a key component of an option's price, has been high in Gilead options recently based on anticipation of the FDA process. Implied volatility is an annualized estimate by the market of how much the underlying security can move.

Generally, the implied volatility portion of the option's price rises ahead of a corporate news event, like earnings. Implied volatility doesn't indicate which direction people potentially think the underlying stock will move, only the severity of a potential move. And it looks like people are looking for it to move a lot. The increase in implied volatility isn't earnings-related, considering Gilead reported earnings in late October.

In a note to clients Monday, Larry McMillan of

McMillan Analysis

, noted the high implied volatility of Gilead's options, which he pointed out have appeared on his high implied volatility list a few times lately.

As for the price of Gilead options today, the December 80 options were at 100, while the January 80 options were at 94, according to Paul Foster of

in Chicago. Three months ago implied volatility was at 77 and a month ago it was 84, Foster said.

Trading in the options was scant, with the heaviest trading in the December 75 puts, which rose 3/8 ($37.50) to 3 3/8 ($337.50) on volume of just 10 contracts.

On Wednesday, specialist and market making firm


will begin operations on the

Philadelphia Stock Exchange

with an initial allocation of 14 equity option products, the firm announced today.

Mike Riley, the Letco partner in charge of the firm's East Coast unit, will manage the PHLX specialist operation. Letco also has market-making and specialist operations on the

Chicago Board Options Exchange

, the

American Stock Exchange

and the P-Coast.