Scrambling to meet a Jan. 19 deadline, the four U.S. options exchanges met Wednesday night to finally hash out a plan to link up electronically so that options customers get the best prices for orders.
"That deadline will be met,"
Securities and Exchange Commission
Chairman Arthur Levitt told
this week. "That deadline should have been met five years ago."
The SEC ordered the
American Stock Exchange
Chicago Board Options Exchange
Philadelphia Stock Exchange
last October to come up with a linkage plan by Jan. 19 that would increase competition and give customers the best possible prices.
Industry insiders find Levitt's threats ironic, given that during his tenure as head of the Amex, Levitt led the charge
linking the options markets electronically. As the nation's top securities regulator, however, Levitt and his SEC have come under increasing pressure to revamp both the equity and options market structures. (A spokesman for the SEC had not returned a call by press time regarding the outcome of Wednesday's meeting.)
For Joe and Jane retail investor, electronic linkage of option markets sounds boring, but it will give them a better window onto the action of the trading floors. Is Philadelphia giving the best price for
options, or is Chicago?
The holdup in establishing a linkage system has come from a crucial disagreement among the country's largest options exchanges -- the Amex, the CBOE and the two smallest, the Pacific and the Philly -- about how best to route orders.
Pacific Exchange Chairman Phil DeFeo and Philadelphia Exchange Chairman Sandy Frucher have fought bitterly for what's known as "time and price" priority, which would send each option order to the market that offers the best price the fastest.
"If price-time priority is incorporated into a linkage plan, it will be of benefit to investors and promote vigorous price competition," Frucher wrote in a recent letter to the SEC.
Rival exchanges, like the new electronic
International Securities Exchange
, argue that customers should be allowed to choose where to route their orders.
"Some folks may love Rock Bottom
Airlines. However, I prefer not to have to rent seatbelts; I would also rather fly on planes with jet engines, rather than propellers! Why must I fly Rock Bottom when every other airline is charging the same fare?" wrote ISE Chief Executive David Krell in a letter last year to SEC Chairman Levitt.
Three of Wall Street's most influential firms --
Morgan Stanley Dean Witter
-- are said to have come down in the "price-time" camp along with the Philly and Pacific exchanges, according to at least three industry sources.
And if the exchanges don't come up with something, the SEC may force them to adopt a government-sponsored linkage plan. To date, there has been no electronic linkage that allows the exchanges to send orders from one to another, even though options have exploded in volume.
A record 507 million equity options traded in 1999, compared with 406 million in 1998, according to the
Options Clearing Corp.
, in part, because many options began trading on more than one exchange last September. Of the total in 1999, roughly 92% of options trades were in multiply listed issues, according to the OCC.
Among the big names trading this morning, heavy
activity continued Thursday ahead of earnings due after the close of trading.
On Wednesday, the January 90 calls were among the most active options as the stock made new highs and investors sought those options to benefit from any continued strength. Often, investors will buy calls ahead of good earnings to speculate on movement in the underlying stock price.
Generally, that type of stock move accompanied by "heavy call trading usually bodes well for an earnings announcement," wrote Larry McMillan of
in his morning research note. McMillan added, however, that he wasn't satisfied with Intel's stock volume. "We're just going to watch it, rather than buy it."
By Thursday, the January 90 calls had drifted down to around 4 ($400) from 4 3/4 ($475) at midday Wednesday, and the January 90 puts were lately equally as active, with more than 2,400 contracts trading at an average price of 3 7/8 ($387.50) on three different exchanges. Intel stock was down 13/16 to 90 7/16.