Options might soon be quoted in pennies.
Securities and Exchange Commission
Chairman Christopher Cox sent a letter to the six major U.S. options exchanges asking that they start providing options prices in increments of pennies, rather than the 5- and 10-cent increments that are used now.
"Quoting in penny increments will benefit investors by allowing options quotes and orders to be expressed at better prices, and has the potential to enhance further the already strong competition and innovation that exists in the options markets," Cox said in a statement.
The SEC chairman proposed that a limited number of contracts be used to try out the new pricing regimen starting on Jan. 29, 2007.
In 2001, U.S. stock markets changed from fractional quoting to decimals pricing. At that time, the options exchanges convinced the SEC that their systems could not handle the decimal quoting. Speaking at an industry association conference in late May, SEC commissioner Annette Nazareth said, "A move to quoting in penny increments in options could substantially reduce or eliminate payment for order flow. That is, as dealer profits decline, so too does the amount of money that dealers are willing to pay to attract order flow."
Quoting in penny increments in equities reduced spreads in equity trades, which resulted in a corresponding decrease in dealers paying for order flow, she said.