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The rollout of the
Penny-Trading Pilot Program, which will allow options to be quoted and entered in 1-cent increments, was completed when two exchange-traded funds, the
Nasdaq 100 Trust
Russell 2000 iShares
, were added last week. This rounds out the 13-name list that will constitute what is supposed to be a three-month trial period.
But the glitch-free transition and positive feedback pretty much ensure that trading options in pennies is not only here to stay, but will eventually expand to the majority of listings. The impact is already measurable, and traders are quickly taking advantage of the tighter markets.
The average daily trading volume of the equity issues -- which includes,
-- has seen a 9% increase on average since the launch. For the two ETFs, the volume increase has been about 2%, but considering that the QQQQs and IWM had averaged over 100,000 contract a day, this still a substantial increase of some 20,000 contracts.
The increase in volume is probably the result of several factors, but all stem from the tighter bid/ask quoted in the market, many of which have narrowed down to one and two cents for the active strike prices. "A tight market invites trading activity, especially among active professionals for whom every penny counts," says Alan Wickoff, chief strategist at Bal-Wick Capital, a New York based hedge fund.
Indeed, there have always been stocks that traders gravitate to even if they are not among the most "important" in terms market leadership, or even best performers. Throughout the 1990s,
tended to be a trader's stock, and its options often logged more volume than peers such as
, whose technology and business dominated the semiconductor space.
For active option traders, the tighter markets remove some execution risk, such as slippage or trying to leg into a position, and reduces costs. Multileg or spread orders now get scooped up and filled quicker and at better prices.
There is also beginning to be a subtle shift towards away from the
, which is the most popular proxy for trading the broad market, but is not part of the penny pilot, toward the IWM as the vehicle of choice for option traders. Don Kaufman, chief derivatives officer with
, the online brokerage firm, says since the IWM began in pennies, he has basically stopped trading Spyder options. "Why should I pay a nickel or a dime to buy a large amount of out-of-the money options that I need strictly for hedging or margin when I can them for two cents in the IWM?" Kaufman asks rhetorically.
His point is that index products, which have low volatility and are widely used for hedging or complex strategies, enjoy more contracts traded per average transaction size, higher daily volume and greater open interest than most individual listings, so it makes sense to use the lowest cost and most efficient market. Those pennies can quickly add up.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback;
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