That seems to be the message from NASDAQ headquarters, as the exchange announced plans this morning to launch a new market for options. The NYSE launched a limited options program in August, and is planning to extend that program to cover a large number of equities in the near future. NASDAQ expects to launch its equity and index options program in the third quarter of 2007, pending approval by the Securities and Exchange Commission [SEC].
"The options market is on the verge of a transformative change, driven by the SEC's call for quotes in increments of pennies versus nickels," said Chris Concannon, Executive Vice President of The Nasdaq Stock Market, Inc. "The move to decimalization will shift the competitive landscape toward market platforms that are equipped to handle extremely high volume with an equally high level of efficiency."
The SEC told the six major options exchanges to start moving towards penny pricing in January 2007 (options are currently quoted in dimes and nickels). The Nasdaq hopes that its electronic platform – which has been stealing market share from NYSE trading recently – will fit the new penny pricing environment perfectly.
If history is any guide, the decimalization of the industry will drive volumes higher by narrowing spreads and making options more attractive to institutional players. Stocks switched to penny pricing in 2001, and despite much hemming-and-hawing at the time, the move has generally proven beneficial for most participants.
Either way, the options market is already on pace to set another record for volume in 2006. Year-to-date, industry-wide volume is over 42.1 percent over the same period in 2005. The largest options exchange by volume is the Chicago Board Options Exchange, with a 34 percent share, followed by the International Securities Exchange at 29 percent and the Philadelphia Stock Exchange at 14 percent.