The entire NYSE Amex and NYSE Arca Options business teams would like to express our sincere appreciation to all participants at this year’s 29th Annual Options Industry Conference held in Savannah, GA. As this year’s lead exchange, it was once again a great opportunity to get key decision makers from firms, exchanges and vendors together to catch up and talk about hot topics in today’s market. “One of the best things about this industry is that although the competition can be fierce, we all come together once a year to discuss how we can best move the industry forward,” Steve Crutchfield of NYSE Amex Options said. One topic that sparked much conversation at this year’s Conference was “limit up, limit down” rule.
The limit up, limit down rule proposal has option market participants concerned with the potential impact to the option markets. The proposed rule would be designed to prevent trades from occurring outside of specified Price Bands. If the option underlying’s band is touched either at limit up or limit down, a 15 second pause will be instituted. Trades in the underlying at prices “at or better” than last sale may transact during the pause, but these transactions must not move the underlying price further away from the average price. If the underlying does not exit a limit state within 15 seconds, trading will be halted.
Option executives speaking at the Options Industry Conference raised points to be considered regarding the 15 second trading pause. Specifically, there is the potential for options to become an immediate proxy for stock, creating related unfilled demand in the underlying market that could exacerbate the underlying’s price movement. There is also the risk of a disconnection between the price of an option and its theoretical relationship to the price of the underlying.
The option exchanges along with SIFMA (The Securities industry and Financial Markets Association) are in the process of reviewing the rule proposal and formulating new procedures and processes to complement the trading pause. Option executives agreed that a concerted effort will be necessary to ensure the continuation of deep and liquid markets on option exchanges. All parties are encouraged to let their voices and views be heard in this ongoing and crucial endeavor to our industry.