Bats Options Program, Criticized by Rivals, Gets SEC Approval

Regulators approved a program proposed by Bats Global Markets over the objections of CBOE Holdings Inc. (CBOE) and other exchanges that allows market-makers operating on Bats to give certain brokers better options prices.

The U.S. Securities and Exchange Commission said it will allow Bats Exchange Options Market to introduce a so-called directed-order program. The plan was criticized by the Chicago Board Options Exchange, Nasdaq OMX Group Inc. (NDAQ), NYSE Euronext, International Securities Exchange and BOX Options Exchange. The SEC’s approval order was published today.

Bats first proposed a directed-order program in December. The Lenexa, Kansas-based company withdrew that after exchanges objected and suggested a different version of the plan in March. The program will be run on a six-month pilot basis that ends on Jan. 30, 2012, the SEC said.

Bats will provide “plenty of data for public consumption so people can determine the efficacy of the directed-order program,” said Randy Williams, a Bats spokesman. The exchange will also submit monthly reports about the program to the SEC.

The Bats exchange had 4.1 percent of options volume last month, according to data compiled by Chicago-based OCC, which clears all equity derivatives contracts in the U.S. The largest individual market is the CBOE, with 25.4 percent.

CBOE Holdings, NYSE Euronext (NYX) and Nasdaq OMX each had between 24 percent and 27 percent of total options volume last month, OCC data showed. CBOE Holdings, whose total volume was the industry’s highest, and Nasdaq and NYSE, both of which are in New York, each run two options markets. ISE accounted for 16.3 percent and Boston-based BOX had 2.4 percent. NYSE Euronext plans to merge with Frankfurt-based Deutsche Boerse AG, which owns ISE in New York.


Nasdaq OMX said the Bats proposal is “discriminatory” in a letter to the SEC dated June 24. The program “will make trading standardized options incrementally darker and less transparent by enabling market makers to trade exclusively against orders directed to them without exposing the orders to other market participants,” it told the SEC.

The Bats program allows market makers to send the exchange two prices on options contracts. One would be displayed publicly while the other, assuming the first price is quoting at the national best bid or offer, would improve that price and be hidden.

That second, better price would be available only to brokers directing orders to that market maker. Others couldn’t access it. While no broker would be able to see the hidden orders, evidence such as trades being executed on the exchange at prices that improve the national best bid or offer could tip them that other hidden orders may exist.

Public Quotes

The Bats market maker’s hidden order can trade against a directed order up to the number of contracts the market maker is quoting publicly, Bats told the SEC. If other hidden orders are submitted at prices equal to or better than the market-maker’s non-displayed price, those bids or offers would trade first.

Some options exchanges currently have programs that allow brokers to send orders to specific market makers, who can then receive up to 40 percent of the contracts as long as they’re quoting at the industry’s best price. The rest of the contracts are distributed to other firms quoting at that price.

NYSE Euronext told the SEC on June 17 that a Bats letter to the SEC dated June 2 contained “multiple inaccuracies” and misstatements about how current “preferencing and directed- order mechanisms” function. It said the Bats program “will have a significant and damaging impact on the options industry as a whole, and create a less competitive atmosphere for the investing public.”

To contact the reporter on this story: Nina Mehta in New York at

To contact the editor responsible for this story: Nick Baker at

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