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Capital Markets

Equity derivatives: Penny pricing helps boost US equity options trading

The switch to lower minimum price increments that came into effect in the US listed equity options market in February is making the market more efficient, according to a report. Earlier this year, the US options industry switched its minimum price increment from $0.05 (nickels) to $0.01 (pennies) in 13 key option classes under a pilot programme mandated by the SEC. The switch to penny pricing is already having a positive impact for users of equity options, according to Aite Group, a US consultancy firm.

It is too early to draw firm conclusions about the impact of what is termed the "penny pilot", but preliminary findings suggest the programme is lowering the cost of trading, says Aite in its latest report, The equity options landscape: More options than ever! "There has been a compression of the bid-ask spread in penny names (ie, the cost to enter an options position has decreased), the size of the national best bid-offer (NBBO) has declined, volume is increasing (more so in the indices, as preliminary evidence does not suggest significant increases in equity option volume in the penny pilot names), and quote traffic is increasing, as there is some evidence of a decline in payment for order flow as well as some subtle evidence of slight market share shifts between the six exchanges," says Aite.

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