By Bill Alpert
A decision is expected Thursday from the U.S. Securities and Exchange Commission on a new exchange that could shake up the options market. It has a bunch of proponents and some big opponents.
The new exchange would bring to options the same "speed bump" entrance ramp that IEX Markets uses in its stock exchange. That speed bump is IEX's way of protecting institutional traders from being outraced by deep-pocketed, computerized rivals.
IEX says its options exchange would attract new market makers and improve options pricing and liquidity. In comments to the SEC, it is supported by a half dozen market makers, many individual traders, and a number of buy-side institutions like Janus Henderson Investors, Ballie Gifford Overseas, and the Teacher Retirement System of Texas.
Arguing against IEX's entry are the two dominant market makers in options: Citadel Securities (the firm launched by billionaire Ken Griffin), and the Dutch-headquartered IMC Financial Markets. Along with retail broker Charles Schwab, they say the new mechanisms proposed by IEX would hurt small investors and drive rival exchanges like Cboe Global Markets and the CME Group to introduce delay machinery of their own.
An options exchange is a more complex place than a stock market, because each underlying stock and exchange-traded fund can have dozens of listed options with different strike prices and expiration dates. There are about 10,000 stocks and ETFs, but 1.5 million listed options. The market makers on an options exchange therefore need to maintain standing quotes to buy or sell all those options. With so much range to cover, nearly all the standing quotes and liquidity on an options exchange come from the market makers like Citadel -- which is the largest market maker in options and may have a technology and speed advantage over other market makers.
When the price of the underlying stocks are moving quickly, the market maker has to quickly reprice dozens or hundreds of options quotes. Before that happens, ultrafast traders can see how stocks are moving and pick off the "stale" options quotes before the market maker changes them. This fast-trade strategy is called latency arbitrage.
In comments supporting IEX's exchange plan, the market makers Maven Securities and Volant trading say that the "technology tax" to keep up with faster rivals exceeds $5 million a year. Volant said it had to abandon market making in options, because "the costs of maintaining latency competitiveness are staggering."
IEX says its protected exchange would lure market makers, and liquidity, back into options.
In opposing comments, Citadel Securities warns that the proposal from IEX would leave investors with unfilled orders and give IEX, its market makers and its shareholders a "heads we win, tails you lose" advantage over other exchanges and trading firms.
That's because the IEX options exchange aims to combine several advantages simultaneously. Along with the speed bump that slows all incoming orders and quotes by 350 millionths of a second, the IEX exchange would have an automatic mechanism that can cancel or reprice market maker quotes when IEX computers see that the underlying stock is moving.
If the IEX quote had been the best-priced options bid or offer among all exchanges, then it would also benefit from an existing industry rule that requires brokers to send any orders to trade with that quote. As it happens, the SEC is also holding a roundtable on Thursday to debate this "quote protection" rule.
The problem, says Citadel, is that when those forced orders arrive at IEX, the exchange might have repriced or canceled the quote on behalf of its market maker -- rendering the original quote a fading phantom.
"This scheme will unquestionably harm investors," says a Citadel Securities comment, "frequently leaving them with either an unfilled order or an order filled at a worse price than advertised."
A similar combination of delays, one-sided repricing, and force order flow was proposed for stocks by the dark pool platform IntellgentCross -- and seems to have been successfully stalled at the SEC by criticism from Citadel and many other firms -- including, as it happens IEX.
But the SEC has allowed delay and repricing mechanisms on the IEX stock exchange, and federal courts backed them up when they were challenged. The IEX stock exchange had about 3.3% of equity share and dollar trading volume this month, according to Cboe figures.
A comment letter by Citadel laments that the SEC has shown "regulatory favoritism to IEX" in the past.
Write to Bill Alpert at william.alpert@barrons.com
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September 17, 2025 16:55 ET (20:55 GMT)
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