U.S. options clearer moves to end trade type dominated by Nasdaq
The clearinghouse for all stock options said Thursday it will adopt a policy aimed at abolishing a dividend-linked trading strategy that critics say could destabilize markets if left unchecked.
The change at Chicago-based OCC is likely to hurt market share at Nasdaq OMX Group Inc's biggest options venue, where nearly all of U.S. dividend-linked options trading takes place.
"The new policy will likely result in a significant reduction in dividend plays," OCC said in a statement.
Gary Katz, who runs Nasdaq rival the International Securities Exchange and is a longtime critic of the practice, was more direct, calling the policy "the beginning of the end for dividend trades in the U.S. options industry."
Dividend plays account for about 8 percent of all U.S. options trades, OCC said. They account for as much as a quarter of trading at Nasdaq-owned PHLX, ISE estimates, although official figures from OCC are not available.
The policy change comes after years of lobbying by Deutsche Boerse's ISE and CBOE Holdings Inc , which say the trades make PHLX look busier than it really is and could leave traders on the hook for losses if they go awry.
Nasdaq's PHLX has long countered that dividend trades are safe, and regulators have never barred the practice.
PHLX, formerly known as the Philadelphia Stock Exchange, accounted for more than 20 percent of trading in U.S. options on individual stocks so far in May, more than any other options exchange.
CBOE and ISE have each handled about 17 percent of the 263 million stock-options trades so far this month.
PHLX's market share includes a large number of dividend plays, in which professional traders buy and sell massive blocks of options just before the day when investors are required to hold a stock in order to get the dividend.
Professional traders convert those options to shares and collect dividends, taking advantage of less-savvy investors who fail to convert their options in time.
The change at OCC will require approval from the Securities and Exchange Commission and is unlikely to be put in place for several months, if not more.
Spokesmen from Nasdaq and CBOE did not immediately respond to requests for comment.
(With additional reporting by Doris Frankel in Chicago; Editing by Phil Berlowitz)