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SEC Roundtable on Options Market Structure – 4.16.26

June 2, 2026 Uncategorized

SECURITIES & EXCHANGE COMMISSION  

 ROUNDTABLE ON OPTIONS MARKET STRUCTURE 

For questions on the note below, please contact the Delta Strategy Group team. 

On April 16, the Securities and Exchange Commission (SEC) held a roundtable composed of three panels on options market structure.  The agenda and panelists can be found here. 

Below is a summary of the roundtable prepared by Delta Strategy Group, which includes several high-level takeaways and overviews of each panel. 

Key Takeaways

  • Chairman Atkins remarked on how the U.S. options markets have grown significantly in their breadth and depth, with more exchanges trading more products and generating a significant amount of message traffic, alongside a broad cohort of retail investors participating with greater ease and at greater scale.  He framed the roundtable as an opportunity to examine what is working, identify where closer attention is warranted, and consider the opportunities and challenges ahead, highlighting the role of industry-led engagement.  He stated that the roundtable is not a prelude to options rulemakings in the immediate term.  More here. 
  • Commissioner Peirce raised factors such as exchange proliferation, fragmentation, added cost and complexity, reduction in clearing firms, concentration among market makers, proliferation of strikes, and calls for more transparency with respect to execution data, alongside opportunities and challenges from 24/7 trading and tokenization.  She highlighted industry-led solutions, with the Commission playing a supporting role, and cited recent changes to the methodology of the Options Regulatory Fee (ORF) as an example.  More here. 
  • Commissioner Uyeda outlined how issues long debated in equities, including fragmentation, concentration, data asymmetries, and uneven execution quality, exist to an even greater degree in options.  He raised questions on execution quality of retail marketable orders, institutional market maker entitlements, data asymmetries, and competitive barriers, and emphasized modernizing regulations to strengthen execution quality and competition.  More here. 
  • Division of Trading and Markets Director Selway referenced how, with increasing retail participation in options, there are more exchanges, greater competition, and more investor choice, alongside increased strain from expansion in option classes and series, quote traffic, and technological and capital demands.  He noted that liquidity remains concentrated, wider spreads persist in less liquid symbols, and consolidators control a majority of retail flow, as he reiterated the opportunity to re-examine market structure to support transparency, fairness, and competition.  More here. 
  • Panel I focused on growth, competition, cost, and complexity across options markets, with expansion across volume, venues, strikes, and messaging increasing quote traffic and cost to the system, including operational burdens for market makers.  Comments highlighted how exchange and strike proliferation increase the number of quotes market makers must manage, while supporting retail participation, price improvement, and access to products.  Panelists raised differing views on market structure, with discussions focusing on how specialist assignments, guaranteed allocations, auctions, routing practices, and trading floors impact competition, liquidity, execution quality, and market maker participation.  Discussions highlighted that options markets are quote-driven and primarily exchange-traded.  Positions varied on how to evaluate execution quality disclosure, the role of trading floors for multi-listed options, and capital requirements to be more risk-based, alongside continued collaboration across the industry to address future developments and evolving market structure topics.  
  • Panel II outlined the customer experience in options markets, with discussion highlighting strong growth in retail participation, improved outcomes, and broad access to products.  Comments framed how the market has supported price improvement, free commission trading, and customer engagement.  Panelists raised that while targeted improvements may be beneficial, fundamental market structure changes are not necessary, with a focus on preserving retail participation, transparency, operational resilience, and strike proliferation.  There were varying views on execution quality, best execution (BestEx), transparency, and market structure, including payment for order flow (PFOF), routing practices, investor education, and access to tools and data, and how these impact customer outcomes.  Positions ranged from maintaining the current model with improvements in disclosure and education to evaluating BestEx standards, execution costs, AI-driven tools, zero DTE trading, and expanded or 24/7 trading.   
  • Panel III examined the challenges and opportunities that come with the growth of listed options, with continued expansion across participation, products, and volume placing greater demands on execution, clearing, capital, and risk management to maintain resilience and stability.  Comments highlighted how growth has increased fragmentation, systemic risk, and operational complexity, with activity across exchanges and products requiring coordination across infrastructure, clearing capacity, and market operations, while maintaining transparency, investor protection, and stability.  Panelists discussed how market structure, regulation, and infrastructure should keep pace with growth, including execution, clearing, capital, and risk frameworks, alongside innovation in products and extended trading hours, with emphasis on coordination, sequencing, and a measured and deliberate approach to support continued market development. 

DATA PRESENTATION

Jesse Brady and Ethan Coombs from the SEC’s Division of Trading and Markets Office of Analytics and Research presented data on trends observed in the options market in recent years, based on their paper, available here, released last week.  Their presentation highlighted rapid expansion in the options market, with increases in underliers, option securities, exchanges, contracts traded, quoting and trading activity, and message traffic, alongside OPRA message volumes surging significantly and increasing more than equity messages.  It outlined how, at the same time, liquidity and trading became more concentrated in top symbols and products, exchange fragmentation intensified with more venues holding market share, market maker participation declined and then stabilized without a material increase despite rapid expansion, and individual customer participation increased significantly, including a rise in short-dated strategies and trading on expiration date representing a substantial share of total volume, while PFOF grew significantly, became a dominant driver in retail options execution, and remained highly concentrated among a small number of providers. 

PANEL I: FACILITATING COMPETITION IN A QUOTE-DRIVEN MARKET 

Moderators

  • Director Jamie Selway and Assistant Director Arun Manoharan, SEC Division of Trading and Markets 

Panelists

  • Ivan Brown, IEX 
  • Steve Crutchfield, Formerly of Chicago Trading Company 
  • Nathan Duckles, Jane Street 
  • John Fischer, Citadel Securities 
  • John Kinahan, Group One Trading 
  • Katie Kolchin, Securities Industry and Financial Markets Association 
  • Stewart Mayhew, Cornerstone Research 
  • Andrew Schultz, Susquehanna  
  • Steve Sosnick, Interactive Brokers 
  • Kevin Tyrrell, NYSE 

PANEL I DISCUSSION

Options Market Structure: Growth, Competition, Cost, and Complexity Across Venues

  • Brown: Given the growth in options trading, market structure should support competition, strong displayed markets, and positive outcomes for investors.   
  • Fischer: Exchange proliferation has introduced cost and complexity, with small venues introducing significant costs to the industry.  Recommendations include evaluating execution quality disclosure, the role of trading floors, and modernizing capital requirements to be more risk based.   
  • Kolchin: Retail participation is high, and while the number of exchanges is similar to equities, options exchanges generally have higher market share.  Strike proliferation and exchange growth increase the number of quotes market makers must manage, adding cost to the system.  Growth has produced positive outcomes for retail but also raises questions about cost and complexity. 
  • Tyrrell: The options industry is fundamentally strong and has supported volume growth.  Continued collaboration across the industry will be important to address future developments and evolving market structure topics. 

Competition Between Specialists and Market Makers 

  • Duckles: Incentives like guaranteed allocations and noncompetitive specialist processes create barriers for new entrants relative to incumbents.  A lower-touch approach could foster innovation by allowing exchanges to adopt models where any market maker meeting the same obligations has access to the same rights as a specialist. 
  • Tyrrell: From an exchange perspective, this is key to competition, requiring a balance of incentives without becoming stagnant.  The process for selecting specialists has been updated with competitive elements and checks to ensure primary and secondary specialists provide service, volume, and support competitive positioning.  With eighteen exchanges, there is sufficient capacity to test new incentive programs, and the model should evolve with the competitive landscape. 
  • Fischer: Specialists are critical and have the most stringent quoting requirements, with eleven of eighteen exchanges having specialist assignments, largely on pro rata venues, and fourteen market makers serving as specialists due to higher obligations.  Specialists must maintain increased quoting presence, support openings, and quote broader ranges of strikes, including Long-Term Equity Anticipation Securities (LEAPS) and adjusted contracts, and without them many options would have no screens or very wide screens, increasing costs for investors.  In return, specialists receive benefits such as forty percent participation and 100 percent allocation of orders five lots and less, but only when at the NBBO, with benefits applying after non-directed orders and only on specialist venues.  
  • Kinahan: The market functions better when there are fewer guarantees on different segments of order flow, while acknowledging increased burdens for compliance purposes and different levels of service provided by different market participants.  If those market maker guarantees did not exist, markets would be different, likely tighter or deeper, though the outcome is not immediately predictable, as routing behavior and the price of order flow would change.   
  • Crutchfield: Competitive dynamics on the liquidity providing side have been skewed through inaction, as specialists and the five-lot rule originated in illiquid classes where incentives were needed, but no longer make sense in highly liquid names with intense competition.  Specialist appointments in those names provide no marginal market quality while awarding large benefits, stifling competition, with obligations not material and electronic market making able to meet requirements.  Appointments are not reallocated and exchanges have incentives to assign them to firms with order flow, as reallocating risks losing flow, and they cannot fix this alone because removing the five-lot rule would shift flow to competitors.  A regulatory nudge would be valuable, with the five-lot entitlement limited to the most illiquid classes, subject to annual review using metrics beyond volume, and mandatory reallocation to prevent appointments from being locked up. 
  • Tyrrell: The market may not need help on Apple, Tesla, and Nvidia, but NYSE Amex might versus CBOE and NASDAQ. This is an incentive, one of many across exchanges and asset classes, and if not handled right it could limit competition on an exchange.   
  • Brown: Competition among specialists and market makers is shaped by market structure and participant behavior, and guaranteed allocations reduce order flow available to others but reward obligations, capital commitment, service, and being at the NBBO.  The core question is calibration, balancing incentives to further quote competition while rewarding that service.   The forty percent guarantee is relatively benign, with sixty percent available to others, while the small order guarantee is more limiting and can incentivize directing flow to a venue. In a multi-venue ecosystem, participants access multiple guarantees and internalization, so the cumulative effect is that more order flow is less broadly available for competition.  This impacts incentives, as lower probability of interaction and greater likelihood of interacting with toxic order flow leads to less aggressive quoting and less capital commitment.  Specialists are a scarce asset, and any changes must be holistic and coordinated, as altering one guarantee would likely redistribute activity rather than improve competition. 
  • Schultz: The five-lot and allocation apply to a small portion of the market, as a third of exchanges are price time and roughly two-thirds of volume is spreads, auctions, and other trading, not the marketplace where the forty percent is involved.  On obligations, quote traffic and the multiplier of quotes is an area to examine what those obligations mean in terms of costs and revenues.  Market makers only have revenue when there is a trade, and if a quote is wide and not on the market, there is no chance of trading, so where quotes are versus where they are required is an area where exchanges could modernize their approach. 
  • Fischer: The view that liquid issues do not need specialists is not true across all series, as thousands of series are listed in liquid underliers and many do not have liquidity, and without a specialist they would not have liquidity.  Market makers can participate in new issues and solicit for new listed underliers, and if specialists were that valuable and obligations not as significant, more market makers would participate.  Most price time venues do not have specialist assignments, and a market maker can price one tick inside the specialist and participate.  Market makers are often at a fee advantage, as price time venues offer higher rebates, while specialists are typically on pro rata venues, paying fees and for order flow. 
  • Crutchfield: It is appropriate in less liquid issues to have heightened quoting obligations with rewards, but the most liquid options products do not need a five-lot allocation to a single party as an incentive.  In price time markets, or when a specialist is not on the NBBO, the allocation does not apply.  However, the value of five lots is extremely high, as these are least toxic non-professional orders that occur in large numbers and are attractive to trade.  Arguments that it does not matter are inaccurate, as one to five lot orders are routed to firms with a specialist on the quote, and because of that appointment, that firm trades the entire order in large volume. 

Directed Market Makers and Internalization: Broker Routing Practices 

  • Sosnick: Direct routing is used only when it achieves the best outcome, measured by price improvement, markouts, or markdowns.  PFOF can be used, but orders are exposed to multiple counterparties and not prioritized to a single firm, as it is not necessarily the optimal approach. 
  • Mayhew: Evidence from NASDAQ and other markets shows how preferencing affects incentives to quote aggressively and attract order flow.  The question is how much preferencing or directed order flow weakens that incentive, and research suggests some effect, but not a major concern. 

Order-Driven Options Markets: Effectiveness of Maker-Taker and Priority Incentives 

  • Schultz: Quote-driven markets have seen growth in the number of quotes, and market makers cannot control product concentration or how they trade.  Aggregators handle exchange facing fees, so the distinction between lifting and posting may not be apparent to customers.  About half of single order volume is marketable, with customers receiving executions inside the posted screens on the other half.  Mechanisms like flash and complex auctions allow access to liquidity without focusing on taking or posting, and platforms may post briefly and then cross the spread if needed.   
  • Duckles: Customer nonmarket orders are best viewed as demand for liquidity seeking a better price rather than deepening the market.  There is no fee structure that will incentivize meaningful customer liquidity across millions of options series, so posting is primarily an attempt to secure better execution on a wider market rather than add liquidity. 
  • Mayhew: By the number of quotes, options markets are quote-driven, but data shows a large number of non-marketable limit orders relative to marketable orders, and the median trading volume across series is zero with many series having no customer limit orders.  When customers trade, they often submit non-marketable limit orders inside the spread, so the price determining the trade is the order, not the quote, meaning options markets are also order-driven.  Policy should account for both competition to quote narrower spreads and competition to fill non-marketable limit orders inside the spread, including through auction mechanisms that offer price improvement. 
  • Sosnick: In wider markets, it becomes order-driven as someone establishes what they want to pay or offer. In more liquid markets, quasi market makers post tight two-sided prices that may be order-driven or quote-driven and mimic that behavior, so the distinction becomes blurry. 

Competition in Retail Price Improvement Auctions: Fee Differentials 

  • Sosnick: Auctions are used to foster competition and get the best price for customers. As spreads widen, auctions are one of the best ways to achieve BestEx and gain price improvement.  If spreads were always a penny, auctions would not be needed, but they are not, so they are used heavily. 
  • Kinahan: Fees matter to an auction responder, and differences between the solicited side and an auction responder are significant in a competitive industry.  Making it cheaper for the responder could make auctions more competitive, though it would introduce complications and change auction dynamics. 
  • Brown: Auctions are a tool to provide customers with price improvement beyond the displayed market, with greater granularity and broadcast to participants.  In a typical retail auction, a customer is paired with a market maker, with fees and rebates that can result in a credit, and additional rebates when an order is price improved.  Differences between initiating participants and those providing price improvement can be significant and affect the ability to compete at each price point, creating a structural impediment.  These differences could be rationalized, including features like auto match, but any changes must be coordinated and holistic, as changes at one exchange could shift flow to another, and the use of auctions and where they are appropriate should be considered alongside these factors. 
  • Crutchfield: Auctions are appropriate in options markets where there is less natural confluence of buyers and sellers and an opportunity for price improvement that benefits customers.  There is an opportunity to improve design, particularly around competitive dynamics and fee disparity.  The design favors the party that initiated the order flow, and incentives could be improved.  Auto match allows the initiator to update to match responses, diminishing incentives to show the best price initially.  A structure that incentivizes participants to show their best price would be preferable, but it is difficult for exchanges to move away from this because it attracts routed flow.  A review of auction incentives, including pricing and allocation advantages, is warranted, with a focus on auto match as a distortive feature. 
  • Schultz: The timing in auto match includes the aggregator or committed party starting the auction before it trades on the exchange, creating a discrepancy in fast moving products.  Auctions are almost guaranteed to trade, and auto match and the timing offset reflect the aggregator adding liquidity and price improvement. 
  • Fischer: The length of the auction period is relevant, as the initiating market maker is at a disadvantage by committing capital in advance.  Auto match allows the initiating market maker to respond as markets move and others participate.  Price improvement auctions are the primary mechanism for retail orders and are important, but it is appropriate to evaluate whether their use has changed.  Fee considerations should include the payment by the initiating market maker to take on risk and bring in the retail order, which offsets fee differentials. 
  • Tyrrell: On fees, auto match can be difficult for an exchange to change and gain share, and fee structure reflects where the market is now rather than an SEC rule.  Schultz: The timer could be reduced and could be reduced further to ten milliseconds. 
  • Sosnick: There is a need for improvement, including reducing the timer, but changes should not harm customers.  The data shows significant price improvement, and any changes should ensure that price improvement quality does not diminish as rulemaking evolves. 

Trading Floor as an Execution Venue: Physical Trading Floors for Multi-Listed Options 

  • Tyrrell: The floor is handling larger, more complicated orders where electronic execution either is not ideal or may not even be possible, including multi leg and very large orders, not simple outright trades.  Having that extra set of hands on the order at the point of execution provides an extra layer of risk management and allows the folks on the floor to focus on getting the last bit of the execution done, while upstairs sales traders focus on working with clients.  Handling these orders in electronic systems can introduce risk, fees, or require algorithms, and in practice many people are using both the floor and electronics.  Not all orders that come to the floor are matched, some are partially matched and some are one-sided and rely on floor market makers to provide liquidity.  Electronic mechanisms and auctions are trying to replicate the interactions or benefits of the floor, with modest uptake.  The floor has not grown at the same pace as overall options volume and is losing share, but it has not disappeared, and changes over time may depend on electronic tools, with the market deciding that outcome. 
  • Schultz: Susquehanna has supported requiring trades to be exposed electronically, as electronic exposure where any interested participant can respond results in better and fairer executions for the end customer and fair access.  Floors are attempting to recreate electronic auctions but less efficiently.  Price discovery for block-sized liquidity is overwhelmingly achieved upstairs before a block is presented, and the floor is almost never price improving an exposed block, but seeking to participate at the proposed cross price.  A modified approach could include a minimum size for floor trades, such as requiring trades under 500 to be exposed electronically to ensure BestEx for most retail trading while allowing floors to handle larger, more complex trades.  A clean cross rule would block providing better prices. 
  • Kinahan: The first question is what replaces the floors.  Creating an auction mechanism to expose this type of order flow could work if structured carefully.  If the alternative is to close the floors and allow clean crosses or expand QCC, the industry should be wary.  Even with the role of brokers, solicited market makers, and facilitators, the marketplace needs a check, and the floor provides that check. 
  • Fischer: With a large institutional market maker presence on trading floors, it is unclear that options floors continue to provide the benefit they once did.  When floors closed during COVID, there was an increase in price improvement versus on-floor price improvement.  It would be beneficial to study subsegments of equivalent activity executed electronically in auctions versus on the floor.  There are concerns around internalization of small retail orders on the floor, orders being shopped around to minimize participation, and exchange policies that limit market maker participation.  There is support for mechanisms to migrate activity away from floors into electronic mechanisms, potentially through a cap or threshold such as 500 contracts.  A clean cross rule would be problematic, and the impact to displayed price discovery should be evaluated. 
  • Crutchfield: There may be a case in single-list products where liquidity is concentrated on a single floor, such as SPX, where bringing an order to that place can provide pricing benefit.  For multi-list products, floors reflect a regulatory gap, where announcements on a floor are treated as exposure and liquidity seeking orders do not ordinarily go there.  Most orders that go to a floor have already been exposed upstairs, and if they did not find the other side it is not because the floor provides additional value.  Electronic markets are efficient, and orders go to floors when someone is looking to internalize a cross and find low-friction crossing opportunities.  Market makers must have a presence on the floors to participate, while exchanges have incentives to make floors quicker and less likely for participation to interfere with crosses.  Price discovery does not occur on floors in multi-list products, and for most orders, mandatory electronic exposure should be the goal.  A recommendation is a moratorium on approving additional trading floors, as further expansion would be to the detriment of market structure. 

Trade Through Restrictions for Options: Options Governed by NMS Plan Versus Reg NMS Trade Through Provision 

  • Kolchin: Options differ from equities in that there is no off-exchange trading, and if the intent of the trade through rule is to ensure investors get a good experience, retail is being served very well.  On the institutional side, there are mechanisms to execute large orders, and alternatives would develop if needed.  Removing trade through restrictions does not guarantee firms would disconnect from exchanges or change costs.  The key questions are what problem is being solved, what results are expected, how those results would be measured, and how to adjust if outcomes are negative.  There are also exchanges with small market share that collect market data and connectivity fees from day one, raising the question of how to address that. 
  • Mayhew: Non-marketable limit orders are a crucial way customers obtain better prices relative to the spread, supported by the display rule and trade through protection under the options linkage plan.  A goal of NMS is to allow public orders to interact directly without dealer intermediation, and while fragmentation limits this in options, trade through protection supports that goal by ensuring limit orders are displayed and protected.  Exchanges have rules and routing logic to reroute orders to better prices, and the system is operating seamlessly. 
  • Tyrrell: On the cost side, changing the approach to protected quotes would not likely change much, exchanges would not go away and costs would not be reduced.  The issue is future growth in costs, as there is an incentive to keep adding exchanges, and fragmentation is a cost.  The question is whether it is appropriate to have a protected quote and an obligation to connect to a venue on day one, or whether there should be a proving or approval period.  In equities, ATSs have grown before becoming exchanges, and while not a perfect analogy, there may be a need for a threshold or hurdle to obtain a protected quote or the ability to charge for products rather than allowing a new exchange from zero. 
  • Fischer: Exchange proliferation is a major cost to the industry and analysis of venues under a market share threshold shows these costs are substantial.  Changing the trade through rule would not address them because firms are already connected to meet obligations.  Potential solutions include evaluating market share thresholds for SIP revenue and for connectivity and market data costs to curb proliferation, with fixed connectivity costs as a major portion of overall costs. 
  • Duckles: Exchanges having above one percent market share should not be treated as evidence they serve a real purpose.  While ORF reform has reduced some costs of proliferation, the incentive for new exchanges is tied to a more competitive specialist allocation process.  Making that process more competitive and ongoing could reduce that incentive. 
  • Schultz: If exchanges under three or four percent were not considered protected, it would not impact prices customers achieve, as firms evaluate execution quality and liquidity, and whether the 17th, 18th, or 19th exchange is at a given price does not change execution.  There are also significant fixed costs, including connectivity, data center, and cross connects, which have increased as the number of exchanges has grown. 
  • Tyrrell: QCC is a carve out for a particular type of trade, while most orders remain exposed and interact, which benefits the options market.  This is a better situation than equities where many orders are not exposed or broadly available.  Maintaining tools that allow most orders to interact on exchange is positive, but there are concerns if QCC is expanded or if a clean cross order type is introduced. 

Liquidity in Options: Whether a Periodic or One-Sided Auction Could Facilitate Tighter Quotes 

  • Fischer: A key question is what aspects of market structure create excess complexity and cost for market makers, resulting in wider quotes.  Areas to evaluate include capital frameworks that are not sufficiently risk-based, alternative net capital rules and their availability, and allowing model-based risk controls.  Clearing fund allocation and margin methodology should be more risk-based.  Strike proliferation is another issue, with roughly half of options series having zero open interest, many of which have never traded.  Auctions are the main mechanism to provide price improvement to retail investors, but if they result in wider quotes, that is worth evaluating. 
  • Mayhew: Option market makers quote hundreds or thousands of series on the same underlying, with obligations to maintain two-sided quotes across many series, including many that do not trade.  Quotes can be subject to arbitrage if spreads cross with other market makers or are stale when the underlying moves, raising the question of the optimal spread across thousands of series that may never trade given the cost to update model-based systems.  Rather than focusing only on narrower quotes in inactive series, it is important to ensure robust competition when an order arrives, including price improvement through auctions and competition for marketable orders, and to consider how exchange proliferation affects the ability to provide that price improvement. 
  • Schultz: A periodic or one-sided auction would hurt displayed liquidity and prices shown on screens, potentially resulting in wider screens.  Quotes reflect distributed points with correlated risks, and moving to that type of auction would make pricing harder to understand, with cases where an expiration has no bid and no sense of volatility or real risk because there is no trading on those quotes. 
  • Sosnick: There is a disincentive for market makers to quote too tight, and that should not be increased.  With many strikes, including many with no open interest, market makers cannot put their best foot forward on every strike, and increasing strikes increases quote traffic without clear benefit.  Auctions are used to mitigate this, and market access controls prevent trading at too wide of a spread by seeking better prices.  In practice, the midpoint is often treated as fair value, and customers are guided toward that level.  Pricing is both an art and a science, and much of this falls on brokers given the scale and complexity across many series. 
  • Crutchfield: A useful way to think about this is the incentives for a market maker to marginally improve a wide spread in an illiquid product.  Auction mechanisms that allow improvement beyond the quote can disincentivize improving the quote in advance, even while providing better prices to customers, creating a balancing act.  A market maker may choose not to improve the quote and instead respond to the auction, while also facing risk of being picked off by faster price feeds.  There are efforts such as market maker risk protections to reduce that risk.  Allocation is also a factor, as small orders may be routed to exchanges where a specialist is entitled to trade them, even if another market maker improves the quote, affecting incentives to improve quote quality in less liquid products. 
  • Schultz: There is friction in adding strikes intraday when markets move, and while many strikes have no open interest, the environment allows customers to trade when needed.  There is a balance, as reducing strikes too much would limit trading opportunities and increase hedging costs, particularly during large market moves. 
  • Brown: Strike rationalization has been a longstanding topic, but it is difficult for exchanges to coordinate due to antitrust concerns.  A Commission initiative could support a more effective strike regime and rationalization. 

PANEL II: EVALUATING THE CUSTOMER EXPERIENCE 

Moderators

  • Deputy Director Jon Kroeper and Associate Director Eric Juzenas, SEC Division of Trading and Markets 

Panelists

  • Geralyn Endo, MEMX 
  • Ed Hosty, Robinhood Securities 
  • JJ Kinahan, Cboe  
  • Stino Milito, DASH Financial Technologies 
  • Nathaniel Pomeroy, Wolverine Execution Services 
  • Racquel Russell, FINRA 
  • Christopher Schwarz, University of California Irvine  
  • Stephen Sikes, Public.com 

PANEL II DISCUSSION

Evaluating the Customer Experience: Growth, Participation, and Outcomes

  • Endo: Fundamental market structure changes are not necessary. 
  • Hosty: Options trading, including retail participation, has existed safely for decades, with investors using options to hedge, generate income, and manage risk, and increased access has driven record volumes that should be preserved.  The options market is fundamentally different from equities, so changes should be evidence-based, with focus on ORF transparency, strike proliferation with many unused strikes, and operational resilience including data disruptions and error rulings. 
  • Kinahan: The market can use improvement, but changes must be targeted given the interdependence of systems and potential downstream effects.  Schwarz: Research based on placing the same trades across multiple brokers provides insight into execution, including broker routing, wholesaler handling, exchange execution, auction participation, and pricing, offering a data-driven view of retail options market structure. 
  • Sikes: The market has improved retail outcomes, but further improvement should focus on expanding access to asset classes and improving tools and data, including AI for research, portfolio construction, and strategy development. 

Investor Education and Access to Resources

  • Russell: Focus on the threshold stage of retail participation, including the baseline regulatory framework and effective practices.  Firms must follow KYC and FINRA Rule 2360, conducting due diligence on investment objectives, age, income, net worth, employment, and experience to determine appropriate options levels, and provide required disclosures.  Processes may be automated or manual, but should include minimum standards, enhanced requirements for higher levels, and review for red flags to ensure a right-sized and informed experience, with investor education also important given broad participation. 

Hosty: Broker-dealers should understand customers and evaluate suitability, but not in a prescriptive way, allowing flexibility in how firms do so. On education, customers engage across platforms, so firms should meet them where they are and make investing understandable, providing the best information as education evolves, including with AI. 

  • Sikes: Retail investors are increasingly introduced to options through third-party content that may not reflect risk.  AI tools support research, education, and strategy execution, but raise questions about whether outputs are education, screening, or recommendations, and how broker-dealers supervise them. 

Payment for Order Flow: Execution Quality and Retail Customer Experience

  • Schwarz: PFOF provides choice, but cost disclosure should be consistent across commissions and execution costs on pre-trade screens, statements, and confirmations, and there may be a need to strengthen BestEx or clarify that customers are responsible for seeking the best price. 
  • Endo: PFOF differs from equities in that it is transparent, included in exchange fee schedules, and reviewed by the SEC.  It is charged when market makers trade against customer orders, pooled, and allocated based on market maker direction, separate from how a specific order is executed.  
  • Hosty: BestEx obligations apply regardless of PFOF and focus on achieving the best outcome at order entry.  The model relies on intermediaries with their own BestEx obligations and infrastructure, in a competitive environment where execution quality is driven by the value of order flow.   
  • Pomeroy: Consolidators and affiliates deliver price improvement, creating an end-to-end revenue share among customers, broker-dealers, and executing firms.  Competition is based on execution quality, with incentives to improve outcomes, and while affiliates may interact, the obligation to provide execution and price improvement rests with the consolidator. 
  • Sikes: PFOF has led to a no-commission, revenue share model returning rebates to customers for transparency and confidence in BestEx.  Additional disclosure would be beneficial.  
  • Milito: Retail flow is not uniformly desirable, and wholesalers provide liquidity across all conditions within a competitive, quote-driven structure, so changes like moving off exchange could weaken liquidity and price discovery.  Mechanisms such as the DASH ATS solicit responses from liquidity providers and can provide price improvement, additional liquidity, and reduced fees while still interacting with exchanges. 

Zero Day Options: Opportunities, Experiences, and Issues with Zero Day Trading

  • Hosty: The shift toward short-dated contracts, including day of expiry, has been natural as customers use them to manage portfolios and risk in volatile markets and active news cycles.  There are operational concerns and asymmetric risks, creating an opportunity to address them while ensuring infrastructure is prepared, including as markets move toward extended or 24/5 trading, with the goal of supporting continued engagement without creating barriers. 
  • Pomeroy: Short-dated expirations have existed for a long time but expanding them alongside extended trading introduces additional complexity.  Events affecting single-name options are numerous, and managing risk across more expirations and extended hours will require additional resources, staffing, and consideration of assignment and exercise.  Liquidity in pre-open and post-close is likely lower, and market makers will face increased risk during news or volatility, making risk management and customer protection critical. 
  • Schwarz: More products and quoting complexity raise questions about quote quality across strikes and expirations.  Zero DTE creates more churn in retail accounts, as positions must be closed or expire within hours, leading to more transactions and costs.  These short-duration, low-premium products allow customers to trade more contracts, amplifying concerns around disclosure and trading costs. 

Emerging Issues in the Retail and Institutional Customer Space 

  • Russell: Account fraud, including account takeover, is a key focus, with strategies like zero DTE particularly attractive, and firms are building resources such as a fusion center and intrusion reporting, reflecting constant vigilance.  There is also an investor education component with extended hours, as compressed time frames impact opportunities, value, and assignment overnight, and ensuring successful outcomes for investors. 
  • Milito: The current SRO model, with eighteen exchanges plus FINRA and the SEC, creates duplication, inconsistent rule interpretations, and conflicting obligations, with a single order potentially receiving inquiries from multiple regulators, raising questions about for-profit exchanges acting as SROs.  There is also increasing concentration in the clearing base, with two firms handling a large share and capacity becoming a constraint.   
  • Pomeroy: There are concerns about regulatory overreach, particularly with cross-exchange surveillance and recent guidance.  Another area is increasing sophistication in retail order flow, or “Protail,” representing a meaningful share of orders and exceeding the professional customer designation.  While recent adjustments are noted, there are concerns that a small number of sophisticated participants capture price improvement from true retail customers, and there is a need to better segment those actors. 
  • Kinahan: As topics like PFOF and order routing are considered, the SEC should focus on its role in shaping the market, with more clarity around prediction markets, particularly where they are securities.  As the market moves toward 24/7 trading and tokenization, the focus should be on a deliberate path forward rather than ending up without clear direction. 
  • Endo: Moving toward expanded hours makes sense, with a focus on a harmonized solution that considers long-term implications for the entire marketplace.  On strike listings, with the options listing procedure plan approved, the focus is on developing listings and delisting solutions to improve execution quality, overall experience, and alleviate pressure on infrastructure such as capacity and throughput. 
  • Sikes: Organized account takeovers using illiquid options continue, despite being flagged to DOJ, FINRA, and the SEC, raising both market structure issues around strikes and failures to detect and prevent transactions before funds leave the U.S. ecosystem.  On zero DTE, retail investors carry out of the money positions into the close that they cannot support for exercise or assignment, leading to forced closeouts. The gap between trading and exercise and assignment decisions occurs during a highly volatile period, requiring wide liquidation bands and creating significant cost, with a need to condense that timing into a less volatile period. 

PANEL III: OPPORTUNITIES & CHALLENGES OF GROWTH 

Moderators

  • Director Jamie Selway and Assistant Director Richard Holley III, SEC Division of Trading and Markets 

Panelists

  • Andrej Bolkovic, Options Clearing Corporation 
  • Shelly Brown, MIAX  
  • Alicia Crighton, Goldman Sachs 
  • Ellen Greene, IMC Trading 
  • Kevin Kennedy, Nasdaq 
  • Matt MacKenzie, Optiver 
  • Faris Matalka, Schwab 
  • Dmitriy Muravyev, University of Illinois Urbana-Champaign  
  • Jim Toes, Security Traders Association 
  • Michael Treacy, Apex Fintech Solutions 

PANEL III DISCUSSION 

Options Market Growth and Continued Evolution

  • Bolkovic: Growth in the options market places obligations on exchanges, clearing houses, and market participants to ensure infrastructure, rules, and processes scale to maintain safety and stability. 

Crighton: Market structure reform can provide the right incentives for competition, execution quality, and risk management to maintain U.S. options markets as the preeminent market. 

  • Greene: Options markets are fundamentally quote-driven, with market makers competing and continuously managing risk and quoting across a wide range of strikes and venues, supporting liquidity and investor participation. 
  • Kennedy: Competition and innovation have expanded access, and future growth depends on maintaining strong guardrails, including transparency, resilience, and investor protection, with a focus on sustaining high-quality growth through deliberate market structure design with investors at the center. 
  • Treacy: The defining operational challenge in the options space is the shift from start-of-day and end-of-day risk analysis to continuous, 24/7 risk monitoring across smaller intervals. 

General Options Market Structure Concerns 

  • Kennedy: While the market structure is strong, there is a need to focus on real-time response under stress.  On execution, expanding the penny program across more securities could enhance trading, and position limits remain complex and require coordination, both areas for further progress. 
  • Crighton: On execution, servicing institutional clients is impacted by the 60/40 rule, which guarantees floor market makers sixty percent of an order with a last look by matching price without price improvement, disincentivizing liquidity, capital, and intermediation, and reflecting an outdated market environment that needs reform.  On clearing, capacity and risk are central, as clearing requires significant balance sheet, capital, funding, liquidity, and technology to guarantee performance.  As markets grow, protections have not kept pace with risk, making reallocation of the default fund based on risk appropriate. 
  • Greene: Options market structure has promoted competition across market makers and exchanges through differentiation, new models, and innovation, but also incentivizes exchange entry. Fragmentation creates real cost and complexity, as market makers must connect to each exchange, process more market data, maintain quotes across more order books, and allocate more capital, extending to clearing as capital and activity become more distributed.  The key question is whether the incremental benefits of additional venues outweigh costs, and how to preserve competition while adding value and maintaining efficiency and resilience. 
  • Toes: Investor confidence is critical, with account takeovers a key concern, becoming more frequent and sophisticated with AI across options, equities, and ETFs.  In options, this often occurs in far out-of-the-money strikes with no open interest, where conditions allow an imposter to direct orders, and detection is difficult as activity occurs within wide spreads or slightly outside.   
  • Matalka: Account takeovers are a recurring issue, and strike mitigation helps, but additional frameworks are needed.   
  • Brown: Many listed series lack open interest and definitions and relationships between calls and puts matter.  Coordination across exchanges on listings is important but constrained.  A major concern is lack of flexibility in rules, including obvious error, where predefined responses cannot cover all scenarios. 

Market Makers and Capital: Clearing Brokers and Challenges Securing Access to Capital 

  • Bolkovic: Clearing capacity is a concern, with a limited number of firms able to support market makers, particularly in index market making, raising stress event concerns about absorbing participants.  Membership is stable, but capacity remains concentrated, though new entrants and efforts to reduce concentration are ongoing.  At OCC, the focus is on managing risk through margin models, escrow programs, and potential improvements such as paying interest on margin.  As a central counterparty, OCC provides benefits in risk and capital treatment and is working with other CCPs to improve efficiency and cross margin arrangements to support safe and sustainable growth. 
  • Crighton: Clearing capacity challenges fall into operational risk and bank capital under Basel III. Demand has increased with growth in options and other cleared products, and clearing firms provide guarantees at high volume and pace, making it difficult to define and limit capacity, effectively implying unlimited capacity.  On Basel III, the reproposal includes recognition of netting and cross-margin benefits, but the liquidity required to support global trading remains significant, so aligning capital requirements with clearing risk and execution activity is critical to supporting capacity and growth 
  • Mackenzie: Bank capital rules create external constraints, requiring firms to monitor clearing partner risk-weighted assets and adjust behavior beyond supply and demand.  The Basel III reproposal is encouraging, as prior prudential rules were not written with trading firms in mind. 

Bona Fide Market Making Activity in the Options World 

  • Mackenzie: There is engagement between Trading and Markets and PTG on the bona fide market maker exemption to Reg SHO.  One aspect that has not been discussed much is the impact of tokenized securities on the locate requirement for hard-to-borrow securities.  If a security is tokenized, it may be locked up and difficult to borrow, which creates constraints on the hedging aspect of market making. 

Single Stock Weekly Series: Expanding Short-Term Options and Expanded Exercise Window Feasibility 

  • Matalka: Monday and Wednesday expirations have seen strong adoption with robust liquidity and tight spreads, and PDT modernization may increase activity.  The focus is on operational risk, requiring firms to upscale intraday capabilities and monitoring for expiration and assignment risk, with increased demands on hardware, systems, and staffing, and these products have not yet been pressure tested as they expand.  Expanding global trading hours, even by fifteen minutes, will help manage after-hours moves and assignment risk. 
  • Treacy: Apex supports expanded expirations, but issues are emerging, including a key condition for Monday and Wednesday listings, no earnings announcements, already being broken.  There are concerns for broker-dealers and retail in the after-hours cycle, where 5:00 PM versus 5:30 PM cutoffs create challenges around earnings announcements and conference calls that drive volatility, creating risk for retail traders, particularly with debit spreads and failure to exercise the long leg.  Potential cutoff changes to reduce after-hours volatility could help, but expansion should be measured rather than broad. 
  • Muravyev: Individual stock weeklies are part of the trend toward shorter options that fuel growth, but shorter maturities increase the importance of trading costs and BestEx.  Holding periods are shorter, often about one hour, so faster rotation raises cost sensitivity, and while lower option prices attract retail, relative spreads are higher and the one penny tick becomes binding.  There is limited public data on BestEx in options, with effective spreads relatively stable versus equities, highlighting the need for disclosure similar to Form 605.  Trading costs vary with execution quality, and investors should be educated on both strategies and trading costs as they become more important. 
  • Kennedy: Staff took a long time to approve single stock, which was right, and it has been accretive even with normalizing volume.  Moving measured and deliberate learning allows, so we should not open the floodgates, but there is room for more securities and continued collaboration on additional listings or Tuesday, Thursday.  We should keep moving forward with input and not let perfect be the enemy of the good.  There is also an opportunity to work with OCC on the window and narrow it while accounting for trade adjustments and floor modernization 
  • Crighton: As listings and expirations move the market forward, the ecosystem can come together, but appropriate guardrails are needed, as clearing firms, OCC, and investors are bearing the risk.  Exercise and assignment processes are not seamless, highlighting fragility and room for improvement, requiring guardrails and coordination to achieve this safely. 
  • Bolkovic: Operational risk, including core production, exercise, and assignment, remains complex and is a key concern as the market develops.  Sequencing is important, including for extended trading hours, with a need for alignment on global trading hours, extended trading hours, and market close across equities and OCC.  Clearing member firms must also evolve, as operational work continues in the evening and extensions are requested, and these factors should be considered as changes are implemented. 
  • Brown: Exercise risk can be mitigated by extending trading hours and moving the exercise window into a smaller time frame, and by reevaluating how OCC determines automatic exercise, including whether it should be based on the four o’clock closing price. 

Impact of Cash Settled Single Stock Options: Removal of Friction and Potential for Manipulation

  • Kennedy: Cash-settled options remove some friction but require careful design of settlement, as they may be easier to manipulate and could hurt investors compared to index products.  While appealing, this should be approached cautiously with broad input, rather than moving too quickly. 
  • Mackenzie: Within Optiver, this prompted discussion and a range of views.  On one hand, it is an attractive idea, especially for trading or hedging volatility, because it removes friction.  On the other, there is concern about drawing liquidity away from the physically settled market and what that means more broadly.  FINRA 2360 would likely need to be rewritten, and there are operational issues involved.  There is interest as it could incentivize greater participation. 
  • Matalka: There is limited demand for cash-settled single stocks.  When Monday and Wednesday expirations were proposed, cash settlement was discussed to address exercise, assignment, and pin risk, but while it removes friction, it is harder to implement and would be treated as a separate class from physically settled for pairing and margin.  There is more demand in flex options, particularly European-style single stock options to hedge concentrated positions without assignment risk.  A potential use case for cash-settled options is as a binary option or in a predictive market context, as a speculative instrument compared to physically settled options used for hedging. 
  • Treacy: Options are primarily used for speculation, hedging, or yield generation.  The question is why not go cash settled. 
  • Toes: Interest is focused on cash-settled flex options on ETFs, with capital efficiency benefits versus physical settlement balanced against concerns around manipulation on the close. Liquidity and volume thresholds help address this, but the fifty ETF cap is limiting, as over sixty met thresholds but those above fifty were not eligible, so expanding the cap would be helpful. 

Stock Tokenization: Effects on Options Outside of the NMS System

  • Bolkovic: Digital and traditional market infrastructure are converging, with exchanges and CSDs investing in tokenization, including DTCC no action relief for a tokenization pilot and NASDAQ filings.  If equities exist in both traditional and tokenized form, options clearing must accommodate both, with implications for delivery, margin, and collateral.  If tokenized shares trade outside NMS, the link to the underlying becomes more complex, affecting borrow costs, settlement timing, price discovery, and options pricing and risk management.  The industry is taking a slow and methodical approach, with near-term focus on tokenized assets as collateral and potential 24/7 trading, and longer-term evaluation of on-chain clearing and OCC in a digitally native structure. 
  • Treacy: Tokenization is another form of synthetic risk on an underlying, and we need to walk before we run.  If tokenized shares are used to sell an upside call, it should be treated as a naked call or pro rata risk.  Past synthetic risk events where prices detached from parity led to liquidity events, which may not happen here but should be watched.  As equities are tokenized, leverage should be limited, with a focus on lower levels such as 2x or 3x. 
  • Crighton: Ownership and title of tokenized assets is a key question.  Tokenization raises questions about who has title and what can be done with those assets, with implications from execution through clearing, including clearing firm interaction with the clearing house and assets available for recourse.  It may also change the risk composition of clearing houses accepting these instruments as collateral, including non-default losses and how to capitalize for incremental risks 

Opportunities for Growth in the Ecosystem

  • Crighton: The ability to innovate and have ecosystem-wide discussions, including the roles of clearing brokers and clearing houses, is important, and working through solutions as a group supports continued participation.  Capital tailwinds support innovation, capacity, and resources for client growth, and market structure reform, including changes to 60/40 rules, could help firms service clients and support further innovation. 
  • Kennedy: There is strong interest in 24-hour trading, starting with equities at 23/5 and extending to options, but it should be measured and deliberate, with clarity on day order timing, opening cross, playbook for disruptions, and how obvious error and catastrophic rules apply.  There is continued interest in zero DTE and extended hours, alongside significant growth with many of the highest volume days occurring recently. 
  • Greene: Extended hours are a natural evolution, but as seen in equities, coordination across SIP, TRF, and clearing needs to be in place before moving forward, and options will follow with those same requirements.  Options are fundamentally different, with competitive quoting across millions of listed series and liquidity fragmented across exchanges, strikes, and expiries, so extending hours means scaling pricing, risk management, and liquidity provision across that entire surface.  From a market quality perspective, extended hours can introduce wider spreads, less stable pricing, and differences in execution quality, particularly in thinner underlying markets.  There are also practical considerations, including opening rotations within a tight window operating under different liquidity conditions, and differences across products, where broad-based products are more naturally suited while single names introduce challenges around news events and event risk.  The question is how to expand, and coordination and sequencing across the ecosystem will be important. As seen with zero DTE and equities, starting with highly liquid ETFs that already trade in extended hours provides a stable environment before expanding further. 
  • Matalka: With options participation growth and new products, always-on trading is a natural evolution, and while equities are already offered overnight, options and equities are likely to intersect overnight over time despite added complexity.  GTH expansion is a meaningful starting point, including for risk management, but coordination across exchanges is crucial, as differences in how trading sessions are defined create complexity for order types and definitions such as “day” would need to evolve. 
  • Bolkovic: Innovation and future possibilities like tokenization are exciting, but there are still limitations, such as banking holidays on exchange trading days where margin is collected up front, showing we are operating in two different worlds.  Continuous trading is inevitable, but sequencing matters, as options pricing depends on a continuous, reliable reference price for the underlying, and thin overnight equity trading degrades that reliability and affects pricing integrity.  Market makers depend on a functioning underlying market, not just one that is technically open, and expiration mechanics, margin calls, and end of day settlement are built around defined market close times, so extending or eliminating those windows requires rethinking infrastructure at the clearinghouse, clearing broker, and exchange level.  This is not about whether to change but doing the work carefully before committing to a timeline, with a deliberate, phased approach starting with limited extended hours, coordination across options and equities, and Commission engagement. 
  • Muravyev: The future is very bright with growth expected from shorter maturity, including weekly options and eventually zero DTE on individual names.  The European version is attractive as it solves issues with the reference price and underlying stock, closing options account for more than ten percent of underlying equity volume, and solves many problems.  Further growth is expected, along with more data for analysis. 
  • Toes: Outcome ETFs are large and growing, and while trading venues are easier to connect, clearing introduces complexities, including ETFs clearing at NSCC and the options held within them.  Further discussion should include ETF representation, as much of the growth is occurring in outcome ETFs that rely on options to deliver the investment objective. 
  • Brown: A significant flaw in the CBOE proposal is that the majority of obvious errors occur around the opening rotation, and the proposal has two opening rotations, creating two chances for obvious errors and imposing risk on the industry.  If trading hours are extended by two hours a day with similar quoting, quote traffic would increase by about twenty percent.  

“Congressionally Appointed Market Structure Genie:” One Change to Improve Options Market Structure 

  • Bolkovic: A framework that continues and further evolves support for central clearing, recognizing the benefits it brings to the industry and supporting continued growth. 
  • Brown: A trading floor, with a structure similar to single-listed equities trading in eighths and quarters. 
  • Crighton: Follow the risk and follow the funding, and ensure the right guardrails and protections are in place across the chain to support healthy, resilient, and sustained growth. 
  • Greene: In a fragmented market with eighteen exchanges, the focus should be on promoting clarity, consistency of approach, and a level playing field so participants can compete fairly. 
  • Kennedy: Approval of QBTC would provide a clean, regulated bridge between digital assets and institutional market structure and signal coordination across regulators. 
  • Mackenzie: A competitive and transparent process for specialist appointments rather than lifetime appointments. 
  • Matalka: A framework to break fraudulent trades to address account takeover and help cleanse the system. 
  • Muravyev: Form 605 for options to provide objective measures of execution quality. 
  • Treacy: In a volatility event, not to immediately turn to overregulation or turn something off, but to examine what went wrong rather than pull the rug on the technology.