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I just had an hour long conversation with an options regulator at the SEC.
The bottom line is that the fee is levied on the clearing houses and the
clearing houses are only charged for cancellations if the number of
cancellations exceeds the number of executed orders e.g 4,999 cancelations
and 5,000 executions ... no fee. 5,001 cancellations and 5,000 executions
... fee is applied. Thus the clearing firm has no idea in real-time whether
the fee will be assessed or not. He also explained that the exchanges said
they needed the fees to cover their bandwidth and processing costs for all
the cancellations they were getting.
He did not realize that an order modification is actually a cancellation
(subject to fee) and a new order.
I took him through the quotes on one strike in real-time and showed him how
the b/a changes many times per minute and that each change reflects a
cancel/replace. I believe that they now have an understanding that the fee
actually discourages competition with the market makers. Also that traders
have a hard time adapting to changes in underlying price and volitilities
without using C/R orders. Finally, I believe that I effectively communicated
the case for sharing the costs of providing the needed bandwidth and
processing to run an exchange across all users (e.g. a penny per executed
contract) rather than singling out a particular transaction to be assessed a
fee ($1.20 order cancellation) which is not reflective of actual costs.
In summary, I believe it was an hour well spent.
Earl
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