Butterflies and Condors: Remarks at the Options Market Roundtable

Good morning, and welcome to the Options Market Roundtable.[1] Thank you to all the panelists, and to the Commission staff, especially from the Division of Trading and Markets, for organizing this roundtable. Thank you also to the people who submitted comment letters in advance of the roundtable.[2] These letters are insightful, identify problems worth investigating, and provide concrete recommendations. I welcome additional input from audience members with reactions to today's conversations. I expect the discussion to be informative and entertaining-even the terminology of options market-think butterfly and condor spreads-is fun.

Despite the intriguing character of the options market, the equities market dominates Commission attention. As we have been writing and rewriting Reg NMS, the options market has grown enormously. That growth has been not just in notional value or volume, but in participation, in sophistication, and in the option market's role within our broader capital markets. Because of the importance of this market, a persistent item on my wish list during my years at the SEC has been an options roundtable. Thanks to Jamie and his team in Trading and Markets, my wish is finally materializing!

But should I-someone who believes markets generally function well without regulatory attention-really have been inviting Commission scrutiny on the options market? While the equity markets have been pushed and pulled by the detailed mandates of Regulation NMS, the options market has had more space to develop its own solutions, sometimes with gentle prodding from the Commission.

We are not here because the options market is failing, but because it is succeeding. We want to ensure that it continues to function effectively as trading and participation reaches new highs. The Commission's role is to ensure that the plumbing is sound and that the playing field remains open to competition.

As we will hear today, the growth in the options market has been impressive, but has brought with it some matters worthy of consideration:

• We have seen a proliferation of exchanges-soon to be twenty-which raises the question of whether we are fostering competition or fostering more market fragmentation, added cost, and greater complexity.
• We have seen a notable reduction in the number of clearing firms, which raises concerns about resiliency and capacity.
• We have seen a concentration of activity in a few market makers, which, combined with the cost of connecting to numerous venues and quoting across millions of options, raises concerns about competition and barriers to entry.
• We have noted the proliferation of strikes, the limited interest in many of them, and the attendant consequences to the market, its infrastructure, and its participants.
• We have heard from some industry members that generous market maker allocation formulas, established years ago to incentivize liquidity provision, may inhibit competition and may no longer be necessary in the current market landscape.
• We have received calls for more transparency with respect to options market execution data.
• And of course, as with many of our markets, we have heard of both the opportunities and challenges in the options market raised by the possibilities of 24/7 trading and tokenization.

I look forward to a lively discussion on all these topics and more. And unlike the Commission's recent roundtables on the equity market, which have focused on how the Commission can undo the damage it caused through its own Reg NMS heavy-handedness, I anticipate that solutions that emerge will be industry-led, with the Commission playing a supporting role.

The recent changes to the methodology of the Options Regulatory Fee, charmingly referred to as the "ORF," are an example of such a solution. Under the previous methodology, the ORF permitted an options exchange almost limitless freedom to charge regulatory fees, even for transactions occurring on another exchange or involving a product that was not traded on their exchange. This ability-akin to the state of Maryland being able to charge a toll on your car as you drive over a bridge in Texas-helped to encourage exchange proliferation. A year ago, when I attended the Options Industry Conference, many doubted that this problem could be solved. Yet less than a year later, all the options exchanges have submitted rule changes limiting their ability to assess ORF fees to transactions executed on their own exchange. I want to congratulate the industry, and our staff in Trading and Markets, on the welcome change. Special shoutout to Richard Holley. I hope that the discussions today will lead to similar solutions in the options market that facilitate its growth, foster its resilience, and continue to encourage innovation that serves investors.