Meyer 'Sandy' Frucher
The Chicago Board Options Exchange last week rolled out its new price improvement mechanism (PIM) for its electronic traders and the Philadelphia Stock Exchange could be next in line. "We are looking at it," said Meyer "Sandy" Frucher, chairman and ceo of the Phlx, declining to comment further. The Securities and Exchange Commission has stepped up demands on brokerages to provide price improvement to customers, putting pressure on market makers to initiate price improvement auctions and on exchanges to offer it (WSL, 11/4). "Participating [in price improvement] on your own exchange lifts the pressure of having to connect to competitors to show regulators your firm is trying to price improve," one CBOE market maker explained.

Boston Options Exchange and the International Securities Exchange offer automated PIMs, which is typically a three-second electronic auction where market makers bid up a customer's order. While ISE's and BOX's PIMs allow market makers to bid in penny increments, CBOE's mechanism is a blind auction that has a minimum improvement of five cents. CBOE's PIM is based on suggestions from market makers who wanted to trade in the auction at higher increments to make it harder for competing market makers to outbid them.

Analysts believe there is pressure on the remaining options markets the American Stock Exchange and NYSE Arca to come out with PIMs of their own by the year-end because market makers see it as essential to their business as they can collect additional fees. Officials for these exchanges declined to comment by press time.