BUSINESSWEEK ONLINE : APRIL 26, 1999 ISSUE
COVER STORY

How the Two-Tier System Hurts the Public


THE SMALL INVESTOR


10:00 A.M.
-----------------
A small investor places an order
An investor wants to buy ten options contracts in XYZ Corp. The price, per contract, on the trading screen is 6 bid, 6 1/2 ask. That means investors who buy options at the ''market'' pay $650 per contract and if they want to sell that option they get $600. The investor puts in a ''market order'' at the prevailing price or a ''limit order'' at 6 1/2. He assumes that is the best price available for investors who want to buy.

10:01 A.M.
-----------------
The order is automatically executed...
The investor's brokerage, to save money, does not use floor brokers. Instead, the order is automatically routed to the option's specialist post on the Amex floor, via the exchange's Auto-Ex order-execution system.

10:01 A.M
----------------
...at a bad price
Seconds later, the order is automatically executed by the specialist, or a trader on the floor, at the price on the screen--6 1/2. The investor pays $6,500, plus commissions.

Meanwhile...
A professional trader is buying the exact same option at a lower price.



THE PRO


10:00 A.M.
-----------------
A professional investor places an order
A professional investor places an order to buy 10 contracts in the same option. The bid-ask prices on the screen are the same prices seen by the small investor--6 bid, 6 1/2 ask.

10:02 A.M.
-----------------
The floor broker announces the order
The pro uses a brokerage firm that employs an experienced floor broker. The broker walks to the specialist post on the Amex floor and announces he wants to buy 10 contracts in the option.

10:02 A.M.
-----------------
A market maker takes the order
A trader in the ''crowd'' at the post consults his pricing data--not publicly available--and sees that his firm's market in the option is 6 1/8 bid, 6 3/8 ask. He tells that to the floor broker.

10:02 A.M.
-----------------
The order is executed-at a better price
The floor broker buys the 10 contracts for the pro at 6 3/8, or $6,375, plus commissions.The better price offered by the market maker--6 1/8 bid, 6 3/8 ask--is not reported on the trading screen, which shows that the price for this option is still 6 bid, 6 1/2 ask.


DATA: BUSINESS WEEK


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BACK TO TOP


The American Stock Exchange: Scandal on Wall Street

COVER IMAGE: Scandal on Wall Street

Price-Fixing, the Amex Way

TABLE: Why Are These Options Spreads So Wide?

A Double Life at Spear Leeds?

Did a Specialist Break the Rules?

The Flaws in Self-Policing

The Gadfly of Trinity Place

ONLINE ORIGINAL: Why More Investors See Options as a Necessity



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