NYX Nyse Euronext

Nasdaq OMX Group Inc. (NDAQ) plans to pay market makers on its PHLX options platform for the first time in an effort to improve pricing for some of the most actively traded contracts, according to a senior executive.

The move marks a fundamental change for Nasdaq OMX PHLX, formerly known as the Philadelphia Stock Exchange, and comes as rival NYSE Euronext (NYX) has taken a bigger piece of the U.S. options market in recent months.

Beginning in January, Nasdaq OMX PHLX plans to roll out a new pricing model in so-called SPY options tied to the S&P 500 SPDR Trust exchange-traded fund. The move is aimed at encouraging market makers at the PHLX to post better prices on SPY products, the most actively traded class of options.

"It's my belief that this broad-based index would trade better in a make-take environment," said Thomas Wittman, president of Nasdaq OMX PHLX, in an interview. "We believe market makers are going to be on the national best bid and offer a lot more than they have in the past."

In the so-called maker-taker model, market makers are paid to provide liquidity to the exchange and customers who take liquidity pay a fee to trade. This is the model used by Nasdaq OMX's smaller options platform, the Nasdaq Options Market, as well as NYSE Euronext's Arca exchange.

About 83% of U.S. options trade takes place on exchanges like the PHLX, the Chicago Board Options Exchange and the International Securities Exchange, which employ pro-rata pricing models that charge market makers and pay rebates for customer order flow.

Blending the two models at PHLX is a "unique" approach, according to Wittman, and it comes amid increased competition in the U.S. options sector.

In November, NYSE Euronext saw its equity options market share rise to roughly equal that of the International Securities Exchange, the second-largest U.S. options market by volume after CBOE. Competitive pricing played into the gain, as well as a move by NYSE Euronext to bring in banks and trading firms as equity partners in its NYSE Amex options exchange.

Under its new pricing structure, Nasdaq OMX PHLX will retain its pro-rata pricing structure, but now will pay market makers 25 cents per contract to make markets in SPY products. Customers will be charged 25 cents per contract to interact with those markets--well below what they pay at other maker-taker venues, according to Wittman.

That means the exchange is willing to make no money per contract in order to bring order flow in SPY products, he said.

Wittman's goal is to boost the PLHX's market share in SPY products, which in November accounted for nearly 10% of all options trades.

The CBOE and ISE dominate the SPY market, last month accounting for 49% of trading volume, while the PHLX claimed 8%, according to figures from the Options Clearing Corp.

Exchanges with maker-taker pricing models have recently accounted for about one-third of trading activity in SPY options.

"We'll try it out and see if we need to tweak it at all," Wittman said. "Then we'll determine, with our members and our users, if there's another [product class] where we should use this."

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

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