Navigating the Future of US Options Markets: Takeaways From the SEC Roundtable

The US options market is booming, but is its regulatory framework keeping pace? On April 16, the Securities and Exchange Commission (SEC) brought together exchanges, market makers, broker-dealers, clearing firms, academics, and regulators to tackle exactly that question.

What followed was a spirited day of debate: three substantive panels, insightful input from industry veterans, and remarks from SEC leadership — including Chairman Paul S. Atkins, Commissioners Hester M. Peirce and Mark T. Uyeda, and Division of Trading and Markets Director Jamie Selway. While all celebrated the explosive growth of US options markets, Chairman Atkins struck a deliberate tone, clarifying that the roundtable was “neither a prelude to, nor a harbinger of, any options rulemakings in the immediate term,” but rather “a chance to celebrate the strength” of the market and “identify where closer attention is warranted.”

The public weighed in too. Comments submitted before and after the roundtable raised provocative concerns: a lack of transparency in options markets, calls for enhanced order execution reporting, warnings about potential anti-competitive effects of designated primary market maker (DPM)/five-lot entitlements and auto-match auction mechanisms, and mounting costs from exchange proliferation.

The roundtable also came on the heels of the SEC’s recent determination to place on hold for public notice and comment a proposed Cboe rule governing disruptive trading practices. It is clear that regulators are devoting time and attention to further strengthening the options market structure, and given Commissioner Peirce's belief “that solutions that emerge will be industry-led,” this moment of review may present a unique opportunity for the industry to shape the future state of the US options market.

Panel One: Facilitating Competition in a Quote-Driven Market

Market Maker Guarantees and the Five-Lot Rule. Certain specialist market makers are guaranteed the entirety of orders up to five contracts, and panelists vigorously debated the impact of such guarantees. One panelist argued that the specialist five-lot entitlement “makes zero sense today” in highly liquid options like Tesla, Nvidia, and Apple. He called it a “legacy appointment” that stifles competition (particularly when guarantees are stacked across multiple exchange venues) and proposed that five-lot entitlements be limited to the most illiquid classes and subject to rigorous annual review and mandatory reallocation. In contrast, another panelist noted that specialists provide important liquidity to the market, bear heightened quoting obligations, and must support openings and quote a broader range of strikes. 

Directed Market Makers and Internalization. Directed market maker (DMM) programs enable a broker to route customer orders to interact with a specific market maker, often an affiliate, which facilitates internalization. One panelist said that the programs can impact execution quality, describing a frequent outcome as “good enough” rather than “best” execution. Another panelist suggested that DMM programs may undermine incentives for individual market makers to quote better prices to attract order flow. 

Price Improvement Auctions. Panelists addressed how auction fee differentials and the auto-match feature (which allows the initiator of an auction to have a “last look” and match better-priced responses from other participants) may discourage competition. One panelist called auto-match “the most obviously distortive thing,” explaining that “by automatically matching response prices, it pretty obviously diminishes their incentives to provide the best price out of the gate.” Another panelist responded by arguing that auctions are one of the “best ways to get customers best execution” in the case of wider spreads. Panelists also suggested reducing auction fees to increase competition.

Trading Floors. Views were sharply divided, with panelists arguing both for and against trading floors. The core disagreement centered on whether floors serve as genuine venues for price discovery and liquidity provision on complex orders, or whether they function primarily as low-friction internalization venues where prearranged crosses are executed with minimal competitive pressure. Supporters framed floors as essential infrastructure for institutional flow that cannot be easily replicated electronically, while critics argued that mandatory electronic exposure would result in better, fairer executions.

Trade-Through Rule & Exchange Proliferation. Moderators asked if a trade-through restriction, requiring brokers to execute trades at the best-displayed price across any exchange, is appropriate for options. One panelist noted that trade-through protection is “consistent with the goals of the national market system and empowering investors” and that it is “operating pretty seamlessly.” Other panelists noted that the accompanying obligation to connect to every exchange venue — no matter how new or small — imposes significant costs on the industry and proposed a market share threshold for considering a particular exchange’s quotes as protected. 

Wide Spreads in Less Liquid Symbols. Moderators also asked panelists what could be done to facilitate tighter quotes in illiquid symbols. Panelists identified a wide range of ways to reduce complexity and cost for market makers, but also questioned whether Commission attention to the issue is necessary when nearly half of the options series have no open interest at all.

Panel Two: Evaluating Customer Experience

Account Opening and Investor Education. The panelists discussed the customer experience during account opening and firm approval of new options traders. FINRA’s representative detailed requirements for broker-dealers facilitating customer participation under FINRA Rule 2360, including that they collect information on customer investment objectives, income, net worth, and experience to determine appropriate options trading levels. The panelists also noted that options retail participation is skewing younger, as well as the corresponding need to find ways to provide high-quality education to investors. Panelists also discussed challenges associated with artificial intelligence, which could potentially make investment recommendations that trigger regulatory obligations.

Payment for Order Flow (PFOF). One panelist argued that execution quality variation among brokers was “almost perfectly correlated with the amount of payment for order flow” and called for pre-trade fee disclosure and heightened order execution reporting obligations for options (similar to the Form 605 obligations that exist for equities). Another panelist, though, argued that PFOF is “one of the core components on why the system has worked so well for retail investors,” noting the “unprecedented growth in volume, scale and surging retail participation” as evidence. Yet another panelist emphasized that the PFOF model requires routing brokers to “win order flow” by delivering high execution quality, and that there is still “robust competition” for retail order flow. 

Zero-Days-to-Expiration (0DTE) Options. The panel discussed 0DTE options, which refers to the ability of an investor to buy an option on the last day before it expires with lower time premiums. They noted that customers are “naturally gravitating” toward 0DTE for short-term risk management and portfolio hedging. Panelists cautioned, however, that 0DTE creates “a lot more churn on retail accounts,” and that removing the pattern day trader rule would amplify this further. 

Emerging Issues: “Pro-Tail” Traders and Account Fraud. “Pro-Tail” traders refers to highly sophisticated traders who are technically classified as retail customers and benefit from fee structures, priority queues, and price improvement auctions designed for ordinary investors, but trade with the speed, volume, and strategy of professional market participants. Panelists called for better segmentation of these actors from genuine retail flow.

Panel Three: Opportunities and Challenges of Growth

Key Concerns. Panelists were asked about their concerns with the current options market structure. One cited systemic risk and growing interdependence and advocated for expanding the penny pilot program and modernizing position limits. Another panelist focused on a rule that guarantees floor market makers 60 percent of orders by simply matching on price, calling it “one of the most significant impediments to being able to service” institutional clients. Another emphasized the growing complexity and cost of compliance for connecting to more than 18 exchanges. 

Market Makers and Capital. Moderators asked what challenges market makers and clearing brokers are facing today, and what can be done to help facilitate solutions to those challenges. In response, the panel noted that clearing capacity “continues to be a topic of discussion and concern,” with only a few firms capable of supporting market makers, especially for index options market making. One panelist noted challenges associated with the locate requirement for hard-to-borrow securities. 

Single Stock Weekly Series. The panel discussed the expansion of the number of short-term options weekly series on single stocks and the associated risks. Panelists noted strong adoption of recently launched Monday/Wednesday expirations but emphasized that the shift toward shorter and shorter maturities has increased the importance of best execution and the need to educate retail investors about trading costs. Panelists further emphasized the importance of moving in a “measured and deliberative” manner toward offering additional names.

Cash-Settled Single Stock Options. The panel also addressed the possibility of single stock cash-settled options and how this might increase the risk of manipulation compared to physically settled options. Although cash settlement is enticing for extracting profits, panelists seemed wary of making this change. One cautioned that cash settlement “removes some of the friction” that has historically helped mitigate manipulation risk.

Tokenization. Panelists noted that an investment in tokenization will make the link between the options market and the underlying more complex, which will affect options pricing and risk management. The OCC is “exploring the acceptance of tokenized assets as margin collateral to improve efficiency.” Panelists also raised questions about ownership of a tokenized asset and the associated impact on risk composition. 

Growth Opportunities. When asked about opportunities for growth, panelists referenced the potential for extended trading hours; additional growth in 0DTE options; attracting additional younger investors to the options markets; and increasing demand for US options from South America, Asia, and Europe. 

Looking Ahead

The roundtable underscored both the remarkable growth of the US options market and the range of structural questions that growth has surfaced. While Chairman Atkins emphasized that the roundtable should not be read as a signal of imminent rulemaking, the breadth of the discussion suggests that several of these topics will remain in the regulatory spotlight. Katten will continue to monitor developments in this space and is available to assist clients navigating these evolving market structure issues.