* Majority of targeted trades take place at Nasdaq's PHLX
* Move marks "the beginning of the end" for dividend trades
By Ann Saphir
SAN FRANCISCO, May 23 The clearinghouse for all
U.S. stock options said Thursday it will adopt a policy aimed at
abolishing a dividend-linked trading strategy that critics say
could destabilize markets if left unchecked.
The change at Chicago-based OCC is likely to hurt market
share at Nasdaq OMX Group Inc's biggest options venue,
where nearly all of U.S. dividend-linked options trading takes
"The new policy will likely result in a significant
reduction in dividend plays," OCC said in a statement.
Gary Katz, who runs Nasdaq rival the International
Securities Exchange and is a longtime critic of the practice,
was more direct, calling the policy "the beginning of the end
for dividend trades in the U.S. options industry."
Dividend plays account for about 8 percent of all U.S.
options trades, OCC said. They account for as much as a quarter
of trading at Nasdaq-owned PHLX, ISE estimates, although
official figures from OCC are not available.
The policy change comes after years of lobbying by Deutsche
Boerse's ISE and CBOE Holdings Inc, which
say the trades make PHLX look busier than it really is and could
leave traders on the hook for losses if they go awry.
Nasdaq's PHLX has long countered that dividend trades are
safe, and regulators have never barred the practice.
PHLX, formerly known as the Philadelphia Stock Exchange,
accounted for more than 20 percent of trading in U.S. options on
individual stocks so far in May, more than any other options
CBOE and ISE have each handled about 17 percent of the 263
million stock-options trades so far this month.
PHLX's market share includes a large number of dividend
plays, in which professional traders buy and sell massive blocks
of options just before the day when investors are required to
hold a stock in order to get the dividend.
Professional traders convert those options to shares and
collect dividends, taking advantage of less-savvy investors who
fail to convert their options in time.
The change at OCC will require approval from the Securities
and Exchange Commission and is unlikely to be put in place for
several months, if not more.
Spokesmen from Nasdaq and CBOE did not immediately respond
to requests for comment.