`Wall Street Crossfire' Awaits Sec in Options Trading Rule / Over-the-Counter Proposal

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WASHINGTON - The Securities and Exchange Commission will step into a Wall Street crossfire today when it considers whether to permit trad ing in over-the-counter stock options and index options and, if so, who should trade them.

The issue has pitted almost all of the nation's stock exchanges and the brokerage community's industry group - the Securities Industry Association - against a host of firms, including Merrill Lynch, First Boston and Paine Webber, as well as the Justice Department. No one seems willing to predict the outcome.

Few market regulation issues have drawn such intense and strong reaction from Wall Street, according to Brandon C. Becker, an assistant director in the SEC's Office of Self-Regulatory Oversight andMarket Structure.

""It's an important decision for the commission because it involves developing a new marketplace,'' he said. ""And it's a particularly difficult issue because you do not have a unanimity of opinion.''

The trading of options - which are the right to buy the underlying stock at a fixed price in the future - has exploded in the last decade. Investors use options both as a hedge to protect current profits on stock they own and as a way to speculate in the movement of stocks or the market itself. The recent wave of hostile takeover bids has given a boost to the latter use of options.

The most controversial issue the SEC and its staff will have to consider is whether to accept a proposal by the National Association of Securities Dealers to let its member firms that make a marketin a particular over-the-counter stock sell options on that stock - also called side-by-side trading.

Currently, such side-by-side trading is prohibited on other exchanges, to prevent manipulation of the price of the option. Indeed, the New York Stock Exchange recently got approval from the SEC to trade options, but it was required to segregate trading in the common stock from trading in the option.

The NASD, however, has proposed to permit such side-by-side trading provided there are 10 member firms that make a market in a particular stock and are five firms that make a market in the option. …