The primary objective of this paper is to design a security-constrained locational marginal pricing framework with specific emphasis on creating clear incentive for the demand side to make participation in serving the reserve option. Both the contingency forms, such as line outage and generator outage, are taken into account. The reserve services from the demand side are identified from the respective energy requests only, based upon a concept of load service security. Different prices are established for generating and load entities. Those are defined as generator and load locational marginal prices (LMPs), respectively. The load LMPs are further differentiated based upon the service security levels requested by different load entities. In the case of any system stress due to security constraints, the load prices go higher for a higher level of service security. Therefore, the necessary price signal is generated to control the service security requests. The prices that are established also resolve the overcharge and underpayment issues involved in the conventional security-constrained market optimizations. The price split that takes place is well characterized to provide clear price signals for future investments. The compatibility of financial transmission rights with the new pricing framework is also addressed. © 1969-2012 IEEE.