The International Securities Exchange may introduce a second platform for U.S. equity options, opening what may be the nation’s 10th venue for the contracts, according to Chief Executive Officer Gary Katz.
Should the New York-based market start a second venue, it may have a trading floor, Katz said during an interview in Boca Raton, Florida, at the Futures Industry Association conference. ISE was the first all-electronic U.S. options exchange when it began in May 2000. The company, owned by Frankfurt-based Deutsche Boerse AG (DB1)’s Eurex subsidiary, shelved plans for a second venue when the German exchange announced its takeover of New York-based NYSE Euronext.
“We put it on the back burner as a result of the merger,” Katz said, referring to plans for a second market. Deutsche Boerse’s takeover of NYSE Euronext (NYX), owner of the New York Stock Exchange, was blocked by European antitrust regulators last month. “Now that the merger is behind us, we’re putting it back on the front burner. We’re fully focused on what that market model should look like and what innovation we can bring to that model. All the original goals are back as strong as ever.”
There are currently nine U.S. options exchanges, which compete by offering different rules and pricing to attract specific traders. Miami International Holdings Inc. plans to start an equity derivatives market this year, Shelly Brown, the Princeton, New Jersey-based company’s senior vice president for strategic planning and operations, said in September.
Attracting Order Flow
“We don’t want to simply look at another maker-taker or another pro-rata model,” Katz said, referring to different types of rules for matching orders on options exchanges. “We want to look at ways to attract order flow by combining market structures and pricing structures.”
ISE is the only major U.S. options market operator with a single venue. CBOE Holdings Inc. (CBOE) in Chicago and Nasdaq OMX Group Inc. and NYSE Euronext in New York each run two exchanges that trade options. The Chicago Board Options Exchange, which has a trading floor, is the largest, with 27.7 percent of volume, according to Chicago-based OCC. The organization clears and settles equity derivatives contracts.
Nasdaq OMX PHLX, which also runs a so-called open-outcry floor, is the second-largest, with 20.5 percent of U.S. options volume, data compiled by OCC show. The ISE has 15.3 percent.
Opportunity to Compete
“There are certain types of trades done on floors today that ISE doesn’t compete in,” Katz said. “If there’s opportunity to compete for that volume I’d be very interested in doing that.” He added that any floor the ISE may create wouldn’t look like existing open-outcry trading pits. “It has to be a floor for the 21st century,” he said. “What that would look like and how it would compete is something I’d open to.”
There’s no time frame for the introduction of a second market, Katz said. The exchange owns 31.5 percent of Direct Edge Holdings LLC, a U.S. stock exchange operator in Jersey City, New Jersey, and has no plans to open an equities market of its own, he said. A futures exchange remains a possibility, he said.
“If the right model were presented, we would consider it,” Katz said. “History has shown it’s a very challenging business to get into. I’d have to look at a business model very, very carefully before choosing to go into that segment of the business.”
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