BOX Options Exchange LLC, owned by the Toronto Stock Exchange operator and seven brokers including Citadel LLC and Interactive Brokers Group Inc. (IBKR:US), won approval today to become a U.S. securities exchange.
TMX Group Inc. (X), which owns 53.8 percent of parent company BOX Holdings Group LLC, will limit its equity stake in the self- regulatory organization, the entity registered with the U.S. Securities and Exchange Commission that will operate the market, to 40 percent and its voting share to 20 percent, according to the document. Interactive Brokers will have 20 percent of BOX Holdings. Citadel, Citigroup Inc., UBS AG and Credit Suisse Group AG will each own between 3.99 percent and 4.2 percent.
BOX, introduced in 2004, currently uses the exchange license of Nasdaq OMX BX, owned by New York-based Nasdaq OMX Group Inc. (NDAQ:US), to run its options market. The company has been seeking its own license since at least 2008, according to Chief Executive Officer Anthony McCormick. An obstacle was the large ownership stake of Toronto-based TMX Group, because regulators don’t want SROs to be more than 40 percent-owned by another exchange, he said in a phone interview in February. The approved corporate arrangement addresses that concern, he said.
“It will be very nice to have a medallion,” McCormick said by phone today. “We’ll be able to file for our own products and contracts now and hopefully there will be some operating efficiencies from not having a vendor contract relationship. We also won’t be regulated by a competitor any longer.”
McCormick said the Boston-based electronic venue will shift to using its own exchange license in mid-May.
BOX accounted for 4 percent of trading in U.S. options on stocks and exchange-traded funds last month, according to data from Chicago-based OCC, which clears and settles all transactions on U.S. venues. Nasdaq OMX PHLX is the largest for those products, with 22.3 percent last month, the OCC data show. The Chicago Board Options Exchange is the biggest single market for all options products including index contracts. It had 27 percent of total volume in March.
There are nine U.S. options exchanges. Nasdaq OMX plans to use the license BOX surrenders for its third equity derivatives market, according to a notice on the company’s website. Nasdaq OMX BX Options, which will be the 10th exchange, will begin trading at the end of June, the notice said. The exchange has not yet published its proposed rules, which will require SEC approval before it can start.
The International Securities Exchange, the first fully electronic options exchange in the U.S., is also considering plans for another venue. Chief Executive Officer Gary Katz said in an interview on March 13 that the New York-based exchange wants to offer a second market that provides new ways to attract order flow “by combining market structures and pricing structures.”
Molly McGregor, a spokeswoman for ISE, said in an e-mail today that the company is hoping to introduce its second exchange by the end of 2012.
ISE is the only major U.S. options market operator with a single exchange. CBOE Holdings Inc. (CBOE:US) in Chicago, Nasdaq OMX and New York-based NYSE Euronext (NYX:US) each run two exchanges that trade options. There are 13 U.S. equity exchanges.
Miami International Holdings Inc. plans to add its own options venue, Shelly Brown, a senior vice president at the Princeton, New Jersey-based firm, said last year. The market is planned for this year, he said.
BOX Holdings Group will own and operate the options trading platform instead of the current BOX Options Exchange Group LLC, according to the SEC document. A board of mainly independent directors will be named for the BOX self-regulatory organization. These include Paul Stevens, former president of OCC; Laurence Mollner, who served as chairman of the Futures Industry Association in the mid-1990s; Robert Whaley, a professor at Vanderbilt University, TMX Group CEO Thomas Kloet and Jim Boyle of UBS, McCormick said.
BOX’s current board will vote on the exchange’s directors next week and the group will be in place by May 10, McCormick said.
While BOX may consider an initial public offering of stock or sale “down the road,” that’s not currently in its plans, McCormick said in a phone interview in February. The company isn’t likely to introduce an equities exchange once it gets its license, he said.
BOX pioneered price-improvement auctions in 2004 to allow orders from customers to seek executions at higher levels than the best nationally available bid and lower than the best offer among venues. Most options exchanges followed BOX over the years with similar auction mechanisms.
The price-improvement auction on BOX has saved customers $367 million since it began in 2004, McCormick told the SEC in a letter dated Dec. 9. He said he hoped to boost BOX’s share of equity options to at least 4.5 percent by the end of 2011.
“We want to operate an exchange that handles options on stocks and” exchange-traded funds, he said. “We’re interested in servicing the retail sector and giving retail customers greater price improvement.”
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