Technology

An Electronic Exchange with a Twist


Ken Liebler knows how to run a bourse. He's a former president of the American Stock Exchange and current chairman of the regional Boston Stock Exchange. Now, Liebler is building a new exchange that will allow investors to trade options -- the right to buy or sell securities or commodities at fixed prices. Included in the technology he'll use for his new Boston Options Exchange is a unique system that mimics the New York Stock Exchange's auction market. Like an increasing number of exchanges, the BOX won't have a trading floor and will have myriad market makers for specific options issues. BusinessWeek Online Senior Reporter Jane Black interviewed Liebler on Sept. 18. Here are edited excerpts from that conversation:

Q: What's the BOX?

A: It's an acronym for the Boston Options Exchange. We have put together a proposal which is now sitting before the SEC [U.S. Securities & Exchange Commission]. We hope within the next month or two to have it approved. The BOX would be another marketplace for the trading of securities options.

We will deal in stock options that are listed and traded on a variety of exchanges. But our exchange will be different in that it will be fully and completely electronic. There will be no [trading] floor. No physical involvement of people. Everything will be electronic, from trading to settling trades to moving money. Also, we won't have traditional seats or memberships. You apply, and if you meet our qualifications, you can trade. This will be a wider, broader, more accessible exchange than ever before.

Q:That sounds awfully reminiscent of the dot.com business plans -- cheaper, faster, more democratic? Is this realistic?

A: Really what we're talking about is a model that isn't fundamentally different from the ideas that people had in the late '90s. But we have more established backing. This isn't three people in a garage. The Boston Stock Exchange as well as the Montreal Stock Exchange have tested the technology. We think we have stable tech that has been proven and the participation of some of the largest investment-banking firms.

Q: What technology are you using?

A: The company that built it is ATOS Euronext. There were three exchanges that had traditional floors -- Paris, Brussels, and Amsterdam. They all closed the floors and replaced them with Euronext. We adapted it and made it applicable for the trading of options. There's already connectivity built into the platform.

That's key, because in the securities world if the major firms aren't interfacing -- and it's expensive to interface -- you won't get a lot of business. We didn't want to start from scratch and build a new trading system. We wanted to capitalize on the fact that people were already connecting to it.

Q: Does it have any special features?

A: On the floor [at traditional exchanges] buying and selling is done physically. The guy who yells first or who's physically most imposing gets the trade. We put into the electronics a feature called the price-improvement auction. When an order goes into that feature, there's a three-second period that allows anyone to take the other side of an auction.

At the end of the three seconds, whatever is the best offer will be taken. It mimics the New York Stock Exchange auctions. Typically, ECNs [electronic communications networks] don't have auction features. The trade only happens if there's a buyer and seller who match. Here, we create an auction so they can ratchet the price up or down. It's the first instance where a full auction process is replicated electronically. It could in theory work in both the options and equities market.

Q: There's another electronic options exchange. How is it different?

A: There is one options market that does this -- the International Securities Exchange. It's fully electronic. The major difference is: They have replicated the franchise system that occurs on the floors of exchanges. They're electronic, but they have specialists who have to handle trades in specific options. Memberships cost more than $1 million. What we're trying to do is not only be electronic but to be a much broader and more open platform.

Q: Will manual trading disappear from the securities business?

A: Cheaper, faster, and more efficient is important [to investors], but the jury is still out on whether all trading will be done electronically or in a floor-based fashion. What you see in the world of stock markets is that the NYSE has a dominant position. While there's lots of tech, it's a human process.

That's opposed to the ECNs, which have an automated, electronic process. So I think that battle is going on in the marketplace. The ECNs are gaining share in stocks and options and in futures. They aren't going to dominate, and no one believes that they will overtake the traditional NYSE system entirely. But it will be an interesting battle over the next few years.


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