ISE Moves Ahead With Plan For New Options Exchange
First Published Friday, 27th April 2012 08:03 pm - © 2012 Dow Jones
By Jacob Bunge
Of Dow Jones NEWSWIRES
The International Securities Exchange is drafting rules and legal documents as it seeks to launch the company's second stock-options exchange by the end of 2012, according to its chief executive.
A junior options market is a chief goal for the ISE as the firm has ceded trading business to rivals running multiple venues, such as CBOE Holdings Inc. (CBOE), NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ).
"It is a very high priority at the ISE to get this done," said Chief Executive Gary Katz in an interview.
The fiercely competitive U.S. options exchange market is already split between nine platforms, with two others set to be added as well as ISE's planned launch.
Market leader CBOE Holdings Inc. (CBOE) and NYSE Euronext (NYX) each run two exchanges, while Nasdaq OMX Group Inc. (NDAQ) plans to add a third platform this year. Miami International Holdings Inc., a start-up staffed by former Philadelphia Stock Exchange officials, is also working on a new options exchange.
The launches could challenge margins as equity options trading volume fell 12% in the first quarter from a year earlier. The market volatility that fuels options trading has dwindled to levels not seen since mid-2007, according to a report from Raymond James Financial (RJF).
New York-based ISE's share of trading in equity options declined from 18.3% in the fourth quarter of 2011 to 16.8% in the first quarter of 2012, according to financial results released by Deutsche Boerse Friday.
Adding a second exchange would enable the ISE to offer a different slate of pricing and trade functions and potentially draw in a broader array of customers.
The ISE had been moving toward the introduction of a new exchange in late 2010 but postponed those plans as parent Deutsche Boerse embarked on a yearlong merger effort with NYSE Euronext that earlier this year was blocked by European regulators.
The ISE now is preparing a formal filing with U.S. market regulators who must approve its new platform, which is to be built on new technology rolled out last year to power its existing exchange, said Katz. He declined to comment on the name of the planned exchange or specifics of any pricing and functions it may offer to lure investors.
The technology upgrade has enabled ISE to match up trades more quickly and expanded the exchange's ability to facilitate complicated, multipiece options transactions. ISE is also able to update the system more quickly because the technology is its own, versus the Nasdaq-developed system that had previously powered its market.
Having the new technology in place will help minimize brokers' cost of connecting to any new exchange, Katz said. Firms will be able to use lines to ISE's existing exchange to hook into the new platform, which is expected to operate out of the company's current data center.
"We believe that the benefits will outweigh the costs" of connecting to the new market, Katz said.
-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; firstname.lastname@example.org
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