CBOE still market leader, but competitor nipping at heels
January 9, 2003
BY DAVID ROEDER Business Reporter
The Chicago Board Options Exchange still can claim to be the nation's leading options market but, if trends continue, that title soon will need an asterisk.
At the end of 2002, the CBOE clung to its lead in market share for a critical portion of the business. The International Securities Exchange, which is less than three years old, is running even with the CBOE in its volume of the most actively traded options on individual stocks.
Unlike the CBOE, which must shoulder the expense of a trading floor, the New York-based ISE is strictly an electronic operation. Its success has given the CBOE fits and driven home the challenges that electronic trading poses to a traditional exchange and to a way of life in Chicago's markets.
Traders attributed the ISE's success to two factors. They said the "spreads'' on the ISE's market, or the difference between what sellers are offering and buyers are bidding for each option class, are usually tighter compared with the CBOE's prices.
In addition, execution times on the ISE system tend to be faster, they said. The difference is in fractions of seconds, but that can be important in volatile markets.
James Gray, president of G-Bar Limited Partnership, a firm that's a CBOE market maker, said many traders have found they can quickly hedge risks or take new trading positions on the ISE's computers. The principal advantage the CBOE retains, he said, is the depth of its markets, reflecting both the number and size of its quotations, Gray said.
Steven Sears, research director at the ISE, said leading investment banks such as Bear, Stearns & Co.; Morgan Stanley, and Goldman, Sachs & Co. have shifted business from the established options exchanges, the biggest of which are the CBOE and the American Stock Exchange. "They've gotten used to our point-and-click functionality. We're also a cheaper place to trade,'' he said.
Goldman and Morgan are investors in ISE, as are such discount brokerages as E-Trade, Ameritrade and Scottrade.
CBOE executives said they're expanding the exchange's own electronic system to meet the challenge. The system is limited to early-morning trading before the floors open, but it's been modified to interact with the floor. A critical point will come in May, when the CBOE is scheduled to let market makers use the system to post competitive quotes, an innovation designed to counteract the ISE.
In overall options trading, the CBOE is still the clear leader, with 2002 volume of 267.6 million to ISE's 152.3 million. But that's because of its dominance in index options, including the popular Standard & Poor's 500 and 100 and the Nasdaq 100. The ISE has no index options business.
The battle is being fought within options on equities, for which the CBOE reported a 2002 volume of 173.2 million contracts.
Data from Sears show that for options on more than 500 stocks that are traded both at the CBOE and the ISE, the CBOE's 2002 market share was 25.7 percent, just ahead of ISE's 25.3 percent. A year ago, the ISE's market share was about 18 percent. |
