ISE Maintains Its Lead As Competition In Options Trading Heats Up
Marilyn Alva
Wed Sep 13, 7:00 PM ET
Options equity trading has grown so much in recent years that the question isn't which stock exchange offers the service.
The question is this: Who doesn't?
The transition to fast-paced electronic trading is credited with much of the growth. This year alone, growth in options trading has topped 40%. Last year, it was 27%.
And it was International Securities Exchange (NYSE:ISE - News), also known as ISE, that started the ball rolling when it opened the first all-electronic options exchange in 2000.
Since then, sleepy floor-based options exchanges have added automated trading operations to become hybrid exchanges.
Chief among them are the Chicago Board Options Exchange, ISE's chief rival; the American Stock Exchange; and NYSE Group (NYSE:NYX - News), which got into the act this year after it merged with Archipelago.
The all-electronic Boston Options Exchange debuted in 2004. The Philadelphia Stock Exchange, which has an options arm, also is on an all-electronic path.
Now the Nasdaq Stock Market (NASDAQ:NDAQ - News) wants in. This month, Nasdaq said it would open an options exchange in next year's third quarter to leverage its core strengths in automated trading.
ISE seems to take it all in stride. "We've always viewed competition as good," said Bruce Goldberg, ISE's chief marketing officer. "With the strong growth you've seen, options trading is viewed by many as an attractive industry."
One incentive: It's more profitable than trading stocks.
ISE still gets its fair share of the business. It remains the leader in equity options, with 32% market share in the second quarter. CBOE, which does more volume in the far smaller business of index options, is the next largest.
ISE's average daily volume in August was up 32.2% from August 2005 to 2 million contracts. However, that number was down from July.
Options Trading
One chief growth driver: institutions such as mutual funds, pension funds and hedge funds, which once shied away from the options market. Institutional business accounted for 21% of ISE's total average daily trading volume in the second quarter, the company says.
"Only in the last few years could you actually get the type of liquidity in the options market to transact in larger sizes," said Jason Lehman, managing director of hedge-fund giant Citadel Investment Group. "Electronic trading was the catalyst that improved liquidity in the market."
ISE's first-mover advantage in electronic options trades gives it a leg up on rivals, Goldberg says.
As competition has heated up, pricing has come under pressure, though. As volumes have grown, fees charged by exchanges -- including ISE -- have declined. Still, volume has more than made up for the drop in prices.
ISE's second-quarter revenue rose 38.2% to $51.1 million. Earnings jumped 67% to 35 cents a share. Analysts estimate earnings for the year will grow 38% over last year to $1.32 a share.
If Nasdaq takes some of the wind out of ISE's growth, it won't happen for at least another year, when Nasdaq expects to start up its options exchange pending approval by the Securities and Exchange Commission.
Nasdaq officials have said the firm's expertise in automated trades would serve it well if and when penny trades go into effect. Options are now traded in nickel denominations. The SEC plans to start a test run in penny trades in January.
"Certainly our entry into the options arena is a result of the changes we see around decimalization and how it will favor the electronic options exchange," said Chris Concannon, Nasdaq's executive vice president.
Decimalization of options trades would make special fixed-allocation awards to certain customers less attractive, he says.
For now, ISE is reserving judgment on penny trades until it sees how next year's test run plays out, Goldberg says. He says ISE asked the SEC to gauge the impact of pennies on the exchanges, vendors, order flow providers and market makers.
Meanwhile, as stock exchanges such as NYSE and the Nasdaq encroach on the options front, ISE and the second biggest options equities exchange, CBOE, plan to poach on their side of the table.
On Sept. 8, ISE launched the ISE Stock Exchange with MidPoint Match trading. The continuous, instantaneous and anonymous platform executes orders at the midpoint price of the national best bid and offer.
Stock Exchange
The exchange started trading in just 10 stocks, but will soon add up to 600 names, says Andy Brenner, head of the ISE Stock Exchange.
"These first couple of weeks are not about volume," he said. "They're about making sure things work seamlessly."
In December, ISE plans to roll out a fully displayed stock market, with the nondisplayed MidPoint Match product embedded in it.
"Nobody needs another stock exchange out there," Brenner said. "But no exchange offers both displayed and nondisplayed venues, and that's where we are different and on a continuous basis." A continuous platform would likely appeal to algorithmic traders especially.
"ISE's launch into equities, and Nasdaq's into options, is just another sign of the increasing competition in the equity markets, which is likely to continue for the foreseeable future," said Banc of America Securities analyst Chris Allen in an e-mail. |
