In late May, the International Securities Exchange (ISE)-the first all-electronic U.S. options market-went live. Initiallly, the exchange listed options on only three stocks, but intends to list the 600 most widely traded U.S. equity options by year's end. Separately, just prior to its launch, the ISE became a member of the Options Clearing Corp. (OCC), a post-trade organization that clears and settles trades executed on all of the U.S. options exchanges.
Backed by financing from E*Trade Group Inc., Ameritrade Holding Corp., Scottsdale Securities, Knight/ Trimark Group and Herzog Heine Geduld, the ISE will use OM Technology's ClickExchange as its trading engine. The ISE expects to compete with the four major U.S options markets-including the Chicago Board Options Exchange (CBOE).
The exchange has three classifications of members: primary market makers (PMMs), market makers (MMs) and electronic access members (EAMs). The PMMs, who will include the five broker/dealer investors, will provide continuous bid/ask quotes on assigned options and will be required to fill orders at the best available price from all competing options exchanges. The MMs will be responsible for maintaining continuous quotes on a smaller group of assigned options. The EAMs, who will pay an annual access fee to the ISE, will electronically enter orders - either for their customers or on behalf of their own accounts.
To date, 40 broker/dealers have registered with the ISE as EAMs. The exchange has also signed up a group of 10 PMMs. That group included Banc of America Securities, Adirondack Trading Partners (2 memberships), Arbitrade Holdings, The Arbitrage Group, Bear Specialist Inc./Hunter Specialists, Deutsche Bank Securities, Goldman Sachs and The Hull Group, Knight/Trimark Group and Morgan Stanley Dean Witter. The ISE expects to add 100 CMMs to its group of participants by the time its options rollout is completed.
Before going live, the exchange tested its electronic trading system- which is being provided by OM Technology-for volume and execution efficiencies. Although the exact fee structure for the OM arrangement was not made public, the ISE has said that OM will be paid a premium for every contract traded on the exchange.
In addition to getting its platform up and running, the ISE has also been busy solidifying its post-trade situation. The exchange's participation in the OCC will allow standardized options contracts traded on the ISE to be offset against the same options traded on other U.S. exchanges. Gary Katz, senior v.p. of marketing and business development at ISE and one of the market's co-founders, has been appointed to the OCC's board of directors.