In a bold move, the American Stock Exchange -- which runs the second-largest U.S.-equity options market -- has begun offering its members firms a new front-end trading application that will give them the power to electronically route orders to all five American options exchanges. AMEX members that use the new system, dubbed Total Access Options, will not only have the ability to see dynamic quote updates for stock options listed on all five options markets, but also be able to send orders to the trading platforms run by the AMEX, Chicago Board Options Exchange, International Securities Exchange, Philadelphia Stock Exchange and Pacific Exchange.
The AMEX ultimately hopes to leverage TAO to improve its options market share, by offering incentives to members that use the workstation software to send orders to its market center. But there is definitely an element of risk to the AMEX's blueprint for TAO, because members could decide to use the front end to route orders to other options exchanges, potentially boosting the volume of the likes of CBOE and ISE -- the AMEX's two biggest rivals.
Michael T. Bickford, AMEX's senior vice president in charge of options, says that TAO can be seen, at least partially, as a response to the success of the all-electronic ISE. Following its May 2000 debut, the ISE grew rapidly, by offering clients a combination of easy-to-use technology, speedy executions and lower transaction costs. The AMEX's members, cognizant of the point-and-click front end the ISE was offering to its customers, responded by asking the exchange to develop a desktop system that would give them more freedom and choices.
But instead of building a replica of the ISE's offering, the AMEX decided to form a partnership with First Traders Analytical Solutions -- the vendor driving the technology behind TAO-- to develop a more all-inclusive solution. "When we began to speak with (our members) about developing a (front end) device of our own, they told us, quickly, that they don't need five icons for each of the different options exchanges .... (Rather), what they really wanted was a front end device that would allow them to send orders to all five exchanges," says Bickford.
While acknowledging that there is "clearly" a risk involved in providing AMEX members with a device through which they can route their orders to rival exchanges, Bickford says that he is confident in instances where the AMEX's price is equal to or better than that of its competitors for a specific option, members will use TAO to send their orders to the AMEX. TAO, he says, will feature AMEX-biased incentives aimed at convincing members to do just that. "That's really where we (should) begin to gain market share," Bickford says. "But, quite honestly, if we don't have the best price ... (or) if you've got an order larger than the size that's available on our exchange, than it's not a reasonable expectation that we are going to get that order. The order is probably going to some other place."
In lieu of developing a system on its own, the AMEX decided to adopt a front end built by First Traders Analytical Solutions. Under its deal with the vendor, the AMEX has exclusive marketing rights for TAO -- a system that the exchange has private labeled for its own marketing purposes. First Traders, meanwhile, gets access to AMEX's large, established distribution network.
Bickford says that before deciding to adopt a customized version of First Traders' front end, the AMEX considered tweaking the Booth Automated Routing System -- its floor-based order-routing network -- to meet the workstation software demands of its customers. But the AMEX ultimately rejected that idea, fearing that it would not be able to tweak BARS in time to deliver an all-inclusive front end to the market before any of its competitors. "We looked at extending out our BARS network and putting market data which doesn't currently go through BARS into BARS. But the development time for that was fairly extensive and we were afraid that would not get us first to market," Bickford explains. "First Traders had a fairly well-developed product that was pretty much on the shelf and ready to go ... (and) we saw in them the fastest (time) to market."
The AMEX has just started pitching TAO to its members and has not yet actually signed up any firms to use the front end. But Bickford says that AMEX is confident that a large number of members will eventually sign on for TAO, because there has been a lot of member demand for an advanced front end.