The International Securities Exchange was the pioneer, but soon it will not be the only all-electronic options exchange in the United States. The Boston Options Exchange (BOX), a fully-automated options market jointly owned by the Boston Stock Exchange (BSE), the Bourse de Montreal and Interactive Brokers (IB), expects to make its debut next year. Moreover, Eurex, the all-electronic German-Swiss derivatives market, is devising a strategy to throw its hat into the electronic U.S.-options ring.
BOX, which initially plans to list the 250 most actively traded U.S. options, has already filed its market model and rules with the Securities and Exchange Commission. Pending regulatory approval, the market could be operational by the second quarter of 2003. Eurex, meanwhile, is currently weighing two options for breaking into the American-options arena: launching its own all-electronic options market or partnering with an existing U.S. exchange.
The owners of BOX will each play a key role in the launch and evolution of the exchange. The BSE will act as BOX's regulatory-services provider; IB, a direct-access broker, will be responsible for the exchange's market design; and the Bourse de Montreal will provide the technological infrastructure -- including the core trading engine -- for BOX.
BSE officials, through an exchange spokeswoman, decline to comment on BOX. But Rosanna Teti, vice president of business solutions and information technology at the Bourse de Montreal, says that BOX will employ a competitive market-maker model. Instead of having a single specialist, she says, BOX will have multiple market makers trading each option listed on the exchange. "It's a first-in, first-out model ... where, basically, the best trade wins," says Teti.
The Bourse de Montreal, an all-electronic, Canadian-derivatives exchange, employs a very similar market model. Moreover, Teti says, the exchange just converted from a floor-based market to a fully-automated exchange last year -- so it is very familiar with both the business and technology challenges the BOX will face. "The challenge to building a trading system for this type of model is that there is no limit, in terms of number of market makers. So the challenge, technology-wise, lies in capacity," she says. "Market makers, as you know, have the obligation to continuously provide two-sided markets, and you can imagine how many quotes they (might generate) in the span of a second. We tackled that challenge for Montreal, but the challenge will be greater at BOX." In fact, Teti says, the Bourse de Montreal expects BOX to be "10 times bigger" than its own exchange, in terms of volume.
The BOX will use a customized version of NSC, the Bourse de Montreal's trading engine, to handle that volume. The Bourse de Montreal licenses NSC from ATOS Euronext, the IT arm of the pan-European, all-electronic Euronext exchange. But Teti says that Montreal is tweaking the system for BOX, to both ensure that it can handle large volume and certify that it is in compliance with the exchange's specific rules for options trading.
In addition to the trading engine, the Bourse de Montreal will also provide networking and connectivity solutions to BOX. "We will be responsible for the whole infrastructure, beginning to end, that is necessary to operate an electronic market," says Teti. BOX, she says, will also use an open application-programming interface that will allow exchange participants to electronically link to the market via the front end of their choice.
Meanwhile, a Eurex spokesman says the derivatives exchange is currently talking to its U.S.-based customers to understand their options needs. It is possible, he says, that Eurex will launch a standalone, all-electronic U.S. options exchange, using the internal matching engine through which it currently trades European-equity options and futures contracts. But it is equally possible that Eurex will partner with an existing U.S. stock exchange to establish a niche in the American-options market.
Eurex's review of this market, says the spokesman, is still in its "very early" stages, and the exchange is not leaning in any particular direction. However, it is certain that Eurex will try to leverage its existing derivatives contracts, regardless of which venue it chooses to make its U.S.-debut. "Our powerful indices and options contracts in Europe are the main focus we would also have for the United States," the spokesman says.
While Eurex has not yet finalized its strategy, the BOX is now merely awaiting approval from the SEC. Exactly when the commission will make its ruling on BOX remains unclear, but Teti says Bourse de Montreal is planning to deliver all of its technology to the new exchange before the end of the second quarter of 2003.