More Competition To Enter Exchange Space

Terry Flanagan

With the possibility of another two exchanges trading options, market participants are questioning if there is enough order flow to go around.

The International Securities Exchange is considering starting up a new exchange for the trading of options, according to chief executive Gary Katz. In bucking the industry-wide shift away from traditional trading floors and toward all-electronic models, the new venue could potentially have a physical floor.

However, any floor that the ISE would create wouldn’t look like the traditional open-outcry trading pits. Rather, it would be something completely new and innovative, and different to anything currently on the market.

Broker-dealers and other market participants believe that there is room for new competition entering the exchange and trading venue space if they bring something new to the table.

“As long as the new exchange is providing a compelling reason to create a new market rather than just competing for market share with aggressive fees, and an aggressive fee schedule, then I believe that additions are good as long as it helps to promote competition, technology, market vibrancy and transparency,” said one derivatives electronic trader.

“However, I believe there is some number that is too great—I don’t know what it is—but I think we’re approaching that number. If the new venue is providing something new, a new compelling reason to come to that market, be it technology, order facility, complex order books or anything else, then there is room for more.”

“When it comes to a new exchange, there’s always room for a new idea,” said one exchange executive. “There’s always room in any industry for a competitor with new idea, whether an ATS [alternative trading system] with unique function or an exchange with new technology.”

In addition to the new venue from the ISE, an all-new electronic exchange is also in the works, to be based out of Miami. Miami International Holdings is planning to launch a new options exchange during the third quarter of this year. Pending regulatory approval, the MIAX Options Exchange would be the tenth options trading exchange in the U.S.

The New Jersey-based company has also said that it plans to launch an equities exchange as well. Both platforms are to be located in Miami and would be built from the ground up. They would focus on listing securities and stocks from companies based in Central and South America.

If the ISE goes forward with its own venue, the total would be 11 U.S. options exchanges. There are currently 13 equities exchanges in the U.S., in addition to the estimated 40 or so alternative trading systems.

There may also be competition entering Brazil, competing with the incumbent BM&FBovespa, in the form of Direct Edge and Bats.

Latin America remains one of the most attractive regions for many market participants looking for global expansion. The U.S.’s fourth largest equities exchange operator by market share announced plans to enter the Brazilian market with Direct Edge Brazil, an all-electronic platform for the trading of Brazilian equities. The exchange is expected to go live in the fourth quarter of this year, pending regulatory approval from the Comissao de Valores Mobiliarios. It would be the first stock exchange to be based in Rio since 2002, when BM&F acquired the now-defunct Bolsa de Valores do Rio de Janeiro (Rio de Janeiro Stock Exchange).

Bats is currently under a memorandum of understanding with Claritas, a Brazilian asset management firm, to explore opportunities in the Brazilian market, including the potential creation of a new exchange. It has also not made any official announcements regarding potential expansion into Canada, aside from the SEC filing citing its intention to start trading in the country.

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