Exchange Competition To Hot Up

Terry Flanagan

New equities and options trading venues are about to join the already fragmented U.S. exchange landscape.

In the world of new exchange competition, it seems that when it rains, it pours. Nasdaq OMX has announced that it will launch a third options market, Nasdaq OMX BX Options, which will utilize the existing trading rules from its Nasdaq Options Market. The new venue will use the self-regulatory license that was recently surrendered by the Boston Options Exchange. BOX Options last week received approval from the Securities and Exchange Commission to become a self-regulatory organization (SRO) itself.

The niche Chicago Stock Exchange, which during April traded just 0.36% of average daily equities volume, or about 23 million shares daily, last week also announced plans to start a second equities trading platform.

“The second exchange would be utilizing the infrastructure that we’ve already developed, so we can do what other markets have done and operate multiple pricing models with a common infrastructure,” said David Herron, chief executive of the Chicago Stock Exchange.

The new initiative follows the recent transition of part of its data operations, including its Tape A, Tape C and co-location services, to a New Jersey data center, in order to be closer to its east coast customers. Its Tape B data operations, which consist of its exchange-traded fund listings, are still in Chicago.

The move by CHX is intended to boost its presence on the exchange landscape, potentially doubling its market share, and create additional arbitrage opportunities for high-frequency traders.

As a minor player in a world of global exchange groups, it would only be natural for the exchange to also seek partnerships or alliances with other market participants, similar to what has been done by its rivals.

“We are open to all discussions,” said Herron. “In this environment, it would be foolish to close the door on anything.”

In addition to the new options exchange from Nasdaq, the International Securities Exchange is also considering starting up a new venue. 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.

Meanwhile, Miami International Holdings is planning on launching a new options exchange during the third quarter of this year. The New Jersey-based company has also said that it plans to launch an equities exchange down the line 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.

With these new exchanges joining the 13 equities exchanges and nine options venues already operating in the U.S., market participants wonder if a tipping point has been reached.

“You reach the point of diminishing returns at some point,” said Jon Werts, managing director and head of broker dealer execution services Bank of America Merrill Lynch. “Now we have nine options exchanges, some would say we don’t need that many. It’s also cheaper now to launch an exchange. Companies put up a few servers and call themselves an exchange. The SEC has been quick to approve SRO licenses. You hope new exchange introduce something unique that will help grow the entire pie.”

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