Nasdaq, Others Planning New Options Exchanges

Terry Flanagan

The US options-exchange landscape, already plenty crowded, may expand by one-third by the end of the year.

Nasdaq OMX and International Securities Exchange plan to launch their third and second options exchanges, respectively, while Miami International Securities Exchange (Miax) is planning to roll out one of its own.

The imminent expansion of the field comes as options trading volume has declined by about 8% this year compared with year-earlier levels. While some market participants downplay the decline because the comparison is off 2011’s record levels, there is no assurance that the trend will reverse itself in the near future, especially given a still-tepid equity market. That would leave more options exchanges competing for less order flow.

For their part, the exchange companies rolling out options exchanges say their own offerings are differentiated enough to carve out market share.

Last week, Nasdaq said it would launch BX Options in June, to complement its existing PHLX and NOM venues. Whereas PHLX offers a traditional allocation model and NOM deploys price/time allocation, BX is geared for retail traders who need liquidity.

“We see an opportunity to provide a venue for customers to remove liquidity in all names, and get paid for removing liquidity,” Nasdaq OMX Head of U.S. Options told reporters on May 4 at the Options Industry Council conference in New Orleans.

Once BX launches, Nasdaq will be able to “give options to all types of customers,” Wittman said. “We’ve had a bit of a gap.”

The ISE and Miax exchanges are meant for launch later this year. At the start, market participants expect all three new exchanges to fight for a couple percentage points of market share, a level currently occupied by CBOE’s C2 exchange, Bats, and Boston Options Exchange.

In a separate presentation at the OIC conference, Nasdaq OMX Chief Executive Robert Greifeld suggested one way to reduce fragmentation in the options-trading landscape would be to pull the plug on an exchange that doesn’t attain some minimum market share after two or three years of existence.

To be sure, the options-exchange rubber band cannot expand forever, especially in a contracting market.  While each new exchange brings at least some nominal differentiation, it’s an open question whether the differentiation will be sufficient in the eyes of the market.

“There is more than enough capacity to meet the needs of traders now,” said Russ Chrusciel, division head for SunGard’s Valdi Options.

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