Fall 2003 Issue 9
ISE to Offer Index Options
Vows to Enhance Competition
After establishing a successful foundation in equity options trading, the International Securities Exchange, whose all-electronic trading platform has led to lower transaction fees and better prices in equity options trading, is making preparations to introduce index options. While ISE has been establishing the technological and regulatory framework to support index options trading, it is also currently
Gary Katz, Chief Operating Officer
How to Send Spread Orders to ISE
Intermarket Linkage Completed
around the exchange
ISE President and CEO David Krell on Competition
assembling a stable of index options products to compete with existing index products. ISE will first introduce options on existing indexes, such as the Standard & Poor's SmallCap 600. By year's end, ISE will introduce options on proprietary indexes that will provide investors a variety of ways to navigate the financial market. Despite repeated requests from investors and their brokerage firms, ISE is precluded from listing options on exclusively licensed index options, such as the Standard & Poor's 100 and 500. ISE has, however, petitioned the Securities and Exchange Commission to use its rule-making power to prohibit options exchanges from obtaining exclusive or preferential licensing arrangements with respect to index option products and options overlying other instruments, including options on securities whose value is based on an index. The petition may be viewed at: http://www.sec.gov/rules/petitions/petn4-469.htm ”We are pleased that we can bring greater efficiency to index options trading, but disappointed that we cannot bring those benefits to all index products. Competition is vital for the health of the US options market. Multiple listing of index options will give investors the level playing field, lower costs and improved efficiency they have come to expect when trading options,” said Gary Katz, ISE's Chief Operating Officer. Indeed, competition has been proven to lower transaction fees and to improve prices for investors. The SEC's December 2000 study on payment for order flow and internalization in the options market found that multiple listing of options created a competitive environment among the exchanges that benefited investors. These benefits included providing faster and more reliable executions, lower transaction costs, and increased liquidity.
question of the month
>> What are the different methods of submitting spread orders to ISE for automatic execution? <<
>> ISE member firms can submit spread orders for rapid, fully electronic execution via the ISE Open Interface, CLICKTrade™ and the traditional CMS format. In August, ISE announced support for spread orders via the FIX protocol. For more information about spread trading via FIX, please email: firstname.lastname@example.org.
Dan Amar Steve Meizinger
Name: Dan Amar Number of Years at ISE: 1 1/2 years Personal: ”My great wife, Cathy and I are lucky to have two girls, Kelly and Kate.” Area of Concentration: ”I focus on monitoring EAMs and their trading issues. I also serve as a point of contact for Linkagerelated trading issues.” Previous Positions: ”I held various positions at US Clearing, including working on the CBOE and NYSE floors, as well as on the retail desk and in the order room.” Favorite Moment at ISE: ”Because I deal with Linkage on a daily basis, witnessing its successful implementation was very satisfying.” What’s the biggest difference about working at ISE? ”Before ISE, I was accustomed to manual processing of orders. It is great to be involved with the first completely electronic options Exchange in the US.”
Name: Steve Meizinger Number of Years at ISE: 1 1/2 years Personal: ”I live in South Brunswick NJ, with my wife Susan, and our two children, Matt, 13 and Ryan, 8.” Area of Concentration: ”My area of concentration is ISE's market makers. A large portion of my job is representing customerrelated trading issues to the market maker community.” Previous Positions: ”For nineteen years, I was an equity options specialist affiliated with Spear, Leeds & Kellogg, working on the floors of AMEX, NYSE and PHLX.” Favorite Moment at ISE: ”The five consecutive days in July when ISE was the most active options Exchange.” What’s the biggest difference about working at ISE? ”Being at the forefront of technology. At ISE, we have introduced multiple quoting by market makers, ‘onesize fits all’ for trading participants and spread order matching to name a few.”
Members’ Area Website Enhancement
ISE continues to enhance the Members' Area of its website. The latest addition is a member calendar that provides a schedule of trading system enhancements, member events, committee meetings and other dates that are important to member participation on ISE. Members that have not signed up to get their password to the member website should contact Rich Pombonyo at email@example.com or Astrid Tsang at firstname.lastname@example.org.
Q2 new listings >>
Bin 1 - Knight Financial Products The Ryland Group Inc. (RYL) XM Satellite Radio Holdings Inc. (XMSR) WebMD Corp. (HLTH) Bin 4 - Timber Hill LLC Technology Select Sector SPDR Fund (XLK) Utilities Select Sector SPDR Fund (XLU) Ask Jeeves Inc. (ASKJ) Bin 7 - Timber Hill LLC Bin 2 - SLK-Hull Derivatives LLC Centex Corp. (CTX) Bin 5 - Bear Stearns & Co. Inc. Anthem, Inc. (ATH) Biosite Inc. (BSTE) Bin 3 - Adirondack Electronic Markets LLC Adolor Corp. (ADLR) Lyondell Chemical Co. (LYO) Royal Caribbean Cruises Ltd. (RCL) TIBCO Software Inc. (TIBX) Western Digital Corp. (WDC) Continental Airlines Inc. (CAL) Bin 6 - Bear Wagner Specialists LLC MBIA Inc. (MBI) Sysco Corp. (SYY) Applera Corp. - Celera Genomics Group (CRA) Bin 9 - Deutsche Bank Securities Sonus Networks Inc. (SONS) Michaels Stores Inc. (MIK) E*TRADE Group, Inc. (ET) Level 3 Communications Inc. (LVLT) 3Com Corp. (COMS) Bin 10 - Morgan Stanley & Co. Incorporated American Pharmaceutical Partners Inc. (APPX) Royal Gold Inc. (RGLD) Financial Select Sector SPDR Fund (XLF) AON Corp (AOC) TXU Corp. (TXU) Kinder Morgan Energy Partners LP (KMP) NPS Pharmaceuticals Inc. (NPSP) Northwest Airlines Corp. (NWAC) OM Group Inc. (OMG) Red Hat Inc. (RHAT)
Intermarket Linkage Completed
Linkage, which extends the benefits of best execution throughout the options markets, is now fully operational. On June 27th all options classes listed on US options exchanges became eligible for full linkage participation. Locked and crossed markets require special consideration. When A customer order submitted by a member, where the ISE is not at the NBBO, is subject to Linkage. In this situation, the Primary Market Maker (PMM) has two options. The first is to match the NBBO and fill the customer at the best price, at the ISE. The second option is to send a Linkage order to the exchange with the better market. exchange markets lock or cross one another, it is the responsibility of the party that caused the cross or lock to occur to take action. With the implementation of the final phase of Linkage, the effects of the Linkage program on the industry must be studied. The exchanges have convened a Market In this situation, the PMM can send a Satisfaction order to the away market in order to fill the ISE customer on his own order book.
<< All options classes listed on US options exchanges are now eligible for full linkage participation. >>
If the Linkage order is filled at the away exchange, the PMM will then fill the customer at the best price, at the ISE. If the Linkage order is not filled by the away market, that market is obligated to fade its quote. Linkage also provides trade-through liability. The ISE has created an automated alert system that notifies PMMs when a customer order in the PMM's bin has been traded through at an away exchange.
Operations Task Force that unites business representatives from each exchange to discuss order handling, execution and trade adjustments. Representing traders in advising the Options Linkage Authority is the Market Advisory Group, consisting of traders from each exchange. These groups discuss Linkage-related trading issues and work to modify the Linkage program to better fit customer needs. Members with questions about the Linkage program should contact Wendy Hoffman at (212) 897-0245 or email@example.com.
ISE Profiled by Harvard Business School
Exchange Innovation Subject of Case Study
In the fall of 2003, 60 Broad Street and Harvard Square will have much in common. The International Securities Exchange, which is located on Broad Street in New York's financial district, is the subject of a Harvard Business School (HBS) case study. The study, entitled ”The International Securities Exchange: New Ground in Options Markets,” delves into the forces behind ISE's formation and evolution and explores ISE as the catalyst for fundamental changes in the way that options are traded. Case studies that are selected by Harvard Business School are used to show business school students the practical application of business strategies. The 37-page case study, written by George C. Chacko, an HBS finance professor, and Eli Peter
Prof. George C. Chacko
Strick, an HBS research associate, details the market conditions that allowed ISE to flourish against well-entrenched compe-
tition, and also the innovations ISE introduced that ultimately reshaped the US options industry. The study, which explores the US options industry's history, market structure and the concomitant advances ISE's electronic trading system brought to options trading, is believed to be the first time a US options exchange has been the subject of a Harvard case study. During the fall semester, two of the Exchange's co-founders, David Krell, ISE's chief executive officer and Gary Katz, ISE's chief operating officer, will deliver guest lectures at Harvard when Professor Chacko teaches his case study to students pursuing Master of Business Administration degrees at Harvard. Mark Kritzman, a managing partner at Windham Capital Management Boston LLC, who also is an ISE Board member, was instrumental in bringing ISE and Harvard Business School together for this project.
This publication discusses exchange-traded options issued by The Options Clearing Corporation. No statement in this publication is to be construed as a recommendation to purchase or sell a security, or to provide investment advice. Options involve risks and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker or from the International Securities Exchange by calling 212-943-2400 or by writing the Exchange at 60 Broad Street, New York, NY 10004.
around the exchange
Competition is good for the market. Competition lowers prices for customers. Competition coupled with innovation has grown the options industry from a business that in 1996 traded just 783,928 equity options contracts a day, to an industry that through the end of July was averaging 3.1 million equity options contracts per day, according to data from The Options Clearing Corporation. We achieved our goal of listing options The brokerage firms, exchanges, and liquidity providers that comprise this industry all contributed to this growth by pushing each other to compete. The industry responded with new initiatives and improved technology, products, connectivity and customer service. This competition has benefited customers, who witnessed the multiple-listing of options, and who have subsequently enjoyed reduced exchange fees and enhanced liquidity in popular products. on equities that represent greater than 90% of all equity option volume, and in the process became the largest US equity options exchange. But ISE does not rely on these accomplishments as predictors of future success. We have made important strides to expand our product offering to include the first index options listed by ISE. Competing in the marketplace means determining what customers want next what innovations, strategies and trading functionalities will improve their bottom line. ISE has worked hard to improve the trading system and by extension, service to members. ISE understands that remaining competitive means responding to customer requests with real, functional solutions. Offering functionalities such as ISEspreads, which enables automated execution of spread orders, exemplifies ISE's commitment to aligning customers needs with our system development priorities. Competition yields lower prices and improved market quality for investors. These index products are the first of many product offerings that ISE plans to introduce to the marketplace. Increasing the number of order-flow ISE recognizes this truism and is committed both to staying competitive and defining the future of the industry through continued innovations.
David Krell, President and Chief Executive Officer
providers and liquidity providers in the market also spurs competition. In the past year, ISE introduced the VPN-CLICK program, which has enabled more firms to connect and send orders to ISE by introducing direct access through a virtual private network (VPN). Requiring an existing Internet connection, VPN-CLICK allows for quick and inexpensive access to the exchange from new and existing member firms.
ISE has experienced tremendous growth in its short existence. Mindful of the benefits that competition brings to customers and prices, ISE points to recent and planned future innovations as evidence of its commitment to enhancing the competitive environment.
<< Competing in the marketplace means determining what customers want next - what innovations, strategies and trading functionalities will improve their bottom line. >>
firstname.lastname@example.org - for comments and/or suggestions on our Circuits newsletter email@example.com - for trading incidentrelated inquiries and trading-related issues firstname.lastname@example.org - for information about API and related member test systems email@example.com - for information about scheduling equipment installation firstname.lastname@example.org - for information on connecting to ISE email@example.com - for information on member billing firstname.lastname@example.org - to request information on membership, ISE publications and events email@example.com - for info on ISE rules and interpretations firstname.lastname@example.org - for info on ISE series listings and corporate actions email@example.com - for information on the ISE Order Routing System firstname.lastname@example.org - for general inquiries