The International Securities Exchange launched a second options exchange, ISE Gemini, on August 5, its latest effort to gain an edge in the hyper-competitive equity options field. JLN editor Sarah Rudolph spoke with Boris Ilyevsky, managing director of ISE’s options exchanges, about the Gemini’s pricing structure and first offerings, the difference between ISE’s two venues and the equity options landscape.
ISE Gemini traded 400 contracts on its first day, according to the OCC.
Q: What is the rationale behind ISE Gemini’s pricing structure?
A: Gemini will have a maker-taker style fee schedule where resting orders and market maker quotes earn rebates and orders that remove liquidity pay a fee. This is generally in line with other maker-taker markets. It’s meant to attract liquidity from market makers, broker dealers, and both retail and institutional customers, to the extent that the resting order flow from that segment currently is attracted by the rebates offered at the other maker taker markets, such as BATS, NOM and NYSE Arca.
We intend to compete for that order flow on ISE Gemini, not just with the fees and rebates but with the benefit of a pro-rata and customer priority allocation model.
The fee structure is different from that of ISE’s original options market, but the pro-rata, customer priority setup and the role of the PMM [primary market maker] is exactly the same. We believe that’s a very successful model for encouraging liquidity. Using the same stable and powerful software makes it easy for our customers to participate because they don’t have to develop any new software or co-locate at another data center. On day one we had 15 market makers registered and we had nine of them quoting. We expect that by the middle of the month all 15 will be quoting with additional participants on the way.
Q: Are you targeting a different type of customer with the new structure?
A: We expect to attract the same customer base but a different kind of activity. ISE Gemini is meant to attract not complex orders but single-legged non-marketable resting orders. The maker-taker structure on Gemini will offer competitive rebates for orders that come in and rest on the book — orders that provide liquidity. Basically, it’s the same set of customers but a different side of their business, in which they are currently incentivized to go to maker-taker venues such as BATS, NOM and Arca. Unlike those exchanges, which are price-time priority, at ISE Gemini non-customer orders will trade first based on price and then on size, and customers will receive priority on the order book but with the benefit of a rebate.
Q: Two other new options exchanges were launched in the past 14 months (MIAX and Nasdaq’s BX Options) and so far have seen around 1 percent or less of industry volume. Do you expect more from Gemini and if so why?
A: There are definitely similarities with BX in that Gemini is part of an existing exchange group that customers are already connected to. That made the cost to our members extremely low and made it very easy for them to participate. Our model is different from MIAX, which was a brand new exchange system that members had to code to and another data center and set of hardware they had to connect to. So the hurdle for Gemini is far lower than it was for MIAX.
We don’t have a set growth target in mind. We are of course very hopeful we’ll be able to grow quickly, and we don’t plan to do so by inverting our fees. Other exchanges have inverted their pricing at the expense of profit to attract volume; we are hoping all the order flow we are able to attract is incremental, profitable business, because fee inversion is simply not sustainable.
Q: Are the six companies on which you launched options on ISE Gemini the most traded names? Why did you choose those six?
A: We picked one name for each of our PMMs that wanted to quote on day one. The names have medium activity. All together they averaged 90,000 contracts a day over the past few weeks and account for less than 1 percent of industry volume. We didn’t want to start with the most active names, but we didn’t want to go with the lowest volume names either because we wanted to exercise the setup of the new system by making sure there was some volume. So far we have had more than twice the volume this morning as all day yesterday.
Our rollout schedule is speedy. We will introduce 50 names every Monday for the next several weeks. We’ve already agreed on what those names are, though that is subject to change.
Our initial target is to will list names that account for over 80 percent of industry volume. Our goal is to have the most actively traded names listed by mid-September and to gauge the interest of our members in listing additional names after that. Once you get out of the top 300, the additional names are pretty low volume. We list over 2,000 names on ISE and hope to match that number at Gemini as demand grows.
Q: How is ISE going to insure that this new options exchange complements ISE’s existing marketplace rather than competes with it?
A: That’s why after careful consideration we chose to go with a maker-taker pricing model. We recognized that with ISE being very competitive already in the complex order business, the crossing order business, and the liquidity-taking business, the one obvious gap was resting order flow, of which ISE gets very little. So we targeted a segment of the business we don’t currently attract. You can never guarantee that you won’t compete with yourself. If done correctly, the incremental business will outweigh any overlap.