It’s been quite a ride for almost 20 years for Gary Katz, now officially the former co-founder, president and CEO of the International Securities Exchange.

Nasdaq closed the deal to buy ISE from Deutsche Boerse on June 30, ending one of the most pioneering and successful runs for an exchange in the history of financial markets. Co-founded in 1997 by Katz, David Krell, William Porter and Marty Averbuch, the group set out to create the first fully electronic US equity options exchange. The exchange launched in 2000, but the road was bumpy, funny and frustrating, even on good days. But in five years, ISE went from being an interesting upstart to an exchange holding more than 30 percent of the US options volume. The truth is, it wasn’t an easy five years, not to mention the years it took to develop and create the exchange.

The first task at hand was to build an all-electronic options trading platform. So the ISE team traveled to Stockholm to partner with Swedish market and technology company OM on the building of a new matching engine. Krell and Katz wanted to design a system that was not OM’s FIFO (first in, first out) matching engine, but rather one that would introduce the first electronic WYSIWYG (what you see is what you get) platform. That marked a major challenge for OM, which featured executives such as Magnus Böcker and others who would become transformative themselves in the industry.

Not only that, but in June 1997, Katz recalls laying out the steps necessary to create a viable electronic options market. Requirements included: at least one market maker per name for the top 600 names and independent quoting that would take in six different quotes at a time. In other words, a robust, complex system with lots of capacity. The good news was that OM’s technology could handle 60 messages per second with its technology, although at the time it had never seen more than 12 messages per second. As the OM team turned to Katz, they asked what his estimate would be for ISE. He replied “24,000 messages per second.”

“They just stared at me and said, ‘Do you mind if we speak in Swedish over here because we need to talk this through,'” Katz said. “I wish I spoke Swedish. Then they asked if I could stay and said the other three (Krell, Porter and Averbuch) could go back to New York.”

So Katz stayed to see if OM could actually reach the capacity target he set and remembers the barbeque in Stockholm with OM staff that weekend. There, one of the technologists asked the ultimate question.

“Is it possible that the reason there was no electronic options market in the United States was because it just cannot be done?” he recalled. “I said, ‘Is it possible? You tell me.'”

The consensus internally at OM was that it could not be done in 1997, but within two years, the technology team could figure it out. OM did. ISE was launched in 2000 with continuous independent quotes – a new concept for US options markets. Today, the ISE processes 1 million messages per second.

Katz said the Nasdaq acquisition brings the ISE full circle, as Nasdaq purchased OMX in 2008. In an interesting twist, he will be working with some of the Swedish team again until the end of the year.  

“They took a huge leap of faith,” Katz said. “They trusted us. And when we first started talking with them, they didn’t think the technology was yet there from a capacity, speed and processing point. But they had a confidence and belief.”

Rough Start

Katz also remembers the early days of the exchange when the brand new platform was slow to draw in brokers and market makers. In June 2001, Katz said he sat down with his wife Shelley and told her “we’re running out of money.”

“I said ‘We have a certain amount of runway left and if we don’t start making money, we’re going to run out of funds. And all these people from the industry who supported us and joined the crusade, and bought into the ISE mentality, I was beginning to worry that we weren’t going to make it.'”

The turnaround came unexpectedly, and unfortunately, in the wake of the September 11, 2001 terror attacks in New York. That event was not only a tragic day of immeasurable grief for families, but it was a wake-up call to the financial industry of just how fragile some of their businesses were. A more diverse model for options firms became essential.

“Up until September 11, 2001, and that’s a critical date, we really struggled to get firms connected with their order flow,” Katz said, noting that the industry’s Common Message Switch’s first name was a misnomer. “There was nothing common about it. Every connection was a manual effort. Firms, even investors in the ISE, they didn’t join right away, so we just had market makers trading with market makers.”

After 9-11, Katz said industry participants realized that relying on certain trading floors for the bulk of their business was fraught with risk. And market makers from other exchanges began hitting ISE markets, meaning they would trade on other exchange floors even when the price at ISE was better. As this preceded the industry Reg NMS and linkage system, market makers would then take that trade to ISE and pocket the profit. Once customers noticed that, ISE’s value proposition took hold and volumes blossomed.

In March 2005, ISE became the first US securities exchange to go public, and in 2007 the exchange was acquired by Deutsche Boerse’s Eurex exchange for $2.8 billion.


What was accomplished by Krell, Katz and the ISE team cannot be understated. In a world today that often tosses the term “disruptive technology” around loosely, ISE effectively revolutionized the equity options industry. When asked what the ISE accomplished in its history, Katz, qualified his remarks as “not bragging” but rather highlighting what ISE had been able to do to an options industry that was still rather small and archaic at the time of its launch, even though option markets had been around since 1974.

“We changed this industry entirely,” he said. “This industry was manual. The volume was about 1 million contracts per day. You had no size on the screens, quotes were wide. You had discrimination between customer and non-customer, so if you were an institutional customer you couldn’t get any trades done on the floor. If you were a market maker, you couldn’t trade on another market’s quotes.”

ISE’s announced entrance to the market forged multiple listing of contracts, which spurred innovation, competition and a radical realignment in fees.

“Customer fees dropped from 30 cents per contract to zero,” Katz said, a trend that has continued into rebate structures.

Next Up

Katz will stay on at Nasdaq through the end of the year to help with the transition and to work with Nasdaq on a little-known ISE technology that was included called Longitude, which is used for gaming and wagering industries such as the Hong Kong Jockey Club for horse racing and Sportech for sports betting. The technology’s reach may go well beyond that.

After that, he’ll stop and weigh the next chapter in life, the first new job after almost two decades at ISE. And by then it may be time to create something new all over again.

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