The expanding field of equity options exchanges will grow to 13 around Q3 of this year, as the ISE launches its third options exchange, ISE Mercury.
The exchange, originally set for the second quarter of the year, will give the ISE three options platforms, one for every existing type of fee structure. The ISE is now only waiting for regulatory approval.
The competition is heated in the options space. ISE has recently focused on market segments outside of the payment-for-order flow, rebate style format. But as this structure has become a much larger segment of the market, ISE has adapted and plans to implement it into ISE Mercury.
“When ISE first launched, we offered a classically priced, payment for order flow exchange,” said ISE’s managing director, Boris Ilyevsky, adding that when other exchanges began offering direct rebates to their members, “we decided not to compete in that fee schedule space, and it worked very well for us.”
But that has changed. Exchanges that offer the rebate style structure are the Chicago Board Options Exchange, Nasdaq OMX PHLX, NYSE Amex and more recently BOX and MIAX. That trend helped spur the creation of ISE Mercury, he said.
In its trade allocation structure, ISE Mercury will be the same as ISE’s other two exchanges – standard pro rata with customer priority, with primary market maker allocation where the primary market maker gets any order that is five contracts or less if they are at the NBBO, Ilyevsky said. ISE’s main exchange offers a modified maker-taker model, while ISE Gemini uses traditional maker-taker.
“That is what differentiates ISE Gemini, because it’s the only maker-taker market with customer priority,” he added.
ISE Gemini, which is less than two years old, hit a high of more than 5 percent in options market share for a couple of months last year. In February, its market share was 1.89%, according to OCC data. So far in March, market share is 3.6%, according to the exchange.
Some traders and brokers have complained there is very little differentiation among the options exchanges and said the growing number of options exchanges makes the market more complicated.
“We don’t force any market maker or firm to join. It’s by choice,” countered ISE’s CEO Gary Katz. “Most of the retail order flow goes through consolidators today, and for them to add another destination is relatively straightforward. The amount of work is significantly reduced because we will offer all three exchanges through the same connectivity into the same data center.”
One reason for the complaints may be that traders who are connected to, say, seven out of 12 exchanges start to feel as if they are missing more and more, as the 12 becomes 13 and then maybe 14, Katz said.
Also, “In the options space, there are no dark pools,” Katz said. “As a result, where you might see 50 equity trading venues, including exchanges and dark pools, in the options world you see them all as exchanges. So [13 options exchanges] is not really a large number.”
Another reason is that many people fear change will bring added costs. And it would indeed add cost if the exchange were putting ISE Mercury on a different data center or network, Katz said. But people will access ISE Mercury through the same data center and platform as ISE and ISE Gemini.
“In some cases, depending on how they are set up, some members might have minimal increases to their infrastructure – additional servers they may wish to purchase, for example,” he said. “And in some cases they will have to think about obtaining additional bandwidth – in the case of firms that use extranet providers for connectivity to various data centers.”
But in many cases they won’t even have to do that.
“Also, we are in the Equinix data center NY4 [in New Jersey], and almost everyone is [connected] there,” Ilyevsky said. “So there is relatively little effort and cost involved in launching the new venue.”
“I think most see it as something relatively easy to do,” Gary Katz said. “For others it may be more complex to take advantage of the multiple offerings. It’s on a case by case basis.”