Exchange proliferation has been a hot topic ever since the ISE shook things up at the turn of the last century, boldly challenging the status quo of four member-owned exchanges that had controlled the US market for decades. Today’s market landscape barely resembles that of the 1990s, with a dozen options exchanges now competing for order flow, and benefits in terms of innovation and efficiency that must be weighed against the cost and complexity involved in transacting across such a fragmented market.
Taking a look at option volume over the past eight years paints an interesting picture of the market- while the total volume ‘pie’ has grown more than 50% in size, exchange count has doubled in the process. The only form of consolidation seen so far is common ownership of exchanges, with Nasdaq OMX operating three of the twelve and only BATS, BOX and MIAX, with combined total market share of 7%, standing alone.
In my view, this trend is not as sinister as the term ‘proliferation’ makes it sound, and the benefits of innovation and aggressive competition justify the additional cost and complexity involved. In fact, for many traders a new exchange is a total non-event, handled efficiently by down-stream smart-routers and vendors. The managing director of the International Securities Exchange, Boris Ilyevsky, points out that “Today’s market makers, order routing firms and market data vendors have been very successful at taking advantage of the great variety of market and fee structures offered by the twelve options exchanges, which provides their customers with a seamless experience that is better today than at any other time and mitigates many of the concerns over fragmentation. Ultimately, market participants and the general trading environment will determine the optimal number of exchanges.” I agree with Boris here- and while a dozen exchanges would have been a major impediment to doing business 20 years ago, today is a different story, with cutting edge tools available to deliver an efficient and rewarding trading experience for all.