In E-Trading Competition, Options Customers Win

As the CBOE is no longer the industry goliath, other exchanges have begun slinging rocks with greater frequency. In an attempt to remove its last pillar of strength -- the exclusive trading rights for options-based index products such as the S&P 500 -- the ISE has sent a letter to the Securities and Exchange Commission, claiming that the exclusive licensing agreement amounts to a monopoly in violation of dual listing rules and constitutes anticompetitive practices.

The CBOE counters that index products differ from equity options in that "millions of dollars have been spent in both development, marketing and acquiring the license ... and are therefore protected under intellectual property and contract law," according a letter the CBOE submitted to the SEC.

The Pacific Exchange, which endorsed the ISE's letter, sent one of its own requesting a moratorium on any new exclusives, including the impending launch by the CBOE of trading in options and futures based on its volatility index (VIX). The Pacific Exchange, as Carlson points out, is not "looking for a free ride, and [we] have offered to pay a nonexclusive trading fee. This is what's best for the customer and business over the long term. When the Amex made similar non-exclusive arrangements involving the QQQs, it led to a threefold increase in volume and much more liquid markets."

New Kid on the BOX

Other battle lines are being drawn over the launch of the Boston Options Exchange (BOX), which is currently awaiting approval from the SEC but which hopes to open by the fourth quarter, according to Janice Foley, vice president of corporate communications. Foley notes that the SEC is currently reviewing more than 220 comment letters, of which just 13 are negative. "I don't think it would be a stretch to surmise that those 13 come from competing exchanges," she said.

The major criticism of the BOX's structure is that its Price Improvement Period, or PIP, will promote internalization, i.e., a firm receiving an order can "cross" it on its own books without displaying it on the open market. But Foley explained that "PIP requires at least three firms to bid and allows for a three-second window for price improvement." The BOX won't have any specialist per se, but it will have a layered system of primary market-makers, member firms and those with direct access to the electronic system.

Some think this is tantamount to creating a private auction. "The BOX limits competition, fosters internalization ... and will greatly degrade the auction process," reads one portion of the ISE's comment letter. This is slightly more combative than the diplomatic "we welcome all competition" party line that ISE Director of Special Projects Steven Spears offered a few months ago.

The PCX's Dale Carlson is much more straightforward. "The BOX's [PIP] is a feeble attempt to construct a private auction and keep markets hidden," he said. "Three seconds and three bids does not a market make."

But LiquidPoints' Saliba defends the newcomer. "I think some of this criticism comes from self-preservation and some from a simply lack of understanding," he said. "What people need to realize is that in three seconds we can receive 33 price improvements from over 100 sources." Saliba points out that orders can be placed with a maximum bid or offer that will continually improve on current prices. "The process will ultimately lead to tighter bid/ask and better executions," he concluded.

Despite these turf wars, the customer can only benefit from the increased scrutiny and advances in technology.

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