Year-End Thoughts From the Wise Men of Options

Electronics Killed the Specialist Star?

But even Lek acknowledges that electronic trading "is certainly a step in the right direction" toward leveling the playing field. Given that the International Securities Exchange, the first all-electronic options exchange, has become the market-share leader, wiping out more than 20 years of dominance by the Chicago Board of Options Exchange in less than three years' time, it seems evident that electronic trading is the future of the industry.

This trend will continue with next year's opening of the Boston Options Exchange, or BOX, another all-electronic exchange. This exchange will not only have no specialists, it will take orders on a pure time/price priority -- meaning retail traders get no preferential treatment over broker/dealer or market-maker orders. "This BOX continues the evolution of electronic trading," said Brian Sandberg, a principal of Gander Capital, a New York-based hedge fund. While the structure and arguments for and against the BOX were touched on in an earlier article, the debate is far from over, and I'm sure it will only rekindle when trading commences some time in the first quarter of 2004.

But BOX officials are confident that they are creating an exchange that will meet current market needs. "The growth in option trading is due to increased volume by institutional and professional traders. By allowing them to become order-flow providers without an equity investment, we are targeting the growth segment of the business," said Alan Grigoletto, the BOX's Chicago and San Francisco representative.

The BOX will be prepared to commence trading 10 days after it receives approval from the overburdened Securities and Exchange Commission; at that point we'll revisit the subject and be able to provide a more in-depth assessment. The launch of the BOX might also coincide with the ultimate demise of the American Stock Exchange, which operated on the specialist system. Gain one exchange, lose one exchange -- that's recycling in the name of progress.