New Electronic Options Exchange Goes for Soft Launch

The International Securities Exchange is listing just three options on its first day of trading.
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There's been a lot made of how before one contract ever traded on it, the

International Securities Exchange

helped change the options market forever by forcing the establishment to embrace technology and tighten pricing.

Now the time has come to see if anything changes

after

the ISE begins trading. On Friday, the first contract will change hands -- anonymously -- on the ISE.

When investors come to market Friday to buy or sell options on

LSI Logic

(LSI) - Get Report

,

Alcoa

(AA) - Get Report

and

SBC Communications

(SBC)

, there's a chance those orders will be sent to the first all-electronic options exchange in the U.S.

While some might snicker at the relative dearth of contracts that will begin trading, for the ISE, it's all part of the plan, according to Gary Katz, the ISE's head of marketing and business development.

"I'm sure they'd like to open up with a big bang," says one options market source who requested anonymity, an unlikely scenario now that the ISE is "starting off slow" with listing only three options. Its competitors are the

American Stock Exchange

, the

Philadelphia Stock Exchange

, the

Pacific Exchange

and industry leader

Chicago Board Options Exchange

.

Katz says the measure of success for the exchange isn't the first-day volume, but the ability to open the market, to trade when someone wants to trade and have all the trades cleared. "It doesn't matter what the volume is," says Katz.

David Krell, president and CEO of the ISE, says the exchange is going to take about six months to roll out the options on the 600 stocks.

Anticipation of the launch of the ISE, approved by the

Securities and Exchange Commission

in March, brought multiple listing of options, lower trading costs at the "bricks and mortar" exchanges that trade options, and the rise of automated trading systems.

The options-market pro says ISE's price advantage has been countered because specialists and market makers on the four floor-based options exchanges have told clients they'll match any price on ISE.

The ISE in a sense is caught in a Catch 22, the source says. The exchange needs order flow to make the thing fly, however, orders might not come to it until firms see the exchange work, which will take a fair amount of volume.

"As the ISE introduces the first electronic options market, the competing exchanges are planning new systems to compete. We believe that the increased competition will provide higher-quality executions and quotations, as well as increased liquidity," wrote Scott Fullman, chief options strategist at

Swiss American Securities

, a unit of

Credit Suisse Group

, in a piece on the ISE published earlier this month.

The ISE has attracted some of the biggest names in the options trading world to be either primary market makers or competitive market makers.

Primary market makers, in their assigned options, will continuously make two-sided markets. Competitive market makers will supply additional liquidity and depth via quoting independently.

"This is a work in progress," the source says.