options trader, echoing what's on the minds of many colleagues, wonders aloud about the early progress of the new electronic
International Securities Exchange
: "How is it doing? Are its markets liquid? Are market makers standing up to their quotes?"
He and the other traders on the bricks-and-mortar exchanges are starting to get their answers: The
ISE is making inroads.
Even before the first contract traded on the ISE, it had sparked widespread changes at its four floor-bound competitors. Since multiple listings for all options began last year -- inspired by the ISE's promise to trade the 600 most liquid options -- one exchange typically has done the most volume in an option class, leaving the others to fight over the remainder. It's in those secondary markets that the ISE may be taking some volume, according to the market makers.
The 34 options that trade on the ISE include some historically popular listings, including
Average daily volume on the ISE from its first day of trading on May 26 through June 28 stood at 14,033 contracts (the ISE started with only three listings and added others gradually).
Through last week, SBC had accounted for the two most active trading days of any ISE listing. On June 6, 10,615 SBC contracts traded and on June 15, more than 10,072 changed hands. Coca-Cola options accounted for 8,312 contracts on June 19.
The Pros Come Calling
One market maker says the ISE seems to get more trades from professional investors and market makers on other exchanges in the option he trades, while at his pit it's mostly public customer business.
The market maker, who does a majority of the volume on his option class, says he hasn't seen a noticeable shift in business to the ISE away from him. On other exchanges where fewer trades are conducted in the same option class, however, he says it seemed that their business has tapered off a bit and that business may have gone to the ISE.
There may be good reason for the other exchanges' concerns. Some market pros say the ISE's quoted markets are, at the very least, competitive with the established exchanges.
"In terms of national best-bid/best-offer, the ISE is not always the tightest market, but it is best often enough so that it can't be ignored," says another trader, Henry Schwartz, head of options market making at
Banc of America Securities
, which has both primary and competitive market maker status on the ISE. (National best bid is the highest bid quoted to buy an option among the five options exchanges; national best offer is the lowest price quoted where someone will sell an option among the five options exchanges.)
"With the system designed for national best-price execution, it's perfect for small to midsized orders," says Schwartz. For complex trades, such as spreads and rolls, however, it's more difficult than the floor, he says.
As a result, much of the exchange's volume has come in bits and pieces with few big blocks changing hands, according to some. Also, it appears that so far traders and institutional investors aren't using the exchange to make complex trades involving more than one options position.
All in the Family
It's no wonder the market makers have been competitive from the get-go. The ISE's primary market makers include the
Knight Financial Products
Hull Trading unit are notable exchange floor denizens.
ISE primary market makers are similar to a specialist -- or lead market maker or designated primary market maker at traditional exchanges -- and they oversee the opening and provide continuous quotations in all of their assigned stock options.
Among some of the notable names in the options business that are ISE competitive market makers are
The Arbitrage Group
Tague Van der Moolen
. The ISE has 71 members, according to Gary Katz, its head of marketing and business development.
Pondering Payment for Order Flow
Like its floor-based competitors, the ISE is facing the issue of what to do about payment for order flow.
Richard T. Pombonyo, vice president of marketing, says the ISE has begun discussing the issue with its member firms. (
has reported on payment for order flow programs at the
Chicago Board Options Exchange, the
American Stock Exchange and the
Philadelphia Stock Exchange.)
In the end, whatever one thinks of the ISE's progress so far, it isn't going away. As David Krell, ISE president and CEO, said at the ISE's launch in late May, "This is a marathon, not a sprint."