This column was originally published on RealMoney on Feb. 6 at 2:27 p.m. EST. It's being republished as a bonus for readers. For more information about subscribing to RealMoney, please click here.

Shares of the

International Securities Exchange


are up about 8% today after the all-electronic options exchange reported

better-than-expected earnings.

This stock has been lagging significantly behind those of other publicly traded exchanges; before today's move, it was up a mere 10% over the past 52 weeks. That compares to the

Intercontinental Exchange's

(ICE) - Get Intercontinental Exchange, Inc. (ICE) Report

180% gain, the

Chicago Mercantile Exchange's

(CME) - Get CME Group Inc. Class A Report

45% gain and the

Chicago Board of Trade's

TheStreet Recommends


70% gain during the same time period.

Among the concerns that had been weighing on ISE shares was the belief that the exchange's best growth years are behind it. Even though option-trading volume was growing at a 30% annualized basis for the past few years, the ISE's market share slipped a few percentage points in 2006, the first such decline in its five-year history. The

Chicago Board Options Exchange

(CBOE) regained its leadership, thanks to its domination of trading in index products.

While the advent of electronic trading is what made ISE such a huge success and revolutionized the option industry, it also spawned a more competitive market and laid the groundwork to commoditize the business. There are now six options exchanges that all offer electronic platforms, and almost all products are listed on multiple exchanges. This has led to margin pressure and caused concerns about long-term profitability.

But in today's earnings release, the ISE said profit margins actually expanded, in part because the exchange no longer has to pay licensing fees to list options on exchange-traded funds. More important, its costs to process contracts fell to 1.9 cents per contract per side, from 2.4 cents. This allowed gross margins to increase 27% and profit margins to increase 10.5% from the year-ago period. Everyone knew that volume and revenue would enjoy double-digit growth, but I think it's the big increase in profitability that was truly impressive and caught analysts by surprise.

Today's option activity suggests that some of the skepticism has eroded, as more than four calls have traded for every put. While most of the volume is focused in the near-term February expiration, one sign of the increasing optimism is that some longer-dated calls, such as the April and June $50 and $55 strikes, have each traded more than 1,000 contracts today.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback;

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