SEC Approves New Electronic Options Exchange

FRAMINGHAM (03/02/2000) - The Securities and Exchange Commission (SEC) last week approved a proposal for a new, all-electronic stock options exchange, the New York-based International Securities Exchange (ISE).

ISE is expecting to begin trading May 26, according to a statement made by the exchange.

The approval - the first granted by the SEC since it gave the Chicago Board Options Exchange (CBOE) the green light in 1973 - is expected to light a fire under other exchanges that have been slow to go electronic.

ISE will have an advantage over traditional stock exchanges in that it won't have to pay for the costs associated with operating a trading floor, according to analyst Larry Tabb at TowerGroup in Needham, Mass.

"Through technology, they can match buyers and sellers much more efficiently than the CBOE or AMEX (American Stock Exchange in New York)," said Tabb. While the traditional exchanges have begun moving to electronic transactions, they still have the old infrastructures to contend with, he added.

The ISE approval might push other exchanges to automate sooner, said Dana Stiffler, an analyst at Newton, Mass.-based Meridien Research Inc.

For example, CBOE on Monday began posting real-time quotes for stocks and options on its Web site, This includes quotes on stocks listed on the New York Stock Exchange Inc., the Nasdaq Stock Market Inc. and AMEX, as well as options quotes from the four U.S. options exchanges.

CBOE spokesman Gary Compton said the move was unrelated to the ISE approval.

"We have . . . been implementing a lot of changes and developments" over the past 18 months, he said.

For example, said Compton, 92 percent of all orders are already routed electronically and a full third are executed electronically. The remainder of the transactions, he added, are still handled the old fashioned way - on the exchange floor.

"We already do a lot of what the ISE says they're going to do," Compton said.

"Only we think we do it better because we have a substantial pool of liquidity (market activity) already in place."

In fact, according to analysts, a major hurdle for ISE will be to get enough traders interested in using ISE quickly enough to build up its own pool of liquidity. Otherwise, the exchange will just wither away.

ISE officials said they already have enough traders on board to have a functioning and liquid market on the first day of operation. They said all 110 market maker memberships have been sold, and connections with about 50 brokerages have already been established, including most of the major Wall Street firms.

However, on the May 26 opening day, the ISE will start with only 30 moderately active issues. Eventually, ISE plans to list options on 600 of the most widely owned and popular stocks. "It'll be a much simpler process than if we were starting with the whole 600," said Richard Pombonyo, ISE's vice president of marketing.

The make-or-break issue, according to Tabb, will be ISE's user interface.

Not so, said ISE CIO Dan Friel. "We are providing a workstation to our market makers, but a lot of our members have expressed their desire to use their own technology," he said.

To accommodate those members, ISE will have an open architecture, and several third-party vendors are developing their own interfaces, Friel said. "We see that as a major advantage of our system."

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