The Chicago Board Options Exchange yesterday announced it was spending $25 million to launch a new options exchange, currently called C2, in 2009. The all-electronic exchange will operate under a separate exchange license, pending regulatory approval.
William Brodsky, the CBOE’s chairman and CEO, said in an announcement yesterday that the new “alternative” exchange would “complement our Hybrid marketplace by expanding our customer reach, thus enhancing CBOE’s competitive position.”
In an information circular sent to exchange members yesterday after the markets closed, the CBOE said its expansion is a response to exchange consolidation in the options industry. “Exchange consolidation has enabled major competitors, such as the NYSE/PCX/AMEX combination and the NASDAQ/PHLX combination, to control multiple, separate Exchange licenses,” the CBOE wrote. “The ability to offer different execution venues (for instance, a traditional, floor-based market and an all-electronic exchange) under a single Exchange holding company enables these combined entities to appeal to option users across the entire customer spectrum.”
The exchange did not say whether the new exchange will be a price-time priority exchange. That market model has gained traction over the last year and a half as the industry has run a pilot that in which options priced under $3 are quoted in penny increments. The CBOE has a pro-rata system that guarantees market makers quoting at the national best price up to 40 percent of incoming marketable orders. The pro-rata model doesn’t charge customers transaction fees for most products.
NYSE Arca Options, Boston Options Exchange and Nasdaq Options Market are price-time priority markets with maker-taker pricing that pays those who post liquidity and charges those taking liquidity from their respective platforms. With penny-quoting, these exchanges have logged increases in their market share in penny-quoted names.
“It’s good to see that the CBOE is flexible and responsive to customers’ needs,” said Brian Nigito, an executive at GETCO, a global electronic market-making firm. “It’s a dynamic landscape and they recognize that. That’s why they’ve been around as long as they have and why they’ll continue to be an enormous player in the future.”
C2 will be a subsidiary of the CBOE, which itself will be a subsidiary of CBOE Holdings, once the exchange’s planned demutualization occurs. C2 will operate under a separate exchange license from the CBOE, “with a separate access structure and fee schedule,” CBOE said. It will run on CBOEdirect technology.
The new exchange will have its own board of directors, rules, connectivity, and systems architecture, with its primary data center located in the New York metropolitan area. The location of the data center is important to reduce latency for firms whose trading engines are in New York and northern New Jersey.
The International Securities Exchange, the CBOE’s main competitor, is closely watching developments in the options industry as the market structure changes. “We are constantly evaluating new opportunities, including the maker-taker model, but at this point in time, we are comfortable with maintaining our current pro-rata market structure,” said Molly McGregor, an ISE spokesperson.
The options industry has seen unprecedented trading volume this year. According to the Options Clearing Corp., the industry passed 3 billion contracts in a single year for the first time yesterday.
