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September 28, 2006

The ISE's Foray into Equities

By Nina Mehta

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The International Securities Exchange, one of the country's top two options marketplaces and the first all-electronic options mart, is crossing over into the equities trading business. This month the ISE Stock Exchange will launch its first product, a blind, continuous-crossing mechanism called MidPoint Match. The system matches orders anonymously

at the midpoint between the national best bid and offer. In December, ISE expects to commence trading on its new platform in open-book fashion.

The ISE owns 51 percent of the new exchange. Its 10 strategic partners are Bear Stearns, Citadel Derivatives Group, Deutsche Bank, a subsidiary of E*Trade Financial Corp., Interactive Brokers Group, JPMorgan, Knight Capital Group, Nomura Securities International, Sun Trading and Van der Moolen.

The target market for the new crossing platform is program trading and algorithmic orders, two areas of trading that are expected to continue to grow. Running the brand-new equities market is Andrew Brenner who joined the ISE in May. Brenner most recently worked for the Capital Markets Group of Fidelity Investments. During his two-and-a-half years in the firm's institutional brokerage business, he was responsible for program trading as well as algorithmic trading and analytics.

Before Fidelity, Brenner was at Credit Suisse First Boston, where he was responsible for listed equity derivatives and portfolio trading for the firm's customer-based business in Europe, Asia and the U.S. Prior to CSFB, he was at Morgan Stanley.

Senior Editor Nina Mehta spoke with Brenner to learn more about the exchange's plans and strategies for its new foray into equities.

TM: The ISE is launching a stock market when there are already more than dozen execution venues for equities. How do you expect to attract business?

Andrew Brenner: We think the MidPoint Match is a unique product. It's a fully automated, continuous, anonymous, algorithmic-friendly product. In December we expect to roll out our fully displayed market, which will be Reg NMS-compliant. The MidPoint Match embedded in a fully displayed market differentiates us from others out there.

TM: Why is the MidPoint Match being launched first, ahead of the displayed market?

AB: We're viewing ourselves as a MidPoint Match exchange. That's the highlight of the exchange and we want people to understand that.

TM: Crossing networks such as Liquidnet, Pipeline and others have been successful in recent years, and many broker-dealers now have alternative trading systems to cross customer orders. Did that fuel the launch of MidPoint Match?

AB: We've certainly seen the success of broker-sponsored crossing venues, and we're aware that many brokerage firms are internalizing their flow. We felt there was still a need for an exchange platform that's totally neutral and where all flow could potentially get equal standing.

TM: What are other benefits of a crossing system within an exchange?

AB: A client can sit on the bid [on the displayed side] and hide up to the midpoint, so they get the benefits of both the displayed market and the hidden market.

TM: Can you give me an example of what you mean?