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October 4, 2007

Regionals Comment on Their Future

By James Ramage

Last month's demise of the Boston Equities Exchange has prompted industry analysts to predict more casualties ahead among the smaller stock exchanges, but the remaining five say they have what it takes to tough it out.

None sees BeX's demise as a harbinger of its own fate. In fact, each expects its business model to attract volume and keep it alive.

BeX ceased operations after just over two years because its window of opportunity to garner even subsistence-level volume closed once the "major players" invested heavily in technology, a spokesman for the Boston Stock Exchange says. In a desperation move last June, the BSE had cut the BeX's take charge drastically and eliminated its provider rebate to draw volume.

"We and everybody else never expected there to be a half-dozen regional exchanges indefinitely," says Mike Traynor, senior vice president in charge of strategy at the National Stock Exchange. "The news wasn't surprising; it doesn't change our thinking one iota."

The National plans to continue its utility service model of low overhead costs combined with aggressive pricing, which includes a liquidity-provider rebate at 30 cents per 100 shares, Traynor says. The National also relies on order flow it gets as part of its long-standing order-delivery/ ECN aggregation plan with BATS, Traynor notes.

"We have such a low-cost infrastructure-relative to many of the others in this space-that we can make money at more aggressive prices than virtually everybody else," Traynor says.

For the ISE Stock Exchange, says Andrew Brenner, head of the equities exchange, survival depends on its market model and services. The ISE embedded its dark pool, MidPoint Match, inside its displayed stock market. BATS now quotes on its platform. According to Brenner, the ISE's daily volume has increased from an average of about 8 million shares in June to 45 million shares in August, and 90 million shares in September up to the 24th. The ISE is also looking to more fully integrate its stock and options platforms.

Both the National and the ISE are highly dependent on their relationship with BATS, sources say. The scrappy ECN, based in Kansas City, Mo., has taken a large chunk of the Nasdaq market and has worked with several exchanges. BATS originally quoted on the National, but recently moved some of its quoting to the ISE because that exchange started offering order delivery. Industry analysts note that those exchanges working with BATS are vulnerable, as BATS has declared its intent to become a stock exchange itself.

For its part, the Philadelphia Stock Exchange is counting on business from its multi-asset platform-in options, equities and futures-for survival, according to Sandy Frucher, its chairman and chief executive. The asset classes operate from a common platform, which permits cost savings.

Options are its main business, Frucher says. In August, the exchange's monthly equities volume jumped 338 percent from last year's figure, as more than 190 million shares traded."Over the long haul, everybody has to figure out a way that they're going to distinguish themselves in this game," Frucher says. The PHLX will "offer thousands of products from different modalities on a common platform."

Over at the Chicago Stock Exchange, chief executive Dave Herron points to the dual nature of his exchange as what will keep it alive.

When the CHX transformed from a specialist system into an ECN-like system, he notes, it was able to keep its brokered activity-the institutional flow worked by floor brokers at the CHX. "We've layered in order flow from market-making firms and leveraged our connectivity with market makers and customers to keep our volume viable," Herron says.

In August, the CHX enjoyed its highest monthly volumes since the February launch of its new trading model. Its average daily volume was almost 40 million shares, with a daily high of 54.5 million shares.

"It isn't that if you are under 50 million you are not making money-it depends on structure," Herron says. "Sometimes you can be healthy at 30 million and not at 60 million, depending on the mix of flow."