November 1, 2013

Piece of the Action

Small options market MIAX trades ownership stake for order flow in deal with six big firms

By

Peter Chapman

The MIAX Options Exchange agreed to sell a stake in itself to six of its largest members.

The deal gives Bank of America Merrill Lynch, Morgan Stanley, Wolverine, Interactive Brokers, Susquehanna International Group and KCG Holdings each the right to purchase up to 19.9 percent of MIAX parent company Miami International Holdings over a two-year period.

The company is owned by Kuwaiti consortium IFA Group and other investors based in the U.S. and overseas.

To gain a stake in MIAX, the brokers must pay some monies up front and meet certain volume thresholds over the two-year period. If they hit those targets, they are eligible to receive warrants to buy MIH stock.

The goal of the deal is help MIAX-one of the smallest of the industry's 12 options exchanges-grow its volume and market share, according to company officials.

"This is a modest attempt by a small options market to attract order volume away from larger competitors by adopting an innovative pricing strategy," company executives said in a filing with the Securities and Exchange Commission.

For the month of September, MIAX controlled about 1.5 percent of the contract volume in single-stock options trading, according to data from the Options Clearing Corp.

The deal gives the big brokers two tracks to gain ownership in the exchange operator. Under the so-called "A-Units Option," a broker must invest $508,475 up-front. In return, the broker receives 101,695 shares of common stock and warrants to purchase an additional 2,182,639 shares. The warrants are exercisable upon the broker achieving certain volume thresholds over a 23-month period.

Under the so-called "B-Units Option," a broker must prepay exchange fees of $500,000, covering a 22-month period. In return, the broker receives warrants to purchase 1,713,251 shares of MIH stock.

According to Tabb Group analyst Andy Nybo, the deal benefits MIAX by securing order flow. The deal benefits the brokers if the value of their investment increases.

"MIAX is effectively cementing the relationship and encouraging those new equity owners with the opportunity to gain an equity stake in the exchange in return for hitting certain volume thresholds," Nybo said. "As the exchange increases its market share and volume rises, the value of that equity stake for the brokers goes up as well."

It is unclear how many shares MIAX has outstanding or the value of the exchange.

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