ISE Offers Customers Free Ride on ETFs and Indexes
Traders Magazine Online News, April 30, 2009
"We don't want to give customers a reason to look elsewhere," said Boris Ilyevsky, head of the ISE's options market. "We wanted to make sure we're competitive." Although the 18-cents-per-contract fee for these products is being scrapped, the ISE will continue to charge customers for trades in its own proprietary indexes.
Nasdaq OMX PHLX and NYSE Amex Options do not charge customers for the vast majority of ETF options. However, the ISE and Chicago Board Options Exchange, for several years, have charged customers fees for most premium ETF and index products (except the QQQQ). All of these exchanges earn the bulk of their transaction fees from broker-dealers, firms and market makers.
For the ISE, the decision to retire its customer fees for premium products was perhaps inevitable, given increasing customer interest in ETF options compared with single-stock options, against the backdrop of a fiercely competitive marketplace. "This was not an easy decision to make because ETFs are a large percentage of the pie of options volume," Ilyevsky said. "It's not a revenue-friendly move cutting our fees this way, but it was the right time. We're hoping to benefit in market share and increased trading activity."
He stressed that the decision was proactive. "It's important to never be forced into reacting and making a hasty decision," he said. "We wanted to do this from a position of strength." The announcement came just prior to the Options Industry Council's 27th annual conference, currently underway near Ft. Lauderdale.
The industry's largest market is the CBOE, whose volume includes high-turnover contracts such as the SPX and OEX, based on the Standard & Poor's 500 and S&P 100 indexes, which are proprietary. The ISE is the second-largest exchange in overall volume, and has the largest market share in multiply listed equity options.
Last month, the ISE's market share in equity options volume was 29.6 percent, down from 32.1 percent a year earlier. The CBOE had 27.2 percent, compared to 28.4 percent in March 2008. These figures include a half-percentage-point dip so far this year for the CBOE, and a gain of more than one percentage point by the ISE.
"The ISE's market share hasn't slipped in recent months, but people might have been thinking about moving away from them to seek lower fees," said Randy Frederick, director of trading and derivatives at retail broker Charles Schwab. "If a firm can trade on seven exchanges and smart order routers can route specifically away from the ISE to cut fees [when the ISE is tied at the best price with at least one other market], that could hurt."
Penny quoting and the rise of smart routing to access liquidity across markets have forced all the exchanges to battle one another on price and speed. More electronic trading from a range of participants, particularly in penny-quoted options, has fueled this contest.
Andy Nybo, a principal and head of derivatives research at TABB Group, a financial markets research firm, sees even more competition on the horizon. "The greater adoption of technology, the entrance of new types of market participants, and the evolving regulatory environment are just beginning to impact the options market," he said. "Exchanges will continue to test new market structures, fee schedules and trading protocols in an attempt to gain--and maintain--market share." He said these efforts are only likely to intensify.
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