Responding to the success of some options exchanges in offering a maker-taker pricing model, the International Securities Exchange launched ISE Gemini in early August.
With maker-taker pricing, market makers and other participants that provide or make liquidity are rebated, and participants that trade against the resting quotes and orders pay a taker fee. The pricing is designed to encourage market makers and other participants to post orders on the exchange, said Boris Ilyevsky, managing director of ISE’s options exchanges.
“Historically, as other exchanges have introduced maker-taker pricing models, they have been able to attract a fairly significant portion of the resting order flow, both on the customer and non-customer side,” he said.
The ISE has not traditionally competed well for resting order flow, Ilyevsky said. Other options exchanges offering maker-taker pricing include Arca, Nasdaq Options Market and BATS.
As of mid-August, ISE Gemini has approved 26 market makers to operate on the new exchange, which is in the process of rolling out the top 300 most active options classes. The exchange is now at 56 names and is planning to debut 50 additional names each Monday.
MARKET EXPANSION
With a 15.5 percent market share for the first seven months of this year, according to the Options Clearing Corp., the ISE has the ability to leverage its existing franchise, enabling its current market makers to expand into the new market model, said Andy Nybo, head of derivatives research at Tabb Group.
“The more flexibility an exchange can bring to the table helps them to expand market share and grow revenue,” Nybo said. “Gemini provides the ISE with another way to attract order flow from both end users and the market-maker community.”
One of the biggest factors market makers evaluate when deciding to participate on a new exchange is obviously liquidity, but also the cost to participate on that exchange in terms of connections, legal requirements and market data costs, Nybo said.
“If you are able to connect to a new exchange that you already have a business relationship with, it makes it that much easier and that much more attractive than establishing a relationship with an exchange you have zero business relationships with,” Nybo said.
ISE members connecting to Gemini can reuse their current connectivity, and the incremental cost to participants is very minimal, Ilyevsky said. The exchange’s quote risk mitigation functionality will work across both markets, he said.
DIFFERENCES
Asked what differentiates ISE Gemini from exchanges like Arca, BATS and Nasdaq Options Market, Ilyevsky said that, like the ISE, Gemini offers pro rata and customer priority market structure, while the others are price-time exchanges.
“We believe there are benefits to customer priority. It was one of the reasons ISE was so successful from the beginning,” he said. Customers can include pension and mutual funds, as well as retail investors.
The addition of Gemini brings the total of options exchanges to 12.
A number of exchanges offer multiple liquidity models, including the CBOE with C2, NYSE Euronext with Arca and Amex, and Nasdaq with Nasdaq Options Market, BX and Philly, Nybo said.
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