Nasdaq, which will acquire a second license to operate an options exchange as part of its purchase of the Boston Stock Exchange, could put that license to use in the not-too-distant future, according to a top Nasdaq official. That development comes despite the fact that the license is currently being used by the Boston Options Exchange, or BOX.
Nasdaq already has plans to launch one options exchange in December. The model for that exchange-a price-time priority market with a maker-taker fee structure-is very different from conventional options exchanges. The success of Nasdaq’s model is therefore not assured. Consequently, launching a second, more traditional dealer-centric electronic exchange could give Nasdaq a second swipe at building listed equity-options market share.
The issue for Nasdaq is whether it wants “a foot in one camp or a foot in both camps,” Adam Nunes, head of Nasdaq’s new options market, told Traders Magazine. Two options exchange licenses would let Nasdaq “participate in both of these market structures,” he said at the Security Traders Association conference in Florida last month.
Nasdaq’s purchase of the BSE, announced in early October, includes BSE’s license to trade equities and options. However, the Boston Options Exchange, which Nasdaq did not acquire, will continue to use the BSE options license for its market. BOX is owned by the Montreal Exchange, the BSE and seven broker-dealers.
Eventually, though, Nasdaq could regain use of that license. When BOX’s contract to use the BSE’s options license comes to an end, BOX could arrange to use another self-regulatory organization’s license or seek to acquire its own SRO license. BOX declined to comment on its plans. Both BOX and Nasdaq declined to comment on the terms of the contract for the options license.
Nasdaq, for its part, remains on schedule to launch its own U.S. options market next month. Nasdaq Options Market, like BOX, will be a price-time priority system with no market-maker participation advantages, Nunes said. It will have a maker-taker fee structure, which has become the norm in the equities market in recent years and is currently being tested by NYSE Arca Options and BOX in the penny-quoting classes.
In recent months, Nasdaq executives have repeatedly stressed that a price-time priority market is best suited to trading options in the penny-quoting pilot that is now being expanded. A price-time market treats all comers as equals. In late October, Robert Greifeld, Nasdaq’s president and CEO, stressed that the “market structure we’re adopting [in options] will increase as a percentage of the overall market, and the market itself is expanding.”
But the biggest exchanges- the Chicago Board Options Exchange and the International Securities Exchange-remain quote-driven markets. And given the liquidity and depth of these markets, even if the existing price-time exchanges gain market share, the bigger venues are expected to retain the bulk of the options business, according to market participants.
As a result, Nasdaq Options Market is likely to be fighting for only a limited share of the listed options market. A second market could alter that prospect.
