NYSE Amex options expects to double its market share in short order by using better technology.
The unit of NYSE Euronext – formerly the American Stock Exchange’s options trading operation – sees its share of the options business rising from a current 6 percent to around 12 percent “pretty quickly.”
After acquiring the Amex last year, NYSE Euronext scrapped the exchange’s aging trading platform and migrated the business to NYSE Arca’s systems. The switch is expected to result in faster fills and more up-to-date quotes.
That could bring in flow from those brokerages focused on speed that abandoned the Amex in recent years.
“We expect the electronic business to grow very rapidly,” Ed Boyle, senior vice president, NYSE Euronext U.S. Options, told reporters this week. “We have a chance to double our market share pretty quickly.”
Duncan Niederaur, NYSE Euronext’s chief executive officer, is equally sanguine. “Between NYSE Arca and NYSE Amex we expect to get consistently 20 percent and 25 percent market share. That number is now between 17 percent and 18 percent. The next stop is 20 percent. Hopefully, by the end of this year or a year from now, if we are closer to 25 percent, we would have really established ourselves.”
NYSE Arca, the exchange operator’s second options marketplace, currently has a market share of 12 percent. It operates under the post-take trading model, while NYSE Amex operates under the pro-rata model.
Boyle is responsible for both exchanges and says the ability to run two exchanges on a single platform produces great synergies. “You can run two exchanges with 110 percent of the staff you would have had for one,” he told Traders Magazine.
With the acquisition, NYSE Euronext brought over senior operations personnel from Amex, including James Hyde, vice president, NYSE Amex options. It did not retain Mike Bickford, formerly in charge of options at Amex.
NYSE executives spoke to reporters on Monday at a press briefing during NYSE Amex’s first day of trading. The company has rebuilt its former Blue Room and Extended Room to accommodate about 300 options traders.
Big players on the new floor include specialists CTC and Susquehanna and brokers Amerivest and Israel Englander. The vast majority of the business is in index and ETF options, rather than single stock options.
Open Outcry
Most business conducted at the Amex is open outcry. Only 20 percent of the flow is traded electronically. That is nearly the exact opposite of the industry as a whole where about three-quarters of all volume is done electronically.
“We believe we will turn [those figures] around,” Boyle said, “so 70 percent to 80 percent will become electronic and 20 percent to 30 percent will become open outcry.”
The use of Arca’s technology is expected to go a long way to bringing in flow from brokers looking for quick fills. The Arca platform can handle 1.5 million quotes and 150,000 orders per second. The old Amex platform could only process 3,000 quotes and a similar amount of orders per second, according to exchange executives.
Also, Arca promises a two millisecond processing time between its matching engine and its gateway, or connection to customers. “NYSE Amex’s options platform is 300 times as fast as the old American Stock Exchange platform,” Boyle said.
Any improvements at Amex are welcome, says an executive at one big brokerage. “If you had to choose an exchange where you could expect quick fills, tight spreads and quick responses, Amex would typically not be at the top of your list,” Randy Frederick, the director of trading and derivatives at the Schwab Center for Financial Research, part of Charles Schwab & Co., said. “The Amex did fall behind as far as technology was concerned. They weren’t able to be as competitive.”
Frederick is optimistic that changes to the Amex’s trading platform could lead to growth at the exchange. “I think there is no question their volume will pick up a little bit if they are able to keep up with the more automated exchanges.”
Pennies
Amex’s expectations for growth however could be undermined by an expansion of trading in penny increments.
Currently, 63 options classes trade in penny increments, accounting for about one-third of the volume. The change from nickel increments began over two years ago. It has resulted in a transfer of market share from the traditional pro-rata exchanges such as Amex and the Chicago Board Options Exchange to the post-take venues such as NYSE Arca and the Boston Options Exchange.
An expected expansion of the penny pilot to a wider swath of options this year is likely to result in more business being done at the post-take exchanges. Any new proposal could expand the amount of volume done in pennies anywhere from 50 percent to 90 percent of total volume.
Boyle acknowledges the issue, but says: “There is a lot more to market share than the fate of the penny names.”
Niederauer added: “I’m not sure how we’ll balance the two [exchanges]. There’s a different product set at NYSE Amex. Most of the market share comes in products that are pretty specific to Amex. We’ll see.”
