NYSE Euronext’s plan to sell a "significant" equity stake in NYSE Amex Options to seven big brokers is a bid to grow electronic trading on the options market. The planned deal, announced on Wednesday, is expected to close by the end of this year.
"Electronic trading is a big piece of what we want to build up through this transaction–to add to our strong floor business," said Joe Mecane, executive vice president for U.S. markets at NYSE Euronext. "That has not been the historical focus of the Amex platform." The exchange operator bought the struggling American Stock Exchange last year for $260 million. In addition to Amex, the company operates NYSE Arca Options. The two exchanges have different market models and attract different types of participants.
The seven firms that will own equity stakes are BofA Merrill Lynch, Barclays Capital, Citadel Securities, Citi, Goldman Sachs, TD Ameritrade and UBS. All are big liquidity providers or order-sending firms. NYSE Euronext will maintain the largest stake in the Amex options market and will run the exchange’s day-to-day operations.
"This gives us the ability to partner with a number of significant liquidity providers as we build out the Amex platform," Mecane said. "From their standpoint, this gives them a vested interest and some control over market structure as we continue to evolve in the marketplace. Our incentives are aligned."
Citadel agrees. "Picking the right partners is really helpful–and in many cases critical–in the initial phase of growing liquidity on a platform," said Marty Mannion, chief operating officer of Citadel Execution Services, the equity market-making and options order-routing business within Citadel Securities. He added that Citadel was very pleased with the other partners in the Amex transaction. Citadel, which makes markets on all seven options exchanges, is the largest market-making firm in U.S. equity options.
The deal with the seven brokers will yield a new board for Amex Options and a new chief executive. NYSE Euronext declined to provide specifics about how large its partners’ equity stakes are, how much the ownership stakes are worth and how the deal is structured.
However, the deal was a long time coming. NYSE Euronext has engaged in discussions about partnering with broker-dealers since at least early this year. The discussions were under way when the exchange migrated the old Amex options platform to Arca-based technology in March.
"We were looking for a way to jumpstart the Amex market share because it had gotten so low over the last couple of years," Mecane said. Last month, Amex’s share in equity options was 6.4 percent. It hit a 20-month high of 7.7 percent in July, after reaching an all-time low of 4.9 percent in March.
"They needed to do something," said Sang Lee, founder of financial-services research firm Aite Group. "Amex should have done something like this before they were acquired by New York. The hope is that giving some of the bigger players financial stakes will make Amex a bit more viable as an options execution venue and add a few more percentage points to their market share."
NYSE Euronext’s Mecane said he expects the market share of the company’s two options exchanges to be in the "mid-20s-percent range" by the middle of next year. Currently, they account for just over 18 percent. This week, Amex also announced that it finally has an electronic complex order book, which enables firms to do multi-leg and spread trades. Amex has lagged all the other exchanges in rolling out this capability (until now, complex trades could only be done on the floor).
Amex, which began trading options in 1975, hemorrhaged market share in the last few years. As recently as 2005, it was the number-three market, with 14.1 percent of the volume, behind the International Securities Exchange and Chicago Board Options Exchange. The ISE is the largest market in equity options, followed by CBOE. PHLX is the third largest, with 16.6 percent of the industry’s volume, followed by NYSE Arca Options, which has 11.7 percent.
Amex now expects to become more competitive. "Partnering with your customers seems to yield good results in terms of growth, expansion, development and market share," Mecane said. "It’s our recognition of a trend around the success that other platforms have had through partnership models."
The planned Amex deal most closely echoes a similar transaction arranged by the Philadelphia Stock Exchange in 2005. That summer, it sold equity stakes in its market to six firms, including Citadel Investment Group, Merrill Lynch and Morgan Stanley. The firms owned 45 percent of the exchange, and exercised warrants a year later that brought their ownership up to almost 90 percent.
In June 2005, before the first of the stakes were announced, PHLX’s market share was 10.8 percent. It was 13.1 percent in June 2006. Nasdaq OMX Group in November 2007 purchased the exchange for $652 million, buying out the stakeholders. Philly’s market share that month was 14.5 percent. Since then, Nasdaq has managed to not only hold onto that market share but increase it. Nasdaq, like NYSE Euronext, owns two equity options exchanges.
After the current transaction goes through, NYSE Amex Options will continue to operate a large floor. The floor currently has about 350 market makers, brokers and support staff. Almost everyone working on the Amex floor before NYSE Euronext acquired the American Stock Exchange came over to the NYSE’s storied floor, which was overhauled for the options market.
