ISE Meets Listings Target on Second Anniversary

May 27, 2002
Isabelle Clary
Markets Editor

The all-electronic International Securities Exchange (ISE) celebrated its second birthday last week by achieving its initially stated goal of listing the issues that account for 90 percent of the U.S options industry's average daily equity options volume.

ISE, which was launched on May 26, 2000, reached its target by adding 13 new options to its roster last week, bringing to 515 the equity options classes listed on the only electronic marketplace among five U.S. options exchanges. ISE will still add listings, based on the merits of the new products.

"ISE's market share for all listed equity options during April 2002 virtually tripled that from April 2001," said Richard Pombonyo, ISE VP of marketing. He noted that in the first four months of 2002, ISE handled a daily average of 522,350 contracts, up 224 percent from the same period in 2001. In just two years, ISE also became the primary market, in terms of volume, in 180 issues and has occupied the No. 3 spot among the five U.S. options exchanges for the past seven months.

"Our membership is growing and we are attracting very high quality firms," Pombonyo also said.

National Financial Services, an affiliate of Fidelity, which is a major player in the industry, recently joined the ISE as an Electronic Access Member (EAM). EAMs are members who can place an order on ISE, but do not make markets or enter quotes. ISE has 10 primary market-makers (PMMs) who must provide continuous quotes in all of their stock options and must ensure that orders are not executed at prices inferior than on other options exchanges. ISE competitive market-makers (CMMs) must provide quotations in at least 60 percent of their options. The last CMM seat sold in March for $1.6 million, up from $1.1 million in August last year.

National Financial's move to the ISE may be significant because ISE, which recently demutualized, is looking for investors to further develop its business. Fidelity would be an important partner in that context because it commands substantial order flow. As the world's first options marketplace with an auction system in an electronic trading environment, ISE is also looking at ways of expanding its business overseas, which may involve new partnerships as well.

ISE's new chairman, Ivers Riley, who took over from William Porter on May 26, could help ISE develop an international strategy since he previously headed the Hong Kong Futures Exchange and the KHFE Clearing Corp. and also served as president of the International Options Market Association. Porter stepped down after two years, as required by ISE's constitution. Riley's career has included a number of key industry appointments, such as senior EVP for derivatives at the American Stock Exchange, where he developed the SPDRs or "spiders," the tracking stock for the S&P 500.

Demutualization, where equity interests in the company and trading rights are separated, is a key step for ISE's future growth because the exchange, now a New York limited liability corporation, would have the flexibility to map out its strategy and attract financial backing, if needed. ISE could also venture into new business lines, although its executives have expressed little interest so far in the upcoming single-stock futures.

What ISE has shown in just two years is that technology, as well as money, talks in an environment where participants are seeking efficiency and low costs. ISE trading software, developed by the Swedish financial firm OM, operates on OpenVMS Alpha Server systems from Compaq Computer. The OpenVMS operating system, OpenVMS Clusters and Alpha architecture of Compaq provide configuration flexibility and are scalable enough to handle the high volumes of quotes associated with options trading.