What Is an International Securities Exchange?

The International Securities Exchange, Inc. (ISE) was established in May 2000. It is the first fully electronically traded options exchange in the US options market. ISE became the first stock exchange to be traded in the United States since 1973. The management committee approved the registration of the exchange.

American International Stock Exchange

The International Securities Exchange, Inc. (ISE) was established in May 2000.

ISE

The International Stock Exchange (ISE) was the only new exchange established in the United States between 1973 and 2000. Although it was established in 2000, it has now become the world's largest stock options exchange.

ISE was built to compete

ISE has achieved rapid development since its establishment. By the end of October 2006, its transactions exceeded CBOE's 33% share of the US stock options market. The daily trading volume of ISE is now more than the daily trading volume of all exchanges in 1999 before its establishment. Where is its development?

Reporter: What impact did the establishment of ISE have on the US options market?

Thomas Bendixen (Vice President of ISE): Before the establishment of ISE, there were four options exchanges in the United States: the Chicago Board of Options Exchange (CBOE), Pacific Exchange (PCX), American Stock Exchange (AMEX), and Philadelphia, USA Stock Exchange (PHLX). Each of the four exchanges trades different stock options, so there is no competition between them. In order to modernize the US options market and introduce competition mechanisms, the founders of ISE decided to establish a new options exchange. The original exchanges had fixed trading venues and traded on the trading floor. The newly established ISE in 2000 introduced electronic trading, becoming the first and only fully electronic options exchange in the United States. ISE also implemented an electronic market maker system and introduced market makers such as Goldman Sachs, Morgan Stanley, and Bank of America to enable institutions that had not previously traded on the trading floor to participate in transactions. At the same time, ISE also introduced a competition mechanism. Each exchange can list stock options of other exchanges for trading, which greatly reduces the cost of customers (securities companies, futures companies).

In just five or six years, ISE has shown strong competitiveness and has become the largest option exchange in the United States and even the world.

Thomas Bendixen: The competitiveness of ISE is not just a certain aspect, but a combination of many aspects. It can be roughly divided into four aspects. One is that ISE has a very good trading system, the other is the introduction of a new market maker system, the third is to provide customers with low costs, and the fourth is to continuously pursue innovation.

Here I want to introduce the market maker system of ISE in detail. At present, ISE conducts options trading on 1200 stocks, and about 100 options contracts are traded on each stock, and the number of types of option contracts traded every day is as high as 120,000. To encourage market makers to increase the number of quotes, ISE introduced the PRO RATA model. In the case where multiple market makers have quotations, when there is a buy or sell order coming out of the market, the market maker with a large number of quotes can give priority to the transaction. If the number of incoming orders is large, it will be distributed proportionally according to the number of quotes made by the market maker. As a result, ISE has the best offer, the bid-ask spread is very small, and the market liquidity and market quality are very high.

Thomas Bendixen also showed reporters their statistics on the bid-ask spread data for October 2006 in detail. The final analysis pointed out: "96% of the ISE quote is the best price, and the bid-ask spread is smaller than other exchanges. At the same time, the quotes The number is also higher. "

Litigation on the introduction of competition mechanism on index options

ISE filed a request with the Federal Court of Manhattan to approve the approval of ISE to trade the S & P Index and the Dow Jones Industrial Average Index Options Contract without the permission of the index owners Standard & Poor's and Dow Jones. Behind the lawsuit is the innovative intention of ISE to introduce the competition mechanism to index options. From the initial launch of stock options to listed stocks, ISE's innovative products have emerged endlessly. Could you tell us about the progress of this lawsuit?

Thomas Bendixen: At the moment this lawsuit has just begun, I cannot comment on the ongoing lawsuit and the court process is ongoing. But one thing I can explain is that the purpose of ISE is to increase market competition and create value for customers. It can be seen that due to the participation of ISE, the stock option trading volume in the United States has grown by leaps and bounds, in sharp contrast to the gentle growth trend of the S & P 500 Index and the Dow Jones Industrial Average. As when it was established six years ago, ISE just wanted to change the non-competitive state in the market, and introduced a competition mechanism in the two index option transactions.

Can you talk about relevant US policies in light of the litigation experience that ISE has encountered in product innovation?

Thomas Bendixen: A long time ago, a US court ruled that options on any stock can be traded on the American Options Exchange without the consent of the listed company, so there will be no lawsuit in this regard. Once the stock options are listed and traded, it is mainly a problem between the SEC and various exchanges, and listed companies will not intervene. However, the situation of index options is different. When a company develops an index and owns the ownership of the index, the exchange can only trade its options after obtaining the permission of the index compiling company.

However, the CBOE lawsuit is not the first lawsuit encountered by ISE. Thomas Bendixen said that ISE was also sued by ETF designers last year before launching ETF options. Later, the court ruled that the exchange can trade ETF options without the consent of the ETF designer, and ISE finally won the case. As a result, the ETF option transaction volume has grown rapidly. However, he also said that index options and ETF options are two different lawsuits, and the outcome of index option lawsuits cannot be judged solely on this basis.

Continuous business innovation

What is the direction of ISE's next innovation in business?

Thomas Bendixen: There are several aspects of ISE's business. The first is to continuously introduce institutions to participate in the options market. In the past, traders in the US options market were mainly retail investors. Now ISE has introduced many institutions, such as large investment banks and hedge funds. The second is to prepare for the development of the S & P 500 Index and the Dow Jones Industrial Average Index Options and other index options as described above. The third is market data mining. Generally, services in this area in the United States require a fee. The purpose of market data mining is to provide customers with more effective data, including data that reflects market depth, historical data, and market orientation. The fourth is to carry out extensive international cooperation. The current trading volume in the US options market is not 100% from the United States, some from other countries. By cooperating with foreign exchanges, more foreign investors can see ISE products and quotes, and then participate in this market. At the same time, they can greatly reduce their transaction costs and be more effective in time. On the other hand, ISE is also very willing to help exchanges in other countries to establish options markets. ^[1]