Electronic Trading Sweeps Options Industry
What a difference six years has made in the U.S. options industry.
In 1998 the market was effectively divided into exclusive fran-
chises. Very few options traded on more than one exchange, and
all trading was conducted in traditional open outcry environments
dominated by crowds of specialists. Prices were indicative, and
there was a gentlemen’s agreement to limit competition.
Today the situation is radically different. Starting in August
1999, the exchanges began to compete directly for order flow
across a broad range of options classes, and multiple listings rap-
idly became the order of the day. A new all-electronic exchange
entered the business and captured more than a third of the
market, and the four incumbent exchanges began rapidly devel-
oping and installing electronic trading systems for their most
active products. Spreads tightened substantially, market-making
both expanded and consolidated, and customer transaction fees
were drastically reduced, if not eliminated altogether.
Not all of these changes came about as a direct result of
electronic trading. The government also was involved, in the
form of antitrust investigations by the Justice Department and
regulatory edicts from the Securities and Exchange Commission
that forced greater competition among the exchanges. But
electronic trading, and in particular the formation of Inter-
national Securities Exchange, was one of the central catalysts
for change.
Perhaps the best measure of its importance is that all four of
the incumbent exchanges, even the most resistant to change are
building electronic trading platforms to replace at least some part
of their floor-based markets. They are moving cautiously, migrating
only a few options classes at first and then gradually expanding
the coverage, and seeking to preserve a role for floor-based trading
within the system.
The Chicago Board Options Exchange is now entering the
second phase of its hybrid trading system. As of mid-August, six
electronic specialists were active on the system, and the exchange
expects to begin allowing remote market makers in the near
future, pending SEC approval. As of July 31, the exchange had
made 960 out of a total of 1450 classes available for trading on its
hybrid system, which integrates floor and screen trading.
Development of futures, options and OTC derivatives 11
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