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Exchange picks key players
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December 9, 1999: 3:14 p.m. ET
International Securities Exchange plans to open next year
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NEW YORK (CNNfn) - The International Securities Exchange, a New York-based electronic options exchange slated to debut next year, announced Thursday the primary market makers, which will make the prospective new exchange tick.
The group, which makes up nine of its 10 primary market-maker members, includes such well-known Wall Street names as the investment banks, Goldman Sachs Group and Morgan Stanley Dean Witter, and the large market maker The Knight/Trimark Group.
The primary market makers will act akin to specialists on the New York Stock Exchange, overseeing trading and organizing an orderly market in the 600 options that the ISE plans to list. The exchange will divide the options into 10 groups, allocating each of the primary market makers 60 options apiece.
The ISE filed for exchange status in February with the Securities and Exchange Commission and hopes to start trading options by March 24, 2000.
The ISE aims to improve the market in options trading, bringing narrower spreads, increased competition and lower execution costs.
Each primary market maker will make a two-sided, continuous market in the options it controls. The ISE will also have 100 competitive market makers that will be able to make markets in all 600 options if they so choose.
Adirondack Trading Partners, the group of broker/dealers that is funding the new exchange, sold the primary market-maker memberships and kept two of the memberships for itself. There is one primary market-maker slot that has not yet been filled.
The seven companies that bought the positions are: Deutsche Bank Securities; Goldman Sachs and its affiliated market maker the Hull Group; the Knight/Trimark Group; Morgan Stanley Dean Witter; Bear/Hunter, a specialist firm run by Bear Stearns and Hunter Specialists; Arbitrade Holdings, a trading and research firm; and The Arbitrage Group, an electronic options trading company.
New York-based ISE has not yet divided the options among the market makers, but it will try to balance them by volume, volatility, industry, country and underlying exchange. The exchange will try to spread the most-popular options among the market makers and diversify risk.
Gary Katz, senior vice president of business development for the ISE, compared the primary markets to NYSE specialists, with the responsibility of opening trading and overseeing an orderly, fair market. The Knight/Trimark Group already had a stake in ISE, but the other primary market makers are new investors, buying what amounts to the equity ownership in the exchange, he said.
The competitive market makers will have less responsibility overseeing the trading but will provide liquidity in options trading. They are like the floor traders on the NYSE, the "crowd in front of the specialist,” Katz said. The primary market makers have also taken up 59 of the 100 competitive market-maker memberships.
The four main options exchanges have been under investigation by the SEC and the U.S. Justice Department to see whether they have engaged in anticompetitive practices.
Many of those improvements have already begun to occur since the ISE first filed and in the face of regulatory pressure. Prices and volumes have improved significantly since the four established options exchanges began trading each other’s options this summer.
As a result, there has been speculation that the ISE would find it hard to make a place for itself in the options-trading world.
"I hope this [news] answers that,” Katz said. "On some level, there’s interest” in an electronic options exchange, he said.
He said many of the improvements in options trading stemmed from the prospect of competition from the ISE. Options volume has more than doubled since the idea of the ISE first surfaced two years ago, he pointed out.
"I’m not going to take 100 percent credit for it, but absolutely we have helped in pushing the execution fees down,” he said. "Competition makes for greater efficiency in the market, and greater efficiency makes for greater trading opportunity, which is what we’ve seen.” 
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