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ISE lands Banc of America
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February 10, 2000: 3:58 p.m. ET
Prospective options exchange finalizes final primary market maker
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - The International Securities Exchange, a would-be options exchange, today signed its 10th and final primary market maker, Banc of America Securities. The primary market makers will help run trading on the ISE when and if the exchange gets approval to operate by the Securities and Exchange Commission.
The ISE, founded in 1997 by E*Trade founder Bill Porter and three partners, filed to become an exchange last year. It hopes to be approved by March 24, and make its trading debut on that date.
It has already forced significant changes in the options trading world, which in the United States is limited to four exchanges, by threatening to cut spreads and fees.
The ISE wants to use computer technology and some of the same techniques that electronic communications networks have used to revolutionize the way stock trades are executed.
The prospective exchange in December announced nine of its 10 primary market makers that will make its options trading tick. Now it has signed the last slot, adding Banc of America Securities, the capital-markets subsidiary of Charlotte, N.C.-based Bank of America Corp., the largest retail bank in the United States.
There had been speculation that Salomon Smith Barney would sign up as the final primary market maker slot because it is one of the largest options trading brokerages in the world. Henry Schwartz, head of proprietary options market making at Banc of America, came to the company from Salomon, via Bear Stearns.
At the same time, the ISE also announced 28 additional competitive market makers, including Banc of America Securities, SG Cowen Securities, arbitrage firm G-Bar LP, market maker Wolverine Trading LP, options-trading specialist Helios Holding LLC, European options trader Nordic Options Ltd. and specialist and market maker Timber Hill LLC.
That means the ISE has now signed 87 out of the eventual 100 competitive market maker slots.
If approved, the ISE will start with a test run of the options of 30 companies, then build to the point where it offers executions in trading the options of 600 companies. It is dividing the companies into 10 baskets of 60 options apiece. Because the options of each company have numerous series, with different strike prices and dates, the ISE ultimately hopes to trade 65,000 options series. Those series, according to ISE Senior Vice President Gary Katz, account for 90 percent of all U.S. options trading.
Each primary market maker will supervise trading in its own basket, and is obligated to make a continuous two-sided market, on the bid and ask, of all options and to monitor orderly trading.
Where the primary market makers act a little like specialists on the NYSE, the competitive market makers act like the crowd of floor traders in front of the specialists. They too would buy the right to trade baskets of 60 options, but they would not have the obligation to ensure orderly trading and make two-sided markets.
Soon after its founding, the ISE, which has no revenue to date, sold all the market-maker slots to Centerport, N.Y.-based Adirondack Trading Partners. Adirondack put up the funding to get it off the ground.
"Adirondack Trading Partners has now successfully arranged for the sale or lease of virtually all of the ISE market maker memberships and will now focus on developing its own market making capabilities," Adirondack president Marty Averbuch said in a release. Adirondack kept two of the primary market maker slots for itself.
The ISE is striving to become the first new exchange in the United States since 1973. Though the ISE filed a year ago, on Feb. 2, 1999, the SEC has yet to rule on the filing. The commission has had other matters on its mind, such as clearing the Y2K hurdle and ordering the existing options exchanges to link to ensure orderly trading.
Michael Simon, the ISE's general counsel, said he is still "cautiously optimistic" that the exchange can hit its proposed start date. But he said the ISE has become somewhat frustrated with the SEC, because the ISE announced its proposed launch date long ago.
ISE wants to make its debut on March 24 because that is the first Friday after the expiration of options on St. Patrick's Day, March 17, a "triple witching day." The ISE would then have a weekend to examine its first day of trading.
"We've expressed to the SEC the complications of delaying this any further," Simon said. The ISE deals with the commission day to day, and isn't aware of any reasons why its exchange application is being held up.
But Simon said that, with electronic communications networks such as Island ECN, Archipelago and NexTrade "behind us in the queue" to become exchanges, ISE's application is viewed by the SEC as one setting a precedent. 
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