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SEC OKs new exchange
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February 24, 2000: 5:39 p.m. ET
International Securities Exchange becomes first new exchange since 1973
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - The Securities and Exchange Commission Thursday approved the International Securities Exchange, an electronic options exchange, as an exchange. The SEC's move makes the ISE the first new U.S. exchange in 27 years.
Ultimately, New York City-based ISE plans to trade the options of 600 companies, using computer technology to cut execution costs and spreads on options. The idea is similar to the computerized electronic communications networks, or ECNs, which execute stock trades. Several ECNs, including Island and Archipelago, have also filed for exchange status.
Because options have numerous "series," with different values and dates on which they can be exercised, they are more complicated than stocks to trade electronically. The ISE thinks this is a precedent-setting step. The Chicago Board Options Exchange was the last exchange to register with the SEC, in 1973.
"The first exchange in 27 years, I think that's a wonderful thing for the SEC," said Gary Katz, the ISE's senior vice president. "For us, it's everything we have been waiting for."
The ISE will conduct its own market surveillance, monitoring its trading operations through its own electronic-surveillance technology and in-house team.
It will contract with the regulatory unit of the National Association of Securities Dealers, Nasdaq's parent, for nonmarket regulation, including of its membership, auditing, complaints and arbitration.
The ISE filed for exchange status Feb. 2, 1999. Its executives had been frustrated by the lack of progress at the SEC.
"It's been a long time," Katz said. The ISE had worked extensively with the SEC before filing to become an exchange, sharing drafts with SEC officials. So after filing, ISE executives grew frustrated that the SEC took so long to review its proposal.
Katz joked that every one of his competitors should have to go through a three-year waiting period with the SEC. Still, other than the delay, he said the SEC and the ISE saw eye to eye on most issues.
"We're very comfortable with where we are," Katz said, adding that the filing "really doesn't look that different from a year ago."
"I feel like I just gave birth to my fifth child. I have four, and this is the biggest," he said.
Because of the delay, the ISE today set back its launch date. It had hoped to start operating on March 24, the week after the "triple witching" day on St. Patrick's Day, March 17. That would have made for a quieter first day's trading, followed by a weekend to review the first day.
Instead, the ISE announced today that it aims to open for trading on May 26, another Friday. In the meantime it will work on paperwork it was unable to complete before it received exchange status. It also has to join the Options Clearing Corp. and the Options Price Reporting Authority.
"There's obviously a lot of work to do and building an exchange is not simple," Katz said.
For instance, the company that funded the ISE, Adirondack Trading Partners, has sold all 10 of the primary market maker slots. The PMMs will buy and sell baskets of options for 60 companies each, making sure there is always a bid and ask price on each option. In other words, making the market tick.
Companies such as Goldman Sachs, Morgan Stanley Dean Witter, Bear Stearns and Banc of America have signed on as the primary market makers. But technically the primary market makers have only signed letters of intent. They were unable to become members of the ISE until it became an exchange. Now the ISE plans to complete the membership paperwork.
It also has 100 membership slots for competitive market makers, 87 of which have been sold. Like PMMs, the CMMs will provide liquidity and buy the chance to trade 60-company baskets of options. But CMMs don't have the same responsibilities of making sure there's always a two-sided market in every option and that trading is orderly. The CMMs can also now become members of the exchange.
In a release, the SEC pointed out that the ISE has already had a positive effect on options trading despite not yet operating. The threat of competition forced multiple listings of most popular options, many of which used to trade only on one of the four existing options exchanges.
Spreads have also narrowed between 15 percent and 42 percent since the ISE filed with the SEC, the SEC said, and transaction costs have come down. 
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