The International Securities Exchange Goes Public

All eyes are on the industry's first electronic options exchange as other exchanges ponder going public. In an interesting twist, the ISE chose to list its shares on the New York Stock Exchange, a floor-based market.

On Wednesday, the International Securities Exchange (ISE) kicked off its widely anticipated initial public offering (IPO) in a sign that institutions were snapping up its shares as a sector play on the fast growing options market.

"It's an investment in a marketplace growing 22 percent annually for the last 10 years, on pace to continue that growth. Investing in that exchange is an indication of the overall marketplace," says David Kalt, chief executive officer at OptionsXpress, a Chicago-based online brokerage firm.

Although the ISE is an electronic options exchange -- which captured 33 percent market share in 2004 from traditional floor-based options exchanges -- it chose to go public on the New York Stock Exchange (NYSE), the world's largest equity market. While the NYSE is awaiting approval from the Securities and Exchange Commission for its Hybrid system, which will blend electronic trading with the specialist-controlled auction, the market is currently floor-based.

The ISE is selling approximately 10 million shares of stock, which, at the offering price, could raise about $180 million. Shares of the ISE got off to a strong start on the NYSE, opening at $25.75, more than a 43 percent increase over its initial public offering price of $18 a share.

Several sources speculated that ISE chose the NYSE because David Krell, its chief executive officer, and Gary Katz, its chief operating officer who founded the options exchange in 2000, are former NYSE executives. "David Krell and Gary Katz come from the NYSE, so there maybe some natural loyalties," says Kalt.

But, when OptionsXpress went public in July, it chose a dual listing on Archipelago Exchange and Nasdaq -- both of which are electronic marketplaces. "Nasdaq made more sense for us being a technology firm. We're very much pioneers in what we accomplished. It just seemed much more natural to equate ourselves with Nasdaq. We didn't think long and hard about the NYSE," says Kalt.

However, Joe Gawronski, chief operating officer at Rosenblatt Securities, an institutional agency brokerage firm that operates on the NYSE, says, "As a former NYSE employee, Krell recognizes the unique value the NYSE system provides in terms of liquidity and price discovery for trading equities." Gawronski adds, "Outside of technology stocks where Nasdaq has carved out a niche, larger companies that can meet the NYSE's tougher listing requirements choose the NYSE for the prestige factor and the perception that capital raising is easier with such a listing."

Meanwhile, the ISE's IPO is being closely watched because it may be the harbinger of other exchanges that aspire to go public as part of a whole privatization trend. "It's significant because there's not that many exchanges that are public," says Kalt, an online options broker that routes order flow to all six options exchanges, but predominantly to the ISE.

There are few examples of exchanges that have converted from member-owned institutions to for-profit companies. In the equities world, Archipelago has done so by acquiring the Pacific Exchange, its regulator. Perhaps the most envied example is the Chicago Mercantile Exchange, the futures exchange, which went public in late 2002 at $35 a share and whose stock was recently trading at $190 a share.

Other candidates for an IPO are the Philadelphia Stock Exchange, which already has de-mutualized, while the Chicago Board Of Trade is starting the process, as is Chicago Board Options Exchange, the ISE's large competitor. "Going to the extreme of being a for-public entity does create additional pressure for the ISE that the other floor-based exchanges don't have to deal with," comments Kalt.

As a result of going public, the ISE will face pressure to expand its product offering into other products such as futures and equities, come up with new innovative products and index products to trade, says Kalt. In regulatory filings, the ISE says net proceeds of the IPO will go toward expanding and diversifying the company's products and services. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio