Market Creator
Although David Krell -- founder of New York-based International Securities Exchange, the first fully electronic U.S. options exchange -- doesn't consider himself a technologist, he certainly knows how technology can level a playing field. After all, that's the ISE's competitive model.
For instance, Krell says the ISE's current initiatives include integrating the derivatives pricing technology from recently acquired provider Longitude, launching the recently announced ISE Stock Exchange and dealing with the transition to penny intervals in options, which will require more bandwidth and a scalable infrastructure to handle the increase in market data. But technology challenges are nothing new to the ISE.
Launched on May 26, 2000, the ISE responded to investor demands and brought something to the options market that was lacking: price transparency and automatic executions. As a result, it has put significant pressure on the long-established Chicago Board Options Exchange (CBOE). Today, the ISE and CBOE each command about 30 percent of the options trading arena.
Krell, president and CEO of the ISE, says that his first thought about creating a new options market back in 1997 "left me very intrigued." At the time, Bill Porter, then chairman of E*Trade, and his colleague Marty Averbuch, approached Krell and Gary Katz, both former executives in the New York Stock Exchange's options division, with the idea of forming a new U.S. options exchange. "I have been involved with exchanges for a long time -- this was the first time a customer's need really came to the front" of a business plan, Krell relates. "Exchanges generally provide products because the exchange thinks the products will work, and the products often don't work," he adds. "E*Trade was looking for a change and a different options offering. We saw an opportunity to add automation and price transparency." Today, Katz is the ISE's COO.
Changing the Landscape
But growing from nothing to perhaps the largest U.S. options exchange -- depending on how you measure market share -- wasn't easy. "People thought that you needed face-to-face contact to trade options," Krell says. "But we set out to change the landscape of the options market. We brought in a fully electronic system. We were the first to show the size of the quote."
Krell also says the ISE helped to bring in more institutional business, something that was lacking in the previously individual investor-focused options market. "Our organic growth is driven by increased institutional participants in the options business," he says. "Historically, options was dominated by individual investors, because the spreads were wide and it was inefficient so the institutions stayed away. As the industry evolved and became more efficient, there is a lot more interest from institutions, and especially the hedge funds."
Moving forward, Krell says that his exchange is looking to increase partnerships with other exchanges and, of course, nurture the ISE Stock Exchange. "We've always felt that since we were successful in implementing our vision in options, we could harness our expertise in other areas," he says. "With the ISE Stock Exchange, we are trying to bring the same efficiencies to a new market. We know we can do that better, faster and cheaper" than existing exchanges, Krell adds. <<<
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