Nasdaq Is Planning to Start an Options Exchange in 2007 (NYTimes, 9/7/06)
September 7, 2006
Nasdaq Is Planning to Start an Options Exchange in 2007
By JENNY ANDERSON
Nasdaq, the nation’s second-largest stock market, will start an options exchange next year in an effort to capitalize on a growing market whose competitors and structure are rapidly changing.
The decision comes about the same time that Nasdaq will have to decide whether to increase the 25 percent stake in the London Stock Exchange it acquired earlier this year or even to make a hostile bid for it.
Nasdaq like every other exchange around the world, is facing a new set of challenges and opportunities. Stock markets from Tokyo to Chicago have shifted from being member-owned, floor-based operations to being for-profit, publicly traded, electronic enterprises, focused on building the volume necessary to make the business profitable.
Yet trading stocks is not the most profitable business for exchanges: trading options and other derivatives, clearing stock and derivative trades and listing companies are the areas where exchanges make the most money.
Nasdaq was motivated to start an options exchange predominantly because the Securities and Exchange Commission will begin a pilot program for trading options priced in pennies instead of nickels. Such a radical change in the marketplace could disrupt competition, creating opportunities for a new entrant, said Chris Concannon, executive vice president of the Nasdaq Stock Market.
“We see this as a watershed event in the options market,” he said.
Other reasons contributing to the decision include growth in the options market and the fact that Nasdaq acquired the technology it needed to build an options exchange when it bought Instinet, Mr. Concannon said. The exchange will open in the third quarter of 2007.
Nasdaq will be entering a crowded market, dominated by the Chicago Board Options Exchange and the International Securities Exchange. The two collectively control about 60 percent of the market.
Nasdaq is far from the first exchange to diversify its product offerings. Its archrival, the New York Stock Exchange, bought Archipelago in 2003, an all-electronic exchange, which also gave the Big Board the ability to offer options trading. In August, NYSE/Arca controlled 9.6 percent of all options products, according to the Options Clearing Corporation, a data provider. The NYSE Group has also made a bid for Euronext, a pan-European exchange. Deutsche Bourse has also made a bid for Euronext.
At the same time that stock markets are leaping into the options game, options markets are getting into the stock game. This year, the International Securities Exchange announced that it was starting a stock market; more recently, the Chicago Board Options Exchange followed suit.
“This is a crowded field,” said Meyer S. Frucher, chairman of the Philadelphia Stock Exchange, which operates both stock and options markets. “How one breaks out is hard to see, although the one advantage Nasdaq might have is its desktop real estate with the INET terminal,” he said, referring to the fact that many traders already have the technology that will be used to trade options.
The move reflects a new direction for Robert Griefeld, the chief executive at Nasdaq, who has told analysts and investors he has a “maniacal” focus on stealing market share from the New York Stock Exchange. That is a contrast to John A. Thain, chief executive of the NYSE Group, who has repeatedly emphasized his desire to build or acquire products in new regions around the world.
Mr. Concannon said Nasdaq had not shifted its focus away from New York. “This is us having resources that we can leverage to step into what is a complementary product to our underlying asset class — equity,” he said. “This is not losing any focus on the NYSE story.”
In March, Nasdaq made an unsolicited bid for the London Stock Exchange, which would not diversify Nasdaq’s products, but would diversify its geographical reach. When the offer was rebuffed, Nasdaq went on to amass a 25 percent stake in the exchange.
As a result of that position, Nasdaq will have to wait until early October before acting again.
Nasdaq Is Planning to Start an Options Exchange in 2007
By JENNY ANDERSON
Nasdaq, the nation’s second-largest stock market, will start an options exchange next year in an effort to capitalize on a growing market whose competitors and structure are rapidly changing.
The decision comes about the same time that Nasdaq will have to decide whether to increase the 25 percent stake in the London Stock Exchange it acquired earlier this year or even to make a hostile bid for it.
Nasdaq like every other exchange around the world, is facing a new set of challenges and opportunities. Stock markets from Tokyo to Chicago have shifted from being member-owned, floor-based operations to being for-profit, publicly traded, electronic enterprises, focused on building the volume necessary to make the business profitable.
Yet trading stocks is not the most profitable business for exchanges: trading options and other derivatives, clearing stock and derivative trades and listing companies are the areas where exchanges make the most money.
Nasdaq was motivated to start an options exchange predominantly because the Securities and Exchange Commission will begin a pilot program for trading options priced in pennies instead of nickels. Such a radical change in the marketplace could disrupt competition, creating opportunities for a new entrant, said Chris Concannon, executive vice president of the Nasdaq Stock Market.
“We see this as a watershed event in the options market,” he said.
Other reasons contributing to the decision include growth in the options market and the fact that Nasdaq acquired the technology it needed to build an options exchange when it bought Instinet, Mr. Concannon said. The exchange will open in the third quarter of 2007.
Nasdaq will be entering a crowded market, dominated by the Chicago Board Options Exchange and the International Securities Exchange. The two collectively control about 60 percent of the market.
Nasdaq is far from the first exchange to diversify its product offerings. Its archrival, the New York Stock Exchange, bought Archipelago in 2003, an all-electronic exchange, which also gave the Big Board the ability to offer options trading. In August, NYSE/Arca controlled 9.6 percent of all options products, according to the Options Clearing Corporation, a data provider. The NYSE Group has also made a bid for Euronext, a pan-European exchange. Deutsche Bourse has also made a bid for Euronext.
At the same time that stock markets are leaping into the options game, options markets are getting into the stock game. This year, the International Securities Exchange announced that it was starting a stock market; more recently, the Chicago Board Options Exchange followed suit.
“This is a crowded field,” said Meyer S. Frucher, chairman of the Philadelphia Stock Exchange, which operates both stock and options markets. “How one breaks out is hard to see, although the one advantage Nasdaq might have is its desktop real estate with the INET terminal,” he said, referring to the fact that many traders already have the technology that will be used to trade options.
The move reflects a new direction for Robert Griefeld, the chief executive at Nasdaq, who has told analysts and investors he has a “maniacal” focus on stealing market share from the New York Stock Exchange. That is a contrast to John A. Thain, chief executive of the NYSE Group, who has repeatedly emphasized his desire to build or acquire products in new regions around the world.
Mr. Concannon said Nasdaq had not shifted its focus away from New York. “This is us having resources that we can leverage to step into what is a complementary product to our underlying asset class — equity,” he said. “This is not losing any focus on the NYSE story.”
In March, Nasdaq made an unsolicited bid for the London Stock Exchange, which would not diversify Nasdaq’s products, but would diversify its geographical reach. When the offer was rebuffed, Nasdaq went on to amass a 25 percent stake in the exchange.
As a result of that position, Nasdaq will have to wait until early October before acting again.
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