International Securities Exchange

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International Securities Exchange
Ise.jpg
Founded May 26, 2000
Headquarters New York
Key People Thomas Wittman, executive vice president, global head of equities, Nasdaq
Twitter @ISEexchange
LinkedIn Profile
Website www.ise.com
Releases Company News

The International Securities Exchange Holdings, Inc. is a subsidiary of Nasdaq, which purchased the exchange group from ISE's prior parent Deutsche Boerse on June 30, 2016.[1]

There are three ISE options exchanges, International Securities Exchange, ISE Gemini and ISE Mercury, offering options trading on over 2,000 underlying equity, ETF, index, and FX products. With the acquisition, Nasdaq operates six options exchanges, including its Nasdaq Options Markets (NOM), Nasdaq OMX BX and Nasdaq OMX PHLX.[2]

As of June 1, 2016, ISE’s options exchanges combined represented 15.1 percent of equity options market share, according to OCC data. And with Nasdaq's exchanges' 24.2 percent market share in equity options volume, has a combined 39.3 percent of the equity options volume.[3]

Background

The ISE took root in 1997 when then-chairman of E*Trade, William A. Porter and his colleague, Marty Averbuch, approached David Krell and Gary Katz about the concept for an all-electronic options market. The four founded what became the International Securities Exchange, or ISE, in May of 2000, as the first fully electronic US options exchange.

ISE was the first all-electronic options exchange in the U.S. Regulated by the Securities and Exchange Commission (SEC) and a member-owner of Options Clearing Corporation (OCC).

Early Years

The first task was to build an all-electronic options trading platform. So the ISE team traveled to Stockholm to partner with Swedish market and technology company OM on the building of a new matching engine. Krell, who served as the ISE's first president and chief executive officer, and Katz wanted to design a system that was not OM's FIFO (first in, first out) matching engine, but rather one that would introduce the first electronic WYSIWYG (what you see is what you get) platform. That marked a major challenge for OM, which featured executives such as Magnus Böcker and others who would become transformative themselves in the financial industry.

In June 1997, Katz recalled in an interview with John Lothian News, the steps ISE planned to create a viable electronic options market. Requirements for OM included: at least one market maker per name for the top 600 names and independent quoting that would take in six different quotes at a time. Independent quoting was new for the markets at the time, which often used systems like the the Chicago Board Options Exchange's RAES system. In other words, ISE needed a robust, complex system with lots of capacity. The good news was that OM's technology could handle 60 messages per second with its technology, although at the time it had never seen more than 12 messages per second. As the OM team turned to Katz, they asked what his estimate would be for ISE. He replied "24,000 messages per second."

Katz remembers a conversation with a member of the OM team at barbecue in Stockholm with OM staff who asked him "Is it possible that the reason there was no electronic options market in the United States was because it just cannot be done?" Katz recalled. "I said, 'Is it possible? You tell me.'"

The consensus internally at OM was that it could not be done in 1997, but within two years, the technology team could figure it out. OM did. ISE was launched in 2000. By the time ISE was sold to Nasdaq in 2016, it's system was processing 1 million messages per second.

Early volumes at the ISE were small, hampered by technological barriers that kept many firms from connecting to the exchange. An industry standard called the Common Messaging Switch, or CMS, required a new and customized manual connection for each firm. In January of 2001, the exchange was averaging 150,000 contracts traded per day with a marketshare of about 10 percent in the names it listed.[4] And by mid-2001, ISE was running out of money, Katz said.

But the turnaround for ISE came unexpectedly, and unfortunately, in the wake of the September 11, 2001 terrorist attacks in New York. That event was not only a tragic day was a wake-up call to the financial industry of just how fragile some of their businesses were. A more diverse model for firms, using multiple options exchanges, became essential. After 9-11, Katz said industry participants realized that relying on certain trading floors for the bulk of their business was fraught with risk. And market makers from other exchanges began hitting ISE markets, meaning they would trade on other exchange floors even when the price at ISE was better. As this preceded the industry Reg NMS and linkage system, market makers would then take that trade to ISE and pocket the profit. Once customers noticed that, ISE's value proposition took hold and volumes blossomed.[5]

By 2005, ISE led the industry with 30 percent of all options traded volume. And on March 9, 2007, ISE traded its 2 billionth options contract.

Going Public & Acquisitions

ISE was the first registered securities exchange to demutualize and to go public, in March of 2005. Its IPO was one of the most successful since the Internet bubble, with the first public trade crossing at $26 a share, a more than a 43 percent increase over its initial public offering price of $18 a share. Shares then rose quickly to $30.[6] [7][8] The ISE chose to list its shares on the New York Stock Exchange, which was then a floor-based market.[9]

In 2006 ISE implemented a new front-end trading application called PrecISE Trade specifically designed for broker-dealers. It supports trading of all types, including combination orders, which allow shares of stock and options contracts to be entered as a single order, leading use of that order type to increase more than twofold since the previous year. That technology was considered a key element in the Nasdaq acquisition in 2016, as it can be applied to multiple asset classes offered by Nasdaq's various markets.

In 2007, ISE became the first US registered securities exchange to be owned by a non-U.S. entity, when Eurex acquired ISE on Dec. 20 for approximately $2.8 billion in cash, or $67.50 per share. Deutsche Börse AG took 85 percent of the exchange and SIX Swiss Exchange took 15 percent. ISE was integrated into Deutsche Börse, as that exchange group folded its technology onto its own platform.

ISE introduced a new options trading system, Optimise, based on Deutsche Börse’s trading architecture, in April of 2011. The system was the product of a three-year collaboration with Deutsche Börse Group and was designed to reduce latency on options trading by more than 75 percent compared with the previous trading platform. Optimise also introduced an enhanced complex order book, additional protection mechanisms for market maker quotes, and other risk management utilities.[10]

On June 30, 2016, Nasdaq closed a deal to acquire ISE from Deutsche Boerse for $1.1 billion, less than half of what it had paid for ISE in 2007. The deal

Stock Exchanges

ISE, along with a group of strategic partners, launched the fully electronic ISE Stock Exchange on Sept. 8, 2006.

And in 2008, the ISE entered into a partnership with the ECN DirectEdge, whereby the ISE Stock Exchange became a subsidiary of DirectEdge and ISE gained an ownership stake in the company. The strategic partners of Direct Edge and the ISE Stock Exchange had a combined 68.5 percent ownership interest in Direct Edge Holdings, with Knight Capital Group, Inc., Citadel Derivatives Group, and Goldman Sachs remaining as strategic investors with a 19.9 percent ownership interest. [11].[12] Bats Global Markets, Inc bought DirectEdge from ISE in January 2014.[13]

ISE Options Exchanges: Gemini & Mercury

ISE launched a second US options exchange on August 6, 2013 called ISE Gemini, a maker-taker pricing model combined with pro-rata and customer priority market structure.[14]

On February 16, 2016 ISE launched a third options exchange, ISE Mercury, offering the same customer priority/pro-rata market structure as ISE and ISE Gemini. However, ISE Mercury uses a different fee model than both of ISE Holdings’ existing exchanges, focusing on a payment for order flow/rebate-driven structure.[15][16]

Dividend Trade Issue

ISE spoke out over the years against the "dividend trade strategy," which it has said can allow certain market makers to profit at the expense of retail investors. In March of 2010, ISE published a white paper explaining how dividend trades and short interest trades temporarily inflate and distort trading volume and market share. With volatility low in 2009, dividend trades represented a significant portion of the growth in industry volume. If dividend trades were excluded from industry data, average daily volume in equity options would have decreased 0.1 percent in 2009 over 2008, compared to 2.9 percent growth when dividend trades are included, according to the white paper.[17] ISE does not facilitate dividend trades, saying they allow certain market makers to profit at the expense of retail investors.[18] In November 2012, options exchanges including NYSE Arca, NYSE Amex, and CBOE joined ISE in eliminating support for the dividend trading strategy.[19]

Legal Issues with CBOE

In November 2006, ISE sought a judgment in New York that would let it offer its own contracts on the S&P 500 Index and Dow Jones Industrial Average without securing licenses from the index developers. The Chicago Board Options Exchange had exclusive license agreements with the index providers to lists options on their indexes. ISE argued that the value of the indexes lay in the public domain. The exchange also argued that multiple listings would lower investor costs.

CBOE responded to ISE's November 2006 action with its own lawsuit in Illinois state court, joined by McGraw-Hill Cos. and Dow Jones & Co., the respective owners of the S&P 500 and the DJIA.

In July of 2010, an Illinois court ruled in favor of Chicago Board Options Exchange in the dispute over the index options.[20] [21]

A separate court battle over patents began in 2006 when ISE brought a patent infringement claim alleging that CBOE had infringed ISE's patent on an automated exchange, seeking $1 billion in damages. CBOE won a summary judgement in the Northern District of Illinois in 2011. The case involved a dispute over whether CBOE’s “Hybrid” trading system constituted an “automated exchange.” CBOE prevailed on appeal in 2012 to the Federal Circuit, which affirmed the summary-judgment ruling. Shortly before a trial following that appeal, ISE consented to an adverse judgment in the case. The company again appealed to the Federal Circuit, which in 2014 affirmed the lower court ruling.[22] In 2016 the CBOE's attorneys succeeded in winning an awarded payment for their client of $6,069,266.81 in attorneys fees to be paid by ISE.[23]

The Chicago Board Options Exchange (CBOE) sued the ISE in 2012 for about $525 million, accusing its rival of infringing on three patents related to an automated options trading system. In a complaint filed in the U.S. District Court in Chicago, the CBOE said the patents were issued in 2008, 2011 and 2012, and covered systems to monitor quote risk and automatically adjust quotes when risk exposure gets too high.[24]

In March of 2015 the Patent Trial and Appeal Board agreed with ISE and found that all three patents were invalid,[25] and an appeals court affirmed the PTAB's decision in ISE's favor in March of 2016.[26]

Strategic Investments

ISE complemented its core options business by expanding into other asset classes through strategic investments.[27]

These companies included:

Philanthropic Efforts

In honor of its 10th anniversary in 2010, ISE partnered with Ronald McDonald House New York to launch its first Corporate Social Responsibility Program, “Ten in Twenty-Ten.” Ronald McDonald House New York provides temporary housing and support services for pediatric cancer patients and their families while they undergo active treatment. Under this initiative, ISE organized ten different events to benefit the families staying at Ronald McDonald House New York.[28]

Key People

Board of Directors:

Click here for more information.


Membership

ISE has approximately 190 broker-dealer members, in multiple categories: Primary Market Makers (PMMs), Competitive Market Makers (CMMs), FX Primary Market Makers (FXPMMs), FX Competitive Market Makers (FXCMMs) and Electronic Access Members (EAMs).

ISE Gemini and ISE Mercury member firms have three categories: Primary Market Makers (PMMs), Competitive Market Makers (CMMs), and Electronic Access Members (EAMs).

ISE Options Technology Improvements

ISE currently lists more than 2000 equity, index, ETF, FX and quarterly options. ISE introduced index options in October 2003 and later in 2004 launched ISE Proprietary Sector Indexes, industry indexes that track the performance of publicly-traded companies in various industries. ISE also lists options on broad-based indexes in addition to options on a variety of licensed benchmarks.

On July 9, 2008, the ISE announced that it had introduced a new ISE Order Routing System (IORS2) for its options exchange. The new, internally developed routing system connected ISE members using API or FIX connections to ISE's options exchange interface.[29]

In July 2010, ISE introduced Do Not Route (DNR) orders for both priority and professional customers. This allows ISE’s customers to indicate that they want to cancel their options orders rather than have them routed to another exchange if the National Best Bid or Offer (NBBO) is not posted at ISE. The exchange said this order type gives customers more choice as transaction fees vary across U.S. options exchanges. These orders are executed at the National Best Bid or Offer (NBBO) in whole or in part on ISE’s order book only. If ISE is not posting the NBBO, ISE members have the opportunity to match or improve the NBBO through a stepup auction to trade with the DNR order. Any balance of a DNR order that cannot be executed or placed on ISE’s limit order book is automatically canceled.[30]

On April 9, 2014, ISE completed the rollout of 650 additional equity options products on the exchange. With the addition of these symbols, The move meant ISE equity options covered more than 99 percent of average daily volume for multiply-listed products.[31]

ISE Indexes

The ISE Index group creates indexes and partners with issuers to launch unique ETFs and structured products. In 2007, ISE announced a partnership with First Trust to launch ETFs based on ISE proprietary indexes, further establishing ISE indexes as sector benchmarks. In 2010, Direxion listed the first Leveraged ETFs based on ISE indexes. There are now 10 ETFs based on ISE proprietary indexes with over $1 billion in assets under management:

  • First Trust ISE Natural Gas Index Fund – FCG
  • Direxion Daily Natural Gas Related Bull 2X Shares – FCGL
  • Direxion Daily Natural Gas Related Bear 2X Shares – FCGS
  • First Trust ISE BICK Index Fund – BICK
  • First Trust ISE Global Wind Index Fund – FAN
  • First Trust ISE Global Engineering & Construction Index Fund – FLM
  • First Trust ISE ChIndia Index Fund – FNI
  • First Trust ISE Water Index Fund – FIW
  • First Trust ISE Global Platinum Index Fund – PLTM
  • First Trust ISE Global Copper Index Fund – CU


ISE Proprietary Indexes

Other Major Indexes

ISE FX Options

In April of 2007, ISE listed ISE FX options with dollar-based underlying values,[32] allowing investors to trade their views of the strength or weakness of the US dollar relative to the euro (symbol: EUI), British pound (symbol: BPX), Canadian dollar (symbol: CDD) Japanese yen (symbol: YUK), Australian dollar (symbol: AUX) Swiss franc (symbol: SFC), Mexican peso (symbol: PZO), Swedish krona (SKA) New Zealand dollar (symbol: NZD) and Brazilian real (symbol: BRB). Though strategies for ISE FX options are nearly identical to equity options strategies, ISE FX options are cash settled, thus eliminating the requirement to hold the actual foreign currency.

On Oct. 28, 2008, ISE and NYSE Euronext announced an agreement to license the right to list ISE FX Options products on the NYSE Arca Options platform, allowing NYSE Arca Options to trade options on all currency pairs traded at ISE. [33]

In September of 2009, ISE announced the availability of dual currency conventions for four currency pairs in its portfolio of ISE FX Options. The ISE Spot EURUSD (Symbol: EUU), ISE Spot GBPUSD (Symbol: GBP), ISE Spot AUDUSD (Symbol: AUM) and ISE Spot NZDUSD (Symbol: NDO) began trading on September 22, 2009.[34]

ISE Market Data

ISE is a leading provider of enhanced market data products for sophisticated investors. Investors have access to ISE Depth of Market Feed, ISE Historical Options Tick Data (ISE HOT Data), the ISE Sentiment Index (ISEE), ISEE Select XML Feed, ISE Open/Close Trade Profile and ISE Spread Book Feed.

ISE Depth of Market Feed is a real-time data feed that provides the aggregated volume of all quotes and orders available at each of the top five price levels for options that trade on ISE. This offering provides transparency beyond the Best Bid Offer (BBO) and helps subscribers improve trading efficiency.

ISE Historical Options Tick Data (ISE HOT Data) includes the full daily tick file of all trades and BBO quotes for equities, index and ETF options that are reported to the Options Price Reporting Authority (OPRA).

The ISE Sentiment Index (ISEE) is a unique put/call value that only uses opening long customer transactions to calculate bullish/bearish market direction. As such, the ISEE calculation method allows for a more accurate measure of true investor sentiment than traditional put/call ratios.

With ISE Select XML Feed, customers can have unlimited access to intra-day updates of all available ISE Sentiment Index (ISEE) values as a bulk delivery in an XML format, which provides the ability to develop analytical models based on ISEE data values.

ISE Open/Close Trade Profile provides aggregated volume and the number of trades by series for opening and closing transactions executed on ISE's options exchange. End-of-day data files are available to subscribers in a .csv format. ISE Spread Book Feed, a real-time feed, provides access to multi-legged option strategies on ISE's order book. ISE also offers a market data widget.[35]

References

  1. The International Securities Exchange (ISE) is Now Part of Nasdaq. Nasdaq.
  2. Let Me Count the Ways: Nasdaq Looks at All the Possibilities for Options, and Beyond, in ISE Acquisition. John Lothian News.
  3. OCC Monthly Volume Report. OCC.
  4. ISE Winter 2001. ISE.
  5. “Cannot be done”: ISE’s Gary Katz Tells The Inside Story Of The Biggest Disruptor To The Options Industry. John Lothian News.
  6. ISE IPO An Eye-Opening Success. ETF.com.
  7. The International Securities Exchange Goes Public. Wall Street & Technology.
  8. International Securities Exchange hot. MarketWatch.
  9. The International Securities Exchange Goes Public. Wall Street & Technology.
  10. ISE 2010 Annual Report. ISE.
  11. ISE-Direct Edge Deal Done. Securities Industry News.
  12. Direct Edge Exchange Applications Approved. Direct Edge.
  13. BATS and Direct Edge to Merge, Taking On Older Rivals. The New York Times.
  14. ISE Gemini Announces Successful Launch. ISE.
  15. ISE Holdings Files for Third Exchange License to launch ISE Mercury. ISE.
  16. ISE Mercury™ to Launch on February 16, 2016. ISE.
  17. ISE Whitepaper on Dividend Trade Strategies in the U.S. Options Industry. International Securities Exchange.
  18. ISE 2006 Annual Report. ISE.
  19. Dividend Trade Volume. ISE.
  20. Court Rules for CBOE in Index-Options Battle. Dow Jones Newswires.
  21. Court Rules for CBOE in Index-Options Battle. Dow Jones Newswires.
  22. CBOE-ISE Trial Over Automated Markets Patent Is Canceled. Bloomberg.
  23. $6M in Attorney Fees Awarded to Chicago Board Options Exchange. The National Law Journal.
  24. CBOE sues ISE for $525 mln over options trading system. Reuters.
  25. Winston & Strawn win for international securities exchange before Patent Trial and Appeal Board. Inside Counsel Magazine.
  26. Appeals Court Upholds Determination that CBOE Patents are Invalid. ISE.
  27. Strategic Investments. ISE.
  28. Ten in Twenty-Ten. ISE.
  29. Press Release. International Securities Exchange.
  30. Press Release. International Securities Exchange.
  31. ISE Lists Additional 650 Products. ISE.
  32. ISE FX Options. International Securities Exchange.
  33. NYSE Arca Options to list ISE FX Options. International Securities Exchange.
  34. ISE Introduces Dual Currency Conventions for ISE FX Options®. International Securities Exchange.
  35. Market Data Widget. International Securities Exchange.

External links