Debut of new exchanges could hurt options industry

NEW ORLEANS, Louisiana Fri May 4, 2012 6:21pm EDT

NEW ORLEANS, Louisiana May 4 (Reuters) - With nine exchanges already battling for a piece of the U.S. options market, as many as three new competitors this year may entry the market this year.

The new entrants face the challenge of offering innovation and better ways of managing option order flow, amid a decline in U.S. options volumes, driven by subdued volatility. Volume is down nearly 8 percent this year.

"If these exchanges launch, they would all be trying to compete for order flow in a shrinking market place," said Andy Nybo, head of derivatives research at TABB Group.

First in line is Nasdaq OMX Group Inc, which plans to launch its third stock options trading venue next month, this time targeting retail investors. The new exchange, called Nasdaq OMX BX Options, is expected to launch in June pending approval from the Securities and Exchange Commission.

Next up is the Miami International Securities Exchange (MIAX), which filed an application with the SEC to open the MIAX Options Exchange. The planned launch is late September.

The International Securities Exchange (ISE), which hasn't yet filed an application to the SEC, is seeking to launch its second stock-options exchange by the end of the year.

"Fragmenting markets are always more challenging for investors as well as market makers," Nybo said.

FADING VOLUME

A factor in favor of new competitors has been stagnating cash equity volumes in recent years, at a time when derivative trading has grown at a compound annual growth rate in excess of 20 percent since 2003, according to TABB Group.

This year's decline, however, is partly due to market volatility, which has fallen to the lowest levels in five years. Options are a popular hedging tool against a volatile stock market.

Average daily trading volume on all the U.S. options exchanges in April fell 4.71 percent to 15.98 million contracts from 16.8 million contracts traded in the same year ago period, according to the Options Industry Council.

So far this year U.S. equity options volume, which includes options on individual stocks and exchange-traded funds, came in at 1.27 billion contracts, down 7.72 percent compared to the 1.38 billion traded throughout the same period last year.

In previous years, when new exchanges were created, "nobody was complaining because the pie was getting bigger, the industry was growing," Paul Finnegan, co-chief executive of NYSE Arca options, said at the Options Industry Council conference.

The landscape looks a little different now. "With three more exchanges added, it will be the interesting to see where the profitability comes in. You will have volume, but you may not profit," he told reporters.

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