The Big Board, the world’s largest venue for trading stocks, had a very distinct vision when it merged with Archipelago in March: becoming a multi-asset-class marketplace that traded options, futures and other derivatives. On Oct. 9, seven months after the merger, that vision began to materialize in a major way when NYSE Group—the public company that emerged from the merger—completed its rollout of NYSE Arca Options, a new automated trading system for equity options.
“The introduction of NYSE Arca Options represents a significant step in the fulfillment of NYSE Group’s goal of becoming a one-stop marketplace for a broad range of products and services,” said NYSE Group CEO John A. Thain. “This platform delivers on our promise of creating a system that provides distinct value to the options market, demonstrates strategic growth to our shareholders, and furthers our mission of becoming the world’s pre-eminent multi-asset-class marketplace.”
NYSE Arca Options, which replaces the former options platform of the Pacific Exchange that Archipelago acquired in 2005, trades more than 700,000 option contracts daily on nearly 2,000 stocks and exchange-traded funds.
Jon Werts, vice president of Derivative Products for NYSE Group, points to the superior technology of the platform, which he says is faster and has much greater capacity than rival venues. NYSE Arca Options was built on the same principles of speed, transparency and reliability that made Arca’s equity trading platform—ArcaEx—a star in the electronic trading arena. “Based on client feedback, the throughput and bandwidth capabilities noticeably exceed those of competitor exchanges,” said Mr. Werts.
Customers so far appear to be pleased. “It’s fast, it seems to be pretty reliable, and it does all the things we want it to,” said Jim Harkness, chief operating officer at Wolverine, one of the top options market-making firms in the country, of the new options platform. “We believe in the system.”
NYSE Arca Options offers customers unique functionality, including order types not available on other platforms. NYSE Arca believes in transparency by showing its complete order book.
On top of that, the market structure of NYSE Arca further differentiates the platform from that of competitors. The market structure combines the concept of “price-time priority,” which grants priority to orders on a first come, first serve basis, with the benefit of lead market makers who provide continuous quotes and maintain liquid markets in their assigned securities. The structure allows NYSE Arca Options to offer customers tight, liquid markets across all options classes, while rewarding speed of quoting.
Since the platform was launched, several trading firms have joined NYSE Arca Options as market makers, including UBS, SLK Goldman Sachs and Credit Suisse. A total of 25 market-making firms, 11 of which are lead market makers, were on board at the end of October.
Another big draw for options traders is the reduction in NYSE Arca’s trading fees, made possible thanks to the company’s merger with the Pacific Exchange. Transaction fees for LMMs, for instance, dropped 65 percent, from 26 cents per contract to 9 cents per contract. The cost of obtaining monthly permits to trade options was also streamlined, making it more attractive for traders. For example, one options trading permit (OTP) now costs $4,000, up from $2,250. However, one OTP now entitles market makers to trade 100 options issues, up from eight issues prior to the pricing change. For $16,000 per month, market-making firms can trade all options issues on NYSE Arca Options.
“This is clearly another example of first-rate technology and the synergies realized through the Pacific Exchange integration, providing new cost efficiencies for investors,” said Jerry Putnam, NYSE Group president and co-COO.
Options present a good market opportunity for NYSE Group. The trading of options is growing at a more rapid pace than stocks. According to the Options Clearing Corp. (OCC), U.S. equity option contracts traded have grown at a compound annual rate of 22.9 percent from 1995 to 2005. Last year volume growth by number of contracts traded in the options market increased by 27.3 percent, whereas equity trading share volume increased 5.5 percent, said Jim Binder, spokesman for the OCC.
“Though I see many years of continuing growth in the industry, it’s hard to predict that it will continue at the same rate as in the past,” said Mr. Werts.
For all its benefits and features, NYSE Arca Options faces stiff competition, with much bigger players already in the space, including the Chicago Board Options Exchange and the International Securities Exchange. Despite the formidable rivals, NYSE Arca is determined to build the business, which already commands 10 percent of the options market.
To meet these challenges, Mr. Werts is planning ahead. For example, he has made sure that NYSE Arca Options is well prepared for the expected surge in quote traffic once options markets switch to trading in pennies. “Fortunately we don’t have capacity concerns given our ability to handle traffic,” said Mr. Werts of the anticipated shift to penny pricing in options.
NYSE Arca was the first to file a proposal with the SEC to begin a six-month penny-quoting pilot program in 13 options issues in January. One of the pilot issues, the QQQQ’s, will trade completely in pennies. The other 12 will trade pennies in all series quoted under $3 and in nickel increments in series where the premiums are more than $3.
Looking out even further on the horizon, Mr. Werts is planning to add more features and functionality to NYSE Arca Options, including an electronic crossing mechanism and automated complex orders, which will support advanced trading strategies such as buy-writes and multiple option legs. “We expect to extend our competitive pricing and build on speed,” said Mr. Werts. “We also plan to add more market makers to the system to provide deeper liquidity and tighter spreads for users.”
About NYSE Group, Inc.
NYSE Group, Inc. (NYSE: NYX) operates two securities exchanges: the New York Stock Exchange LLC (the “NYSE”) and NYSE Arca, Inc. (formerly known as the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. In the third quarter of 2006, on an average trading day, 2.2 billion shares, valued at $80.1 billion, were traded on the exchanges of the NYSE Group.
The NYSE is the world’s largest and most liquid cash equities exchange. The NYSE provides a reliable, orderly, liquid and efficient marketplace where investors buy and sell listed companies’ common stock and other securities. On Sept. 30, 2006 , the operating companies listed on the NYSE represented a total global market capitalization of $23.0 trillion.
NYSE Arca, Inc. operates the former ArcaEx®, the first open, all-electronic stock exchange in the United States , which has a leading position in trading exchange-traded funds and exchange-listed securities. NYSE Arca, Inc. is also an exchange for trading equity options. NYSE Arca Inc.’s trading platforms provide customers with fast electronic execution and open, direct and anonymous market access.
NYSE Regulation, an independent not-for-profit subsidiary, regulates member organizations through the enforcement of marketplace rules and federal securities laws. NYSE Regulation also ensures that companies listed on the NYSE and NYSE Arca meet their financial and corporate governance listing standards.
For more information on NYSE Group, go to www.nyse.com.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this article may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on NYSE Group’s current expectations and involve risks and uncertainties that could cause NYSE Group’s actual results to differ materially from those set forth in the statements. There can be no assurance that such expectations will prove to be correct. Actual results may differ materially from those expressed or implied in the forward-looking statements. Factors that could cause NYSE Group’s results to differ materially from current expectations include, but are not limited to: NYSE Group’s ability to implement its strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk and U.S. and global competition, and other factors detailed in NYSE Group’s Annual Report on Form 10-K and other periodic reports filed with the U.S. Securities and Exchange Commission. In addition, these statements are based on a number of assumptions that are subject to change. Accordingly, actual results may be materially higher or lower than those projected. The inclusion of such projections herein should not be regarded as a representation by NYSE Group that the projections will prove to be correct. NYSE Group undertakes no obligation to release any revisions to any forward-looking statements.