The US equity options market is a crowded place.
Seven exchanges battle for market share and BATS, the electronic exchange group, will on Friday join the throng, further fragmenting the market and begging the question of whether there is room for another platform.
With its first foray into the derivatives world, BATS is hoping to mimic the remarkable success it has achieved in the equity market where it has built up market share of more than 10 per cent in the US and about 8 per cent in FTSE 100 stocks in Europe.
Options presents an enticing opportunity: while other financial markets saw trading volumes and profits tumble through the financial crisis, options trading continued to grow, hitting a fresh record last year.
So far this year, it has outpaced 2009, according to the Options ClearingCorporation, which clears for all US options exchanges.
BATS’ ability to take on established stock market players was based partly on aggressive pricing.
BATS Options will use “maker-taker” pricing, a model adopted from the equities market in which trading firms get paid rebates for “making” liquidity and then charges customers for “taking” liquidity.
BATS will be the first exchange to use flat pricing, charging 30 cents per contract to all “takers” and rebating all “makers” 20 cents per contract.
The relatively aggressive pricing and straightforward structure is designed to appeal to high-frequency traders, an increasingly important section of the options-trading world.
BATS can afford to be a low-cost provider since it has used much of its existing equities technology to build its options platform.
Pricing alone cannot guarantee success, however, says Mark Longo of The Options Insider, a website of industry commentary. “Pricing is easy for other exchanges to match,” he says. “In and of itself, that’s not a long-term advantage in the options market. You have other players with deeper pockets than BATS.”
The real aspect that marks BATS out in the options world are its owners, who include JPMorgan Chase, Citigroup, Morgan Stanley, Credit Suisse, Deutsche Bank and Getco, one of biggest high-frequency trading firms.
Its strategy involves securing these institutions’ options order flow as it has in its equities business.
“They don’t have to develop a whole new Rolodex or hire somebody to get this done,” says Jon Najarian of OptionMonster, the trading consultancy.
But many in the industry are sceptical that the exchanges that dominate the market – the Chicago Board Options Exchange and the International Securities Exchange (owned by Deutsche Börse) – are in danger of ceding much ground to the new venture, which is aimed more at poaching market share from NYSE Euronext’s Arca Options and the Nasdaq Options Market (NOM).
If BATS’ entry makes other exchanges claustrophobic, they may need to get used to the feeling. There are likely to be nine US options exchanges soon: the CBOE is planning to launch an all-electronic exchange later this year.
Get alerts on FT Trading Room when a new story is published