The Miami International Securities Exchange’s planned U.S. options venue will compete for orders by giving priority to market makers that meet certain quoting requirements, according to its application to regulators.
MIAX, as the proposed exchange is called, may become the 11th U.S. venue to trade equity options if the Securities and Exchange Commission approves its application published yesterday. The exchange has been planned for several years and its filing, submitted to the SEC in April, provides the first detailed look into its trading plans and rules. The SEC is seeking comment on the exchange as it considers approval.
The surge in electronic trading since 2000 has spurred more competition among older exchanges and startups seeking to draw trades through different pricing and rules for matching orders. MIAX will compete for volume in the growing options market with 10 exchanges, including three run by Nasdaq OMX Group Inc. (NDAQ) and two each from NYSE Euronext (NYX) and CBOE Holdings Inc. (CBOE) in Chicago.
“At this point there are 10 exchanges, so they’re going to have to offer something quite unique to stand out,” Stephen Solaka, who oversees about $60 million including options as co- founder of Belmont Capital Group in Los Angeles, said in a phone interview. “You need something highly differentiated and proprietary to succeed as a new options exchange.”
The exchange doesn’t yet have a president and chief executive officer, according to its parent company, Princeton, New Jersey-based Miami International Holdings Inc. Shelly Brown, senior vice president for strategic planning and operations, declined to comment on the exchange’s application.
The company’s executive chairman is Thomas P. Gallagher, a founding partner at Princeton-based law firm Gallagher, Briody & Butler, which helps companies raise money. Douglas M. Schafer is the chief information officer, Barbara Comly is general counsel and Paul Warner is the chief financial officer. The chief regulatory officer is Edward Deitzel.
The parent company will contribute at least $2 million to the exchange before it begins operating and provide enough capital for it to meet its regulatory and operational requirements, MIAX’s application said. Information about the company’s financing wasn’t immediately available.
The company had about 60 employees in September, more than double the staff in April 2011, Brown said last year.
The electronic exchange’s planned start follows a ninth straight year of record equity options activity in the U.S., with almost 4.6 billion contracts changing hands in 2011, according to Chicago-based OCC.
A 12th venue is also planned. The International Securities Exchange, which in 2000 became the first fully electronic U.S. options market, plans a second venue. Molly McGregor, a spokeswoman, said the New York-based company, owned by Deutsche Boerse AG (DB1) in Frankfurt, hopes to introduce its new platform by the end of this year. The exchange must be approved by the SEC before it can start trading.
The Miami exchange must offer novel features to attract market makers and orders from brokers and asset managers already trading with the established venues, Andy Nybo, principal and head of derivatives at New York-based Tabb Group LLC, said in a telephone interview.
“Miami’s launch and other exchanges bringing new ways of trading provide a challenging environment for market makers to support the provision of liquidity across all of these exchanges,” Nybo said. “At some point the ability to provide liquidity will start to impact market makers and they simply will pick and choose when and where they provide liquidity and how they do it. It’s a tall order to have a presence over 10 or more exchanges.”
MIAX said it will consider some bids and offers from market makers to be “priority” quotes and others “non-priority” quotes. Priority quotes, which must meet specified requirements, would enable the market maker to gain precedence over certain orders willing to buy or sell contracts at the same price, the exchange said. The venue will allow three types of market makers and let them use multiple types of quotes, the application said.
MIAX will match some incoming option orders with bids or offers based on who was the first at a given price, called price-time priority. Other contracts will use a pro-rata system, where some firms will receive a bigger share of incoming trade requests. Adjustments to these methodologies, already employed on rival exchanges, will also be used, the company said.
“Simply tweaking a pricing model in a race to the bottom isn’t enough,” Nybo said. “They need to bring functionalities that improve current market practices.”
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