NYSE Amex’s sale of almost 53 percent of its options market to seven brokers won regulatory approval more than 21 months after it was first announced.
The U.S. Securities and Exchange Commission approved the joint venture that gives 52.8 percent of that options market to brokers including units of Citadel LLC and Goldman Sachs Group Inc. in exchange for sending orders to the venue, according to a notice dated June 24. NYSE Amex is owned by exchange operator NYSE Euronext, which also runs another options market.
“This will allow Amex to attract more order flow,” said Bob Fitzsimmons, Chicago-based head of derivatives for Investment Technology Group Inc. “Those large broker-dealers now have an incentive to direct more order flow to Amex.”
NYSE Amex’s share of total U.S. options trading rose to 13.4 percent in May from 6.1 percent in August 2009, the month before the joint venture was announced, according to data compiled by Chicago-based OCC. Amex is now the fourth-largest individual market. The OCC clears all options volume.
The seven broker-dealer owners must send a minimum number of options contracts to the exchange for five years and three months, according to the agreement. NYSE Amex will adjust the brokers’ share of the 52.8 percent each year based on whether they meet targets tailored to each firm. No brokerage will own more than 19.9 percent, the limit allowed by the SEC.
“Our best customers are potentially our best owners,” Steve Crutchfield, chief executive officer of NYSE Amex Options, said in an interview. “This consolidates our relationship with seven of the best order-providing firms in the industry and allows us to work more closely with them to understand their needs and the needs of their clients as we structure the business.”
Crutchfield said he expects to see “additional growth” in Amex’s market share once the joint venture is completed, and expects the deal to close in the “coming days.”
“Their collective leverage in some of the businesses in which we operate is not to be trivialized,” NYSE Euronext Chief Executive Officer Duncan Niederauer said about the importance of brokers to exchanges’ trading volume at a UBS conference on May 10, according to a transcript. Increasing trading volume requires being “a little creative in terms of organizational construct, business model, et cetera,” he said.
Citadel and Goldman Sachs will initially own 14.95 percent each, followed by Bank of America Corp., Citigroup Inc. and TD Ameritrade Holding Corp. at 5 percent each, with UBS AG at 4.9 percent and Barclays Plc at 3 percent.
Revenue From Trading
Goldman Sachs, based in New York, is the U.S. bank that makes the most revenue from trading. Chicago-based Citadel runs a brokerage as well as a hedge fund. Charlotte, North Carolina-based Bank of America is the nation’s biggest bank by assets, and Citigroup of New York is No. 3. TD Ameritrade of Omaha, Nebraska, is the third-largest U.S. retail brokerage by client assets. Zurich-based UBS AG is Switzerland’s biggest bank, and London-based Barclays is the U.K.’s third-largest lender.
New York-based NYSE Euronext submitted its proposal, which it has worked on with the SEC since 2009, as competition in the options industry intensified. Nine exchanges now trade equity options, compared with five a decade ago. CBOE Holdings Inc. runs the Chicago Board Options Exchange, which began trading equity derivatives in 1973 and is now the second-largest market operator after New York-based Nasdaq OMX Group Inc., whose two venues had almost 29 percent of total volume last month.
Bats Global Markets, Direct Edge Holdings LLC and Chi-X Europe Ltd. have sold stakes in their markets in the past few years to groups of brokers that could send them orders. Bats, owned in part by Bank of America, Tradebot Systems Inc. and Getco LLC, said in February it would buy Chi-X Europe and operate it on the same technology platform as its current European venue. Bats is based in Lenexa, Kansas.
The owners of Direct Edge, which is based in Jersey City, New Jersey, include options market International Securities Exchange, Knight Capital Group Inc., Citadel and Goldman Sachs. Frankfurt-based Deutsche Boerse AG, which owns ISE, said in February it plans to buy NYSE Euronext in a deal currently valued at $9.02 billion, according to Bloomberg data. NYSE Euronext hasn’t said what it plans to do with ISE’s stake in Direct Edge after the acquisition by Deutsche Boerse.
Vying for Business
Options exchanges are vying for business in an increasingly competitive market that’s growing faster than equities. U.S. options volume rose 8 percent last year to 3.9 billion contracts, for an eighth-straight annual record, OCC said. Average daily U.S. equities volume last year was 8.5 billion shares, down from 9.8 billion in 2009, Bloomberg data show.
NYSE Amex will retain regulatory control over the options market and will have the right to buy some or all of the equity stakes of the seven brokers in 10 years. The deal with the brokers doesn’t affect the ownership of NYSE Amex’s equities market, although they use the same regulatory license to operate their exchanges.
“We’re very pleased with the market share growth we’ve seen on Amex over the last 18 months,” Crutchfield said. “We hope it turns out to be a good investment for our partner firms.”