CHICAGO (HedgeWorld.com)–The Chicago Board Options Exchange on Thursday announced plans to begin trading equities by early 2007 via a hybrid electronic and open outcry trading system.
The CBOE Stock Exchange LLC, as the entity will be known, is actually a collaboration between the CBOE and four partners, each of which has taken a monetary stake in the new venture. Those partners are VDM Specialists LLC, Interactive Brokers Group LLC, LaBranche & Co. Inc., and Susquehanna International Group LLP.
“We’re privileged to be partnering with some of the largest, most respected trading firms in the securities industry to launch this exciting new venture,” said William J. Brodsky, chairman and chief executive of the CBOE, in a statement accompanying the announcement. Mr. Brodsky, along with Edward Provost, executive vice president of business development; Edward T. Tilly, the CBOE’s new executive vice chairman; and John Smollen, the CBOE’s newly named member vice chairman, delivered the news about the stock trading venture at a news conference in New York.
The new venture is the CBOE’s way of elbowing further into the equity trading world. Already, the exchange trades single stock futures products on the OneChicago platform, and obviously options on stocks and stock indexes are its main business. The exchange also launched the CBOE Futures Exchange in 2004.
Now the CBOE is taking direct aim at individual equity trading. Its announcement came three months after the options-focused International Securities Exchange said it would launch its own electronic stock trading program, MidPoint Match, in the third quarter of 2006.
It seems the pending Regulation NMS trade-through rule, passed by the U.S. Securities and Exchange Commission in April and set to take effect in February 2007, is keying a spurt of competition in the equity trading space. Reg. NMS shifts the market emphasis away from solely offering best execution. Under the new regulation, brokers and exchanges must be able to guarantee the best price and be able to execute orders automatically.
CBOE officials acknowledged the ISE’s earlier move, but said they think their Hybrid market model, which provides for both electronic and open-outcry trading, gives the CBOE Stock Exchange an edge.
“One of the unique attributes of the market model we’re offering is the Hybrid trading system,” Mr. Provost said at the news conference. He said each stock would have its own designated primary market maker, located at a designated trading post on the CBOE floor, with further liquidity added by multiple competing remote market makers, who can stream quotes and trade electronically from any location, according to the CBOE. The hybrid system will accommodate screen-based electronic trading and include open outcry on a portion of the CBOE trading floor.
The CBOE Stock Exchange will trade the most active 2,500 securities listed on the New York Stock Exchange, the Nasdaq and the American Stock Exchange, as well as exchange-traded funds and other listed securities. The CBOE’s own CBOE Direct trade engine, which already handles CBOE options, OneChicago and CBOE Futures Exchange trading, also will be used for equity trading.
Orders will be matched most likely using an algorithm that places a priority on price and time.
Access to the system will be via permit. All current CBOE members will be given a permit as part of their membership. Non-members will have to apply for a permit. CBOE will be the self-regulatory organization for the CBOE Stock Exchange. The exchange will be regulated by the SEC.
Mr. Provost said the new CBOE Stock Exchange has been designed not only to enhance the CBOE’s business model, but to compete as a viable stock exchange in its own right.