CBOE to face new rival in options market

(Reuters) — The parent of BATS Exchange, the third-largest U.S. stock exchange, said on Wednesday it plans to launch an options market with a competitive pricing model which could attract up to 5 percent of U.S. equity options market share.

BATS Global Markets all-electronic platform, scheduled to begin trading in early 2010, could bring to nine the number of venues battling for order flow in the crowded options arena. There are now seven U.S. options exchanges and two set to launch.

"We plan to employ the maker-taker model with a price time priority structure, meaning the first customer that enters an order" will have that order executed first, said Ken Conklin, global head of business development and marketing for BATS, in a phone interview.

The maker-taker model, used by the smaller options exchanges, rewards liquidity providers by crediting them with a rebate and assesses transaction fees on those removing liquidity.

Launching an equity options exchange would put BATS in competition with top players -- Chicago Board Options Exchange, which plans to launch an all-electronic exchange dubbed C2 this year and the International Securities Exchange.

Together they account for about 54 percent of total U.S. equity option trading during the first half of 2009, according to the Options Clearing Corp.

ISE, the largest U.S. equity mart, is owned by derivatives exchange Eurex, whose parent is Deutsche Boerse.

Currently, two market models exist in the options marketplace. ISE and CBOE use a traditional pro rata model, giving priority to customer orders and charge transaction fees to market makers and to firms trading for their own accounts.

Exchange operator NYSE Euronext and Nasdaq OMX Group Inc. also have options platforms offering two different models.

The BATS platform plans to capture 3 percent to 5 percent of equity options market share within a year of launch by leveraging its current customer base of stock traders. "Many of these members already trade options," Conklin said.

Reuters reported in May that BATS was preparing to launch an options market.

BATS has not yet announced its maker-taker pricing fees but plans to do so closer to launch. "We have been aggressive in pricing in U.S. equities and intend to do the same in U.S. equity options," Conklin said.

BATS launched its stock exchange platform, BATS Exchange Inc, in January 2006, and now has nearly 12 percent market share in U.S. equities. The New York Stock Exchange and the Nasdaq Stock Market, as well as alternative venue Direct Edge, compete with BATS in equities.

The changes in the options market are due to a number of factors, including the U.S. Securities and Exchange Commission's pilot program of quoting options in 1 cent increments, the greater use of technology and rising participation from high frequency quantitative trading strategies, said Andy Nybo, head of derivatives at market research firm TABB Group.

High frequency traders use computers to make thousands of trades a day and have redefined securities trading.

"The option maker-taker business model is expected to account for 21 percent of total trading option volume by 2011 as high frequency traders grab a growing share of the options market," Nybo said.

BATS said it is currently working to file the necessary requirements to trade options with the SEC.