The stock market has been down for three years in a row, but David Krell and his colleagues are giving investors something to cheer about. They cracked the long-standing club that controlled the $650-billion-a-year market in U.S. stock options. Thanks to ISE, trading equity options is now easier and cheaper. And ISE itself is a growth stock: Barely two years after the company’s launch, ISE traded its 200-millionth options contract.
CEO, International Securities Exchange Inc.
New York, New York
FROM DAVID’S ORIGINAL ENTRY:
Tell us what you do (or what your team or organization does) and the specific challenge you faced.
Until two years ago, options’ trading in the U.S. was conducted on only four options exchanges using traditional open outcry systems. However, on May 26, 2000, this concept changed as the International Securities Exchange (ISE) emerged as a new market player. Co-founder and current President & CEO, David Krell led this innovative break from tradition with decisions that altered the face of the options industry and shattered all previous perceptions that options trading must be floor-based.
Questioning why options cost so much to trade, David Krell, Bill Porter, Marty Averbuch, and Gary Katz found that with no co-listing of options, competition did not exist, so there was no incentive to lower costs. The fact that trades were entered manually also did not improve economics. Thus a decision was made and Krell helped to launch the first and only fully electronic options exchange in the U.S. to break from the stubborn stronghold of the entrenched floor-broker community.
What was your moment of truth?
Once the initial idea was developed, innovation and perseverance was necessary for a successful product. Following the success model of electronic options exchanges in other countries, the founders announced ISE’s existence in November 1998 sending a shiver through the U.S. options industry. It received regulatory approval from the Securities and Exchange Commission (SEC) on February 24, 2000 to operate as an all-electronic options exchange making it the first exchange to be recognized by the SEC in 26 years.
What were the results?
With David Krell’s leadership, ISE has been very successful in attracting a pool of market makers possessing the capital, experience and technical capabilities necessary to provide deep, liquid markets to support and provide for ISE’s initiatives and goals.
Fuelled by the benefits of its efficient market structure and trading system as well as the reduced overall transaction cost, ISE’s growth continues to accelerate. Krell has proved that his business creation is here to stay and will continue momentum with each trading day. ISE traded its 50-millionth contract within 16 months of its launch, its 100-millionth contract five months later, its 150-millionth contract within the next four months, and its 200-millionth contract just three months later. Volume records are showing no sign of stopping.
As market participants have started to embrace the unique offerings of the ISE and realize the quality of its markets, the exchange is breaking new volume records over and over again. ISE’s market share in its listed equity options has catapulted to 27.9% in January 2003, closing in on the fast shrinking share of the current market leader, the Chicago Board Options Exchange.
As a testimony to its efficiency, the ISE continues to solidify its position in the U.S. options market. With six CMM memberships approved for sale, one at $1.1 million and the remainder at $1.6 million, the value of the exchange has increased significantly compared to other exchanges that have recently sold seats.
The advent of the exchange has been frequently cited as a major catalyst in the evolution of options trading, and therefore Krell is rightfully a revolutionary man. In response to the ISE, the U.S. options exchanges have invested in trading technologies and increased their capacity for electronic order entry and execution. Moreover, listed options are now being traded on multiple exchanges. Fee structures have also been adjusted, reducing the cost of trading for market users and changing the competitive dynamics of the options industry overall.
Through its unique market structure and trading system, ISE, with David Krell at the helm, has reshaped the industry and set the standard for electronic trading within the U.S. equity options market. The electronic platform is now being emulated in various forms by other markets seeking to capture the efficiencies and benefits introduced by ISE.