|
In early 1996, Bill Porter and Marty Averbuch began exploring ways to decrease costs of execution in equity options for retail investors. Their experience with Roundtable Partners provided them with a successful business model. Roundtable was a consortium of broker/dealers created for the purpose of lowering trading costs for equity securities. In addition, since each of the broker/dealers involved in Roundtable did not have the critical mass to start their own trading operation, Roundtable became the vehicle which shares the trading profits generated from the order flow of the consortium.
In order for Porter and Averbuch to facilitate similar arrangements with equity options, they needed to negotiate directly with the existing options exchanges, since no third market existed for options. Due to the structure under which options exchanges now operate, they were unable to obtain concessions on costs of execution.
The concept of a third market for equity securities cannot be translated readily to a third market for options. Equity securities are created and originally issued by companies to raise capital. In contrast, stock options are not created by the company. Rather, when someone buys an option on an exchange, he or she actually initiates the creation of a new options contract. Equity options contracts traded on a national securities exchange are issued and guaranteed by The Options Clearing Corporation ("OCC"). These options are called "standardized" options and are fungible. That is what differentiates OCC issued options from any other contract between two parties and what facilitates exchange trading of options. Since OCC will only issue and guarantee options contracts if they are traded on a registered market, such as an exchange, Porter and Averbuch decided to create a registered exchange that would be a member-owner of OCC.
While Porter and Averbuch, with a potential broker/dealer consortium, had the stock options order flow necessary to begin trading options, they needed the exchange management skills and options background necessary to successfully develop a fully electronic options exchange.
In May 1997, David Krell and Gary Katz, left their managerial positions in the options division of the New York Stock Exchange and founded K-Squared Research, LLC, a specialized organization focused on education/training, consulting on derivative and structured products, and services to broker-dealers.
Having heard of the NYSE divestiture of its options business, Averbuch approached K-Squared Research to explore the feasibility of developing the first all electronic options exchange in the United States. Thus, Porter, Averbuch, Krell and Katz joined to become the founders of the International Securities Exchange (ISE).
In September 1997, ISE was established with Bill Porter as Chairman, David Krell as President and CEO and Gary Katz as Senior Vice President Marketing and Business Development. Commensurate with this formation, Adirondack Trading Partners (ATP) was formed to fund the design, development and implementation of ISE. Marty Averbuch, as President and CEO of ATP, began the process of creating the consortium of broker/dealers to provide capital and a critical mass of order flow. |
