July 26, 1999
Knight Securities, L.P. appreciates this opportunity to comment on the application of the International Securities Exchange ("ISE") to register as a national securities exchange under the Securities Exchange Act of 1934 ("Exchange Act"). We support the ISE's application and urge the Commission to approve it promptly.
The ISE will bring much-needed competition to the options markets. Although eight exchanges and the NASD currently trade equity securities, there are only four exchanges trading listed options. Even among those four markets, most options trade on only one exchange. Because of limited competition, the costs of trading in the options market are relatively high. The ISE will provide for enhanced competition by providing more firms with the ability to be market makers in actively traded stock options.
Since the ISE publicly announced its intention to register as an options exchange last Fall, the mere prospect of competition has led to changes in the cost structure in the options markets, with the existing exchanges adjusting their fees in an attempt to attract customer order flow. As the ISE moves forward, this trend is sure to continue, leading to significant benefits to broker-dealers and the investing public. As with all changes in the securities market that attract additional investor interest, we believe that this enhanced competition will increase total order flow, benefiting all the options exchanges.
In addition to reducing costs, the ISE will bring added liquidity to the options markets by increasing the pool of market makers. The ISE also will tap the liquidity of firms trading for their own accounts, whether or not as market makers, by encouraging the entry of proprietary orders and by attracting the entry of facilitation orders, through which firms will provide liquidity to their customers.
The ISE is unique in that it will bring these benefits to the market by blending a fully automated trading system with traditional exchange agency-auction trading principles. Rather than being simply an electronic "order driven" market that neither protects customer orders nor provides a guarantee of liquidity, the ISE will be an agency-auction market in which public customers always receive an execution ahead of professionals at a given price. Market participants will compete with each other on the basis of price and size to attract orders. We believe that this is the proper model for competition in the options market.
The ISE's market structure provides numerous other enhancements to the existing options market structure. For example, the ISE will be the first options exchange to require every market maker to quote independently to compete for order flow. In contrast, existing options exchanges generally rely on a "crowd auto-quote." Furthermore, the ISE will be the first options market to integrate its execution system into its limit order book, providing for enhanced price protection for customers. Lastly, perhaps of most importance, the ISE will be the first options exchange that will require market makers to post a size with their price quotations, and will reward market makers who disseminate quotations with the largest size. These are all innovations that Chairman Levitt has urged the options markets to develop, and which the ISE will provide its market participants on day one of its operations.
The ISE has taken care in developing its market, assembling a first-rate team of employees, while forging alliances with high-quality partners. The ISE's senior staff members come from within the securities industry and have significant experience operating a national securities exchange from the business, technical and regulatory perspectives.
We also have a high level of confidence in the ISE's technology providers. The ISE is using OM Technology of Sweden to provide its central exchange system and trading stations, with OM being the world's leading developer of electronic derivative markets. The ISE system will be flexible, with an open user interface allowing the development of a wide range of third party applications for the system. Similarly, the ISE has acquired its technology platform from Compaq Computer, using Compaq's industry-leading AlphaServer systems. The ISE's plan to run dual "hot sites" from two locations offers every possible assurance that the ISE will offer investors a reliable trading market.
Finally, we believe that the ISE's application raises no new regulatory issues and fully complies with all the requirements of the Exchange Act. The ISE is not requesting any exemptions from the statutory requirements for exchange registration, and will provide for the proper governance and regulation of its market. The exchange will be owned by its members, with over half of the members of its board of directors being non-industry representatives. Indeed, not only does the ISE meet all the standards for registration as an exchange, but also the Commission should use the ISE as an example for all prospective new exchanges that seek registration under the Exchange Act. The Commission should require all such applicants to match the high standards the ISE has set.
We urge the Commission to approve the ISE's application for registration as a national securities exchange as quickly as possible. If you have any questions on our comments, please do not hesitate to contact us at 1 (800) 544-7508.
|Kenneth D. Pasternak||Walter F. Raquet|
|Chief Executive Officer||Chief Operating Officer|