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Let Me Count the Ways: Nasdaq Looks at All the Possibilities for Options, and Beyond, in ISE Acquisition

With double the number of US equity options exchanges, Nasdaq has some work to do in the coming months.

Nasdaq closed the deal today for $1.1 billion with Deutsche Boerse, giving the exchange three options markets: International Securities Exchange, ISE Gemini and ISE Mercury, to go along with Nasdaq Options Markets (NOM), Nasdaq OMX BX and Nasdaq OMX PHLX.

Tom Wittman, executive vice president of Nasdaq and global head of equities at Nasdaq, told John Lothian News that the plan is to integrate and migrate the three exchanges onto the Nasdaq platform. That essentially means the technology team at Nasdaq will have to rebuild the ISE exchanges to provide the same functionality and rules that exist today.

Wittman isn’t fazed by the task, however. His team did it when Nasdaq bought PHLX and completed the project in 12 months. He thinks it may be able to finish this project in less time.

Nasdaq is also taking a good long look at PrecISE, the front-end trading software it acquired in the deal. That software, which allows customers to trade into the ISE exchanges, is considered extremely flexible. It may also be used to trade on all six options exchanges, as well as on other asset classes such as equities and futures. In other words, the front-end could provide a strong trading platform for other Nasdaq properties.

“Maybe there is a way for customers, say a bank that wants to execute a complex order, to execute on PHLX, ISE Gemini or NOM, because it operates this certain way,” Wittman said. “So, I see it being able to expand the use there. And I don’t see any reason not to leverage that front-end, easily for equities and why not treasuries if there is a need or want from our customer base?”

The deal also provides a tremendous boost in market share to Nasdaq, giving the exchange 41.6 percent of equity options volumes, as calculated from the OCC volume figures from May. Wittman said the deal “gives us optionality.” Pun intended or not, a fleet of six exchanges, each with different order structures, matching algorithms and pricing models, does give the Nasdaq quite a grip on the options market.

Going forward, Wittman believes there is still more growth ahead for the options business as more retail stock traders, not to mention institutional players, migrate into derivatives.

“A lot of it is just an education process,” he said. “If you look at the firms that do wealth management, they get their clients into equities but never hedge with an options strategy. Those firms are starting to become more educated and will use them more in the coming years.”

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Kharouf is a Chicago-based freelance reporter and editor who was previously CEO and editor-in-chief of John Lothian News.