Adoption of electronic trading at the International Securities Exchange

摘要

Information technology is transforming financial trading, lowering costs, and increasing market transparency. Yet, new electronic trading ventures often fail to attract sufficient activity levels, and close down. Optimark, Tradepoint, Jiway, and BondConnect did not develop sufficient trading volume to survive. In contrast, the International Securities Exchange (ISE), an all-electronic options trading platform has gained trading volumes in the United States in competition with four incumbent markets, including the Chicago Board Options Exchange (CBOE). Compared with floor exchanges, electronic options markets offer immediate trading, direct user access to the market, and reduced costs. The paper describes the ISE and examines newly available data from brokerage firms to comply with the Securities and Exchange Commission's (SEC) Rule 11Ac1-6. The order routing disclosures show that brokerage firms differ widely in the extent of their use of the ISE. Based on a sample of 188 quarterly disclosures from 20 major brokerage firms, OLS, Tobit, and fixed-effects models of ISE use are estimated to explain individual firms' adoption levels. Significant factors are whether the firm is an online discount broker, the firm's membership role in the ISE, and the network externality effect of the ISE market's growth. Firm-specific factors are shown to account for about 60% of ISE adoption explained by the model, with the remaining 40% accounted for by the network effects of growing market liquidity.