New U.S. Options Exchange Gemini Aims To Take Order Flow From Fee-Friendly Marketplace

Monday, August 5, marked the launch of the International Securities Exchange’s secondary marketplace, Gemini.

Originally filed with the SEC under the name Topaz, Gemini is now the twelfth U.S. options market and the third launched within the past 12 months (Miami Options Exchange and Nasdaq BX are the other two). 

In an industry where volume and volatility are near all-time lows, U.S. options exchanges face a constant battle over market share. Gemini is yet another example of the cannibalization that occurs over exchange volume and growth. Simply put, the ISE has to make money and project future success just like any other for-profit, publicly traded company.

Having opened in 2000, the ISE has seen its market share decline over the past decade. Although it was the first fully electronic options exchange in the US, the exchange is not the titan it used to be. It must step outside the comfort zone of old-school, size-priority market making in order to appease its benefactor, Deutsche Boerse AG.

According to The Wall Street Journal, ISE’s head of options exchange, Boris Ilyevsky, hopes that the introduction of Gemini into the U.S. options space is not simply a situation where it will “split the pie into smaller pieces.”

Let’s talk about the winners and losers.

Winners: Market Makers, non-Market Makers limit orders and the ISE.

The market makers are finally getting paid to post markets and get to keep using the ISE’s infrastructure to do so. Historically, a market maker has to pay a fee to quote/trade/do its job, a practice that was made pretty unfair once the penny pilot program was introduced.

Gemini will effectively mix size-priority market making, where the market maker’s percentage of a market order that hits a price level is determined by its percentage of the quantity displayed at that price level, and maker-taker market making that rewards resting limit orders with a rebate. Therefore, non-market maker orders will also benefit from Gemini, as there is a new exchange to collect rebates.

And of course, the ISE wins, as it is in desperately needs to infiltrate the maker-taker space. Per the Options Clearing Corporation’s website, the three maker-taker exchanges (not including taker-maker exchanges; more to come about those little devils in the future): Nasdaq OM, NYSE Arca and Bats—accounted for approximately 27.5 percent of the US equity option volume this past Friday. The ISE is effectively trying to take back the market share it lost since the maker-taker revolution began.

Losers: Customers/Pros that take liquidity, Customers/Pros that will get punished if/when Gemini changes its fee structure unbeknownst to them

Traders do not like to lose. More so, traders do not like to lose and pay nearly half the spread to take liquidity. The introduction of Gemini will essentially take order flow from the more fee-friendly ISE marketplace and move it to its new pet project, where taking will cost traders and extra, say 40 cents. 

So there you have it, the ISE is finally entering the 21^st century by having not only a second exchange, but one that rewards limit orders with rebate. Imagine that, the first 100 percent electronic exchange in the U.S. was pretty much the last major exchange to give birth to a new one.