Ramping Up Market Liquidity: Brokerage Firms ’ Adoption of Electronic Options Trading

Despite the benefits of electronic markets, online trading ventures often fail to attract sufficient activity levels, and are closed down. Optimark, BondConnect, and Jiway in Europe were innovative trading platforms launched in the 1990s that 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 U.S. in competition with four incumbent floor markets including the Chicago Board Options Exchange (CBOE). This paper examines regulatory order routing disclosures for a sample of 15 U.S. brokerage firms from 3Q 2001 to 2Q 2003. Two hypotheses are tested, and the results show that (1) early on the ISE had a group of active member users, and (2) the ISE use has grown through above-average increases from these “committed ” early adopters. “New ” order flow from late adopting firms has increased more slowly. To sustain its growth going forward requires that the ISE win order flow from late adopters with fewer membership affiliations. 1