ARCA BUYS PCOAST
Regular readers of my articles know that I love to talk about the competitive feeding frenzy in the options business. It seems like the number of exchanges battling for a piece of the options pie is growing every year. The addition of the BOX to the mix seemed like madness back in 2004. It should come as no surprise then to learn that the competitive landscape in the options business has been radically altered once again. Archipelago Holdings, the owners of the world’s largest electronic stock exchange, have purchased the Pacific Exchange, one of the six option exchanges battling for dominance in America.
Coverage of this purchase in the mainstream financial media has been limited. One reason is that the options markets are still viewed as a bastard stepchild to stocks & bonds in the eyes of many financial journalists. Another reason is that, in terms of sheer dollar value, this $50 million deal barely even registers on Wall Street’s radar. However, this small deal will have a radical impact on the competitive structure of the industry, and it may very well affect how you trade options in the future. Archipelago’s purchase of the Pacific Exchange did not come as a surprise to most people in the business. The firm had invested heavily in the Pacific Exchange in 2000 and successfully migrated their equity trading floors to the electronic Arca network in 2002.
The purchase of the exchange was merely the final step in a process that has been developing for several years. The larger question hanging over this deal is why Archipelago did it. The Pacific Exchange is hardly a major player in the options business. Although they made a valiant attempt to win over new business in recent years, they have been overshadowed by larger competitors like the CBOE and ISE. As a result, they have seen their equity options market share decline steadily,, accounting for only 10.8% of the volume in 2003. The initial investment by Archipelago was a much-needed source of cash that kept this small regional exchange afloat during turbulent times in the options business. Why anyone would choose to jump into the absurdly cutthroat and amazingly low-margin world of options trading right now is a mystery to me. Why Archipelago would choose to enter this business by aligning themselves with a bottom-rung player is a mystery to many people.
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