UPDATE: ISE To Launch Controversial Options Orders

The International Securities Exchange next week will introduce a long-planned service for trading options contracts that has ignited controversy among rival options exchanges, and prompted some to follow suit.

A new type of order will let investors on the ISE's markets privately carry out large options trades that are linked to a stock transaction, bypassing potential competition from other traders.

Regulatory approval for the service marks a key step in the development of U.S. options trading. At issue is the degree to which options should resemble the stock market, where one-third of all trades now take place off the publicly accessible exchanges.

The ISE's so-called "qualified contingent cross" lets traders privately arrange packaged transactions incorporating both stocks and options, and carry out the options piece without other investors interacting with the order.

The all-electronic exchange, a unit of Frankfurt-based Deutsche Boerse AG (DB1.XE), sees the function helping it compete against rivals that operate physical trading floors, where similar privately negotiated transactions are often carried out between traders and then submitted to the exchange in open outcry trading.

"We applaud the SEC in its decision to allow for fair competition between floor-based and electronic options exchanges for these large-size contingency trades," said ISE Chief Executive Gary Katz in a statement Friday.

The ISE aims to introduce the new function on Monday, after the Securities and Exchange Commission approved it Thursday.

NYSE Euronext, among the exchanges that has objected to the practice, intends to follow suit, according to a spokesman.

"To ensure a competitive U.S. options marketplace with a comprehensive choice of services for investors, both NYSE Arca and NYSE Amex Options anticipate filing similar proposals with the SEC shortly," he said.

Jeromee Johnson, head of options for BATS Exchange, called the move positive for large, institutional options investors. BATS may consider creating a similar function for its market in the future, he said.

A spokeswoman for CBOE Holdings Inc. (CBOE), the Chicago Board Options Exchange parent that mounted a vigorous opposition to the ISE orders after they were first approved by regulators in 2009, had no immediate comment. Representatives for Nasdaq OMX Group Inc. (NDAQ), which runs two options markets, did not respond to request for comment.

Under the ISE's qualified contingent cross orders, the options portion of the trade must be done at the most competitive price available nationally and cannot trade ahead of outstanding customer orders at the same price.

The orders are applicable to all equity options traded on the ISE, though such transactions must be tied to stock trades and incorporate at least 1,000 contracts apiece.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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