On March 1, Miami International Holdings will launch its third options market, the sixteenth such venue in an increasingly crowded field. The new market, called MIAX Emerald, continues the company’s strategy of adapting to the evolution of market structure in the U.S. equity options marketplace.
The launch was previously planned for February, but the U.S. government shutdown curtailed operations of the Security and Exchange Commission and delayed approval. Final testing is scheduled for Feb. 23, barring another lapse in government funding.
In December 2012, Miami International launched MIAX Options, offering options trading with a cost structure that was popular at that time—a pro rata basis with a conventional fee. In other words, the liquidity providers pay whenever their quotes are lifted and the customers trade for free or receive rebates for their participation.
Over the following years, the industry shifted to "maker-taker" pricing. In such a cost structure, the market operator extends transaction rebates to market makers providing liquidity and charges transaction fees on customers who take liquidity out of the market.
In effect, the industry had taken the model used in stock markets—price-time allocation and maker-taker pricing—and applied it to the options business, according to Shelly Brown, executive vice president for strategic planning and operations for Miami International Holdings.
When the maker-taker segment of the options market grew to more than 40% of trading volume, the company followed suit with its MIAX Pearl launch in February 2017, a market that features Miami International's own version of price-time allocation with maker-taker pricing.
Despite facing off against much larger competitors such as CBOE, Nasdaq and NYSE, the two MIAX platforms captured 9.2% of the U.S. equity options market by volume in 2018, up from 6.3% in 2017. Now, a third pricing model is becoming popular, a hybrid form that combines pro rata-allocation like that used on MIAX Options with maker-taker pricing like Pearl. The result is MIAX Emerald.
Brown says the processing speed of the exchange's technology platform—a sub-17-microsecond round trip for a single quote packet—gives it a competitive advantage in an environment of rising price volatility. "That's really important in times of high volatility, which obviously we've just seen for the first time in a long time, because it gives more ability for both liquidity providers and liquidity takers to get in and out of the market faster," he said.
The exchange will be waiving some of the transaction fees for the first few months, but Brown discounts the appeal of discounts as a business driver. "Given the membership we have in MIAX and Pearl and how much they enjoy the experience here, we didn't think we had to get super-aggressive in pricing," Brown said. "We will be competitive, but we’re not going to shoot to be cheapest and buy order flow, per se."
MIH designed Emerald to make it easy for MIAX's current members to dive in, with an interface nearly identical to those of its other exchanges. There were only three major functional changes to its interface, all of which were necessary to support maker-taker pricing: post-only liquidity, post-only orders, and post-only quotes.
"We do that purposefully, so it’s not a big technology lift for the members, who don’t have to rewrite their code," Brown said. "They can reuse 90 to 99% of what they’ve already written for the other two exchanges in the MIAX exchange group."