Launching Successful E-Markets: A Broker-Level Diffusion Analysis of Two Options Exchanges

New financial markets try in a number of ways to achieve successful diffusion and attract a critical mass of participation and usage. Two innovative, all-electronic options exchanges, the International Securities Exchange (ISE) and the Boston Options Exchange (BOX), opened for trading in 2000 and 2004, and offered immediate order execution, direct user access to the market, and reduced costs. ISE and BOX gained trading volumes in competition with four incumbent markets in the U.S. including the largest, the Chicago Board Options Exchange (CBOE). To explain the markets’ diffusion patterns, we first develop a simplified model of broker order routing decisions among competing markets. The model generates hypotheses about new market growth, which we test using a panel of six years of quarterly disclosures from 24 major brokerage firms. We extend prior research and find that firm heterogeneity, including factors such as membership affiliations and firm characteristics, are at least as influential as network effects in explaining the diffusions of the new markets at the broker level. Policy considerations and implications for new trading platforms are described.