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

New e-markets try in a number of ways to 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. In contrast to rival floor markets, they offered immediate order execution, direct user access, and reduced costs. ISE and BOX grew trading volumes and won market share from four incumbent exchanges in the U.S. We observe significant differences between broker order routing practices across ISE and BOX leading to the markets’ different growth patterns. We develop and test hypotheses about new market growth using a panel of six years of quarterly disclosures from 24 major brokerage firms. We find that membership affiliations are the dominate force in predicting brokers’ order routing patterns. In contrast to prior research, network externalities, as measured by an exchange’s previous quarter market share, are not significant predictors after controlling for temporal heterogeneity. Managerial implications are discussed.