WHAT IS THE FUTURE OF INNOVATION?

Transcription

1 WHAT IS THE FUTURE OF INNOVATION? Looking to the Future

2 BUILDING UPON OUR PIONEERING FOUNDATION WITH THE FOCUS AND AGILITY REQUIRED TO DEVELOP NEW PRODUCTS, EXPAND INTO NEW MARKETS, AND EVOLVE TO MEET THE NEW REALITIES OF THE GLOBAL MARKETPLACE. Southwest Securities, Inc. BNY ConvergEX Execution Solutions LLC Lek Securities Corporation Susquehanna Investment Group Swiss American Securities Inc. Calyon Securities (USA) Inc. TD Options LLC Cantor Fitzgerald & Co. Merrill Lynch Professional Clearing Corp. TD Professional Execution, Inc. CIBC World Markets Corp. Terra Nova Financial, LLC Citadel Derivatives Group LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated TFS Derivatives Corporation Citadel Trading Group L.L.C. MF Global Securities Inc. Timber Hill LLC Citigroup Global Markets Inc. Morgan Stanley & Co. Incorporated TJM Proprietary Trading, LLC Collins Stewart LLC Nasdaq Execution Services, LLC Track Data Securities Corp. Cowen & Company, LLC National Financial Services LLC TradeKing Credit Suisse Securities (USA) LLC Natixis Securities North America Inc. Tradestation Securities, Inc. Cuttone & Co. Inc. Nomura Securities International, Inc. Tradition Asiel Securities Inc. DART Executions LLC Nunami Services, LLC UBS Financial Services, Inc. Deutsche Bank Securities Inc. NYFIX Securities Corporation UBS Securities LLC Direct Edge ECN LLC OCTEG, LLC Vandham Securities Corp. E*TRADE Capital Markets, LLC OnPoint Executions, LLC VDM Trading, LLC E*TRADE Clearing LLC Oppenheimer & Co., Inc. Vision Financial Markets LLC Edgetrade Inc. optionsxpress, Inc. Wachovia Capital Markets, LLC Electronic Brokerage Systems, LLC OTA LLC Wachovia Securities, LLC EWT, LLC PEAK6 Capital Management LLC Wall Street Access Fimat USA, Inc. Penson Financial Services, Inc. Walleye Trading, LLC Fortis Clearing Americas LLC Pershing LLC Wedbush Morgan Securities Inc. Genesis Securities, LLC Piper Jaffray & Co. Wolverine Execution Services, LLC Global Execution Brokers, LP RBC Capital Markets Corporation Wolverine Trading, LLC Goldman Sachs Execution & Clearing, L.P. Rosenblatt Securities Inc. Goldman, Sachs & Co. Sanford C. Bernstein & Co., LLC Stock Exchange Members as of 12/31/07 Group One Trading, L.P. Saratoga Capital, LLC Hamilton Executions, LLC Shoreline Trading Group, LLC ABS Brokerage Services, LLC Hapoalim Securities USA, Inc. Southwest Securities, Inc. Albert Fried & Company, LLC Hardcastle Trading USA L.L.C. Sun Trading, LLC Allston Trading LLC HSBC Securities (USA) Inc. TD Professional Execution, Inc. Archipelago Securities, LLC Ingalls & Snyder, LLC Terra Nova Financial, LLC Assent LLC Instinet, LLC TFS Derivatives Corporation Automated Trading Desk Brokerage Services, LLC Interactive Brokers LLC Track Data Securities Corp. Automated Trading Desk Financial Services, LLC ISERoute, LLC TradeKing ITG Inc. Tradition Asiel Securities Inc. J.P. Morgan Securities Inc. UBS Securities LLC Jefferies Execution Services, Inc. Vandham Securities Corp. Jump Trading, LLC VDM Capital Markets, LLC Kellogg Partners Institutional Services VDM Trading, LLC Knight Capital Markets LLC Vision Financial Markets LLC Knight Equity Markets, L.P. Wachovia Capital Markets, LLC Lavaflow, Inc. (fka OnTrade, Inc.) Wedbush Morgan Securities Inc. Legent Clearing Corp. Wolverine Execution Services, LLC X-Change Financial Access LLC Banc of America Securities LLC Barclays Capital, Inc. BATS Trading, Inc. Bear, Stearns & Co. Inc. Bear, Stearns Securities Corp. Biremis Corporation Bloomberg Tradebook LLC BNP Paribas Securities Corp. Liquidpoint, LLC HOW DO YOU ESTABLISH A FOUNDATION FOR EXCELLENCE? Samurai Trading, LLC Lehman Brothers Inc. 2007: The Year in Review

3 01 COMPANY OVERVIEW The International Securities Exchange operates a family of fully electronic trading platforms, creating efficient markets through innovative technology and market structure. ISE s markets portfolio consists of an options exchange and a stock exchange. As the world s largest equity options trading venue, ISE offers options on equities, ETFs, indexes, and FX. The ISE Stock Exchange trades approximately 6,000 products, and is the only fully electronic equities platform that provides the opportunity for continuous price improvement through the interaction of its non-displayed liquidity pool, MidPoint Match, and its displayed stock market. ISE Alternative Markets is scheduled to launch in 2008 and will offer a parimutuel trading platform for derivatives auctions. To complement its markets and enable investors to trade smarter, ISE creates innovative new products including a portfolio of proprietary indexes and enhanced market data for sophisticated investors. On December 19, 2007, ISE became a wholly owned subsidiary of Eurex, a leading global derivatives exchange. Eurex is jointly owned by Deutsche Börse AG and SWX Swiss Exchange. Together, Eurex and ISE are the global market leader in individual equity and equity index derivatives.

4 02 GARY KATZ DEAR FRIENDS: As Frank Jones and David Krell discuss in the other section of this report, we have spent the last ten years establishing a foundation of excellence upon which ISE s future will be built. As we look ahead to 2008 and beyond, that foundation positions ISE to seize the growth opportunities created by the ongoing transformation of the international exchange landscape. Our industry is in the midst of an evolution where consolidation and globalization are creating a structural shift that will shape the future of exchanges and impact the nature of the markets. In the last year, ISE has been a driver of this shift, becoming a multi-asset class exchange with international reach as part of the Eurex network. Our growth has always been fueled by innovation, and in this new environment, we will build upon our pioneering foundation with the focus and agility required to develop new products, expand into new markets, and evolve to meet the new realities of the global marketplace. With Eurex, our growth horizons within this broader framework are now two-fold. First, as product leaders in our respective markets, ISE and Eurex will jointly pursue opportunities to leverage our positions of strength to expand the breadth of our product offerings and to deepen our market reach to benefit all of our customers. At the same time, we will independently evaluate strategic growth initiatives for ISE on a stand-alone basis, both in the U.S. market and abroad. We plan to introduce new products and functionalities to further enhance the attractiveness of trading on the ISE family of platforms. On the options side, we are currently working to list options on Eurex s equity index benchmark products. Pending SEC approval, this will be the first time that these products will be available for exchangelisted options trading in the U.S. ISE will also continue to aggressively pursue expansion into new markets. We recently signed a Memorandum of Agreement with the Osaka Securities Exchange (OSE) to create a joint venture that will launch a new options trading platform for Japan. By partnering with OSE, we believe that there is a great opportunity to bring ISE s experience and market structure to a large market with an untapped potential for options trading. We will continue to evaluate other opportunities as we grow our international footprint. We will also look for new ways to grow ISE s business in our home market, as we did when we launched the ISE Stock Exchange. We built a technology platform in-house that was customized for the unique nature of the U.S. equities markets. By providing exchange members with continu-

5 03 OUR GROWTH HAS ALWAYS BEEN FUELED BY INNOVATION... ous opportunities for price improvement on one platform that integrates a dark pool, MidPoint Match, with a displayed market, we are delivering a value-added product. In today s highly competitive equities market, our technology enables us to provide a differentiated product offering that attracts order flow through value creation. This business model represents one example of the future of innovation at ISE. Just months after the close of our merger with Eurex, we have already demonstrated our flexibility to evolve with new market realities. First, in January 2008, we announced that together with Eurex and the Deutsche Börse Group, we will jointly develop ISE s options trading system for delivery in By combining our resources, we will be able to decrease the time-to-market for enhancements to our system, resulting in an improved trading experience for our members. We have also undertaken a joint initiative with Eurex and The Options Clearing Corporation (OCC), which is designed to offer Eurex members direct access to ISE s products through their existing Eurex connections, using their current Eurex Clearing accounts. Once implemented, this transatlantic options gateway will be the first modern securities linkage for both trading and clearing. This innovative collaboration between ISE, Eurex and OCC will create opportunities for ISE to distribute our options products to the 21 countries and approximately 400 Eurex members that complement ISE s existing membership base. flow directed to our market will increase. As such, our members would have access to a deeper liquidity pool and would be able to interact with orders from a wider range of order flow providers. ISE s market makers and members welcome these new entrants as their participation would benefit all those already trading on our Exchange. These projects are just first steps following the closing of our transaction with Eurex. We will make broad strides together in the future as we collaborate on new product initiatives that span multiple asset classes, seek opportunities to expand in new markets and continue to evolve with new market realities. In ISE s short history, we have relied on our strengths of innovation and technology leadership to propel our growth. Going forward, we will continue to listen to our customers and use our agility to meet the changing needs of an expanding customer base. In terms of what can be expected from ISE in the coming years, I am confident the answer is anything but the status quo. Gary Katz Chief Operating Officer, President and Chief Executive Officer, Present ISE operates the world s largest equity options market, and this initiative has the potential to significantly enhance our leading position. Through the transatlantic link, we anticipate that the order

6 04 HOW DO YOU INNOVATE IN A MARKET THAT ALREADY TRADES $2 TRILLION A DAY? ISE FX Options launched in April 2007, providing investors with exposure to the foreign currency market by allowing them to trade their views on the strength or weakness of the U.S. dollar. As exchange-listed securities, ISE FX Options are cash settled in U.S. dollars and can be easily traded using any options-enabled brokerage account. How did ISE develop FX options products to compete in an already thriving market? ISE s team explores this question from product development, educational and marketing perspectives.

7 05 Kris: The challenge we faced was to introduce a new product that democratized the FX space a product that was easy for people to understand and easy for all types of traders to access. ISE FX Options were designed not just for options traders, but also for a target audience that was completely new to ISE FX spot traders. Our basic belief is that any liquid spot market should have a liquid options market, irrespective of the underlying asset class. FX presented the ideal opportunity to use our expertise to build out an options market over a liquid spot market. Kris Monaco Director of New Product Development Stephen: ISE FX Options are very intuitive, and we intentionally designed them this way to make trading the product simple for investors. If they re bullish on the U.S. dollar, relative to the foreign currency, they could buy a call. If they re bearish on the U.S. dollar, they could buy a put. The simplicity of the product design is only one aspect of creating a successful new product, in addition to educating traders. Elanit: In terms of our marketing approach, we developed a multi-tiered and highly integrated program designed to build awareness and educate retail investors. Both sophisticated options traders and spot FX traders looking for an easier way to trade currencies are interested in trading this product. Our objective is to demonstrate how they can adapt strategies used for equity and index options and apply them to FX options. Stephen Meizinger Director of Education Kris: Innovation also comes from extending functionality that has been tried and tested for other products to see whether it applies to the FX market. And what we re learning is that it does. For example, traders can now do multi-legged orders for FX options, as they have been enjoying for the past few years for equity and index options. This is completely new to the FX space. Stephen: When I m talking to investors about listed options, one of the topics that always comes up is integrity. They like the integrity and transparency of the listed market and the idea that you can actually see the quotes and access the markets immediately rather than having to phone in an order. To that point, ISE FX Options are very liquid and have integrity. Not only can investors see and access the markets, but they also know that all trades take place according to an SEC-approved set of rules. Elanit Levene Senior Brand Manager Elanit: Our goal was to provide investors with the tools they needed to start trading. We developed a comprehensive education program, including a webinar series and interactive tutorials. We wanted to offer as many opportunities as possible for traders to ask questions. By building confidence, we have developed a solid customer base that is continuing to grow.

8 06 TRADING IS APPROACHING THE SPEED OF LIGHT. WHAT IS YOUR FORMULA FOR SUCCESS? In September 2006, ISE entered the equities market with the launch of the only exchange-based, dual-structure equities platform that continuously integrates a non-displayed liquidity pool, MidPoint Match, with a displayed market. ISE s Technology Architecture Officer, Associate Managing Director of the ISE Stock Exchange, and Director of Product Management weigh in on their formula for success in the beginning, now and going forward.

9 07 John: We gained a competitive edge from the outset as a result of our decision to develop the ISE Stock Exchange internally, with no legacy system components. This nimble framework allows us to respond rapidly to changes in the marketplace. It is not that hard to build a trading system with high performance, and it is not that hard to build a trading system that is highly reliable. However, it is difficult to build a system with both characteristics. We built a system with superior performance while maintaining exchangeclass reliability. John Ryan Technology Architecture Officer Bob Books Associate Managing Director, ISE Stock Exchange Bob: Beyond that, we chose to focus on how we could build a unique market that added value to what was already available. We also observed what was happening in the industry the rapid growth of algorithmic trading, increased interest in dark pools and the steady decline in block trading. The timing of the creation of the ISE Stock Exchange was also driven by the development of Reg NMS, which created a particular opportunity at that time in the marketplace. Recognizing what kind of new opportunities were emerging for stock exchanges was a very important element in both what we did and when we did it. Wendy: We stay competitive by watching how our market is being used and by analyzing what particular features of the marketplace members gravitate toward. Not only do we come up with ideas of our own based on that, but we use the feedback that naturally comes from members and others who would like to use our system. To that end, we have always consulted with our membership and encouraged them to come back to us with new ideas that will allow us to distinguish ourselves. We pride ourselves on both our customer service and our ability to respond to our members and the needs that they have set forth as important to them. Bob: We launched the exchange in 2006, but between then and now, the demands for speed have increased at an ever more rapid pace. We have certainly made a lot of modifications since then to keep pace with the speed demands of the marketplace. John: We ve learned that offering a very low latency exchange platform raises our priority in the routing algorithms that are being used. We re very aware of this, and we are continually looking to improve the speed and capacity of the system through innovative software development and cutting-edge systems technologies. Wendy Hoffman Director of Product Management Wendy: Moving forward, we are going to capitalize on the fact that we are both an equities exchange and an options exchange by merging the functionalities and providing more opportunities for members to execute both transactions in a more integrated way.

10 08 WHAT IS THE IMPACT OF THE OPTIONS PENNY PILOT? The options industry reduced its minimum price increment from $0.05 to $0.01 in 35 key options classes in The move to pennies was intended to reduce spreads, but it has also led to a reduction in displayed liquidity and an increase in quote traffic. Boris Ilyevsky and Greg Maynard discuss the impact of pennies on ISE and how the Exchange has adapted to this new reality.

11 09 Boris: The move to pennies has yielded tighter markets, but has also presented the challenge of reduced liquidity for the industry. We re striving to find a way to provide the best of both worlds: the benefits of pennies for retail investors while retaining the benefits of displayed liquidity. We believe this balance can be achieved through maintaining our customer priority and pro-rata market model, while offering our customers advanced trading tools and order types that allow both retail and institutional participants to effectively find liquidity and the best possible price. Boris Ilyevsky Head of Options Business Development Greg: Our goal has always been to stay ahead of the capacity curve, and that s critical in a penny environment. The better we can adapt to these changing realities, the better we can find a way to succeed in an evolving marketplace. We ve always embraced the changing landscape. Boris: In one respect, the penny pilot is an opportunity for us because we ve always spent a great deal of time thinking about new functionality, new products and new ways of transacting electronically what was traditionally only considered suitable for floor trading. One of the things that we heard in the very beginning was that you could only do certain types of trading on the floor because you needed human interaction. We ve been very successful at proving that opinion false. Greg: In the early days, we focused our attention on developing new functionality for the market. I think as we ve gone further into the penny environment, these features have become our biggest strengths. Boris: The advantage that we enjoy, and the opportunity that we provide to our participants, is that we can transact very complex strategies electronically multi-legged options, tied-to-stock, and various crossing mechanisms. Those types of trades are now particularly well suited for the ISE platform, and we ve definitely seen that activity increase as a result of the penny pilot. Greg Maynard System & Product Strategy Officer Greg: On top of that, we ve brought in a depth of market feed for the top five price levels, and we re getting a very good response from users who want that extra information. It is more relevant in a penny environment to see beyond the top of book. To do that, we ve re-architected our systems and put different mechanisms in place to actually deliver that data out to the marketplace. We have the complex functionality that we put in place in the earlier years, and now we have the complex delivery systems to handle these very high data rates, all coming together at once.

12 10 DOES A GLOBAL MARKETPLACE REALLY EXIST? Rapid cross-border consolidation, including ISE s merger with Eurex, has dramatically changed the exchange landscape in the past year. What are the reasons behind the ongoing exchange evolution, and how will the advent of global exchanges impact the markets? Thomas Ascher, ISE s Chief Strategy Officer, offers his views.

13 11 Geography is increasingly falling by the wayside as a measure for a marketplace. If you have a borderless market that essentially rolls from time zone to time zone, geographic boundaries matter less and less. The evolution of the global marketplace is about breaking down barriers, which we believe we ve done by combining with Eurex. Thomas Ascher Chief Strategy Officer If you look at shifts in the market in terms of technology, in a regulatory context, and ultimately in terms of how market participants want to trade, we re better positioned to meet these needs together with Eurex. Technologically, market participants have come to expect the combination of liquidity and what I d call instantaneity. The combined technology resources of ISE and Deutsche Börse Group will enable us to create technology efficiencies to deliver a superior trading experience to our respective membership bases. Another defining factor of a global marketplace is regulation. There s a lot of debate going on about the U.S. regulatory structure and the effect its restrictions are having on investors who want access to securities listed internationally. The discussion centers around the possibility of creating a mutual recognition framework that would open up what is, ironically, in the largest capital market in the world, a border that is arguably closed to its own retail participants. Currently, the product offerings of Eurex and other international exchanges are not fully and efficiently accessible for U.S. market participants because they aren t considered to be U.S. registered securities. Likewise, U.S. markets are not as accessible as we d like them to be for European market participants, though not necessarily for regulatory reasons. The challenge has been in both directions. With Eurex, we will realize our goal of a transatlantic order flow link that provides for both trading and clearing. This framework will ease access into the U.S. and enable Eurex customers to directly access all of ISE s options products. In the end, we would like trading to be seamless and to cause borders to evaporate altogether. Fundamentally, ISE is about offering efficient risk management tools in the deployment of capital. If we can broaden those efficiencies and expand the reach of investors through our trusted marketplaces, then we really will have accomplished a greater good. I think it s something that will benefit all of our customers on both sides of the Atlantic and, ultimately, into Asia. In joining with Eurex, we have solidified our position in the global marketplace with a reach that was simply beyond what was possible before. The new combination is much greater than the sum of the parts.

14 12 MEMBER FIRMS Options Exchange Members as of 12/31/07 Albert Fried & Company, LLC Andrie Trading, LLC Archelon LLC Archipelago Securities, LLC Assent LLC Banc of America Securities LLC Barclays Capital, Inc. Bear Wagner Specialists LLC Bear, Stearns & Co. Inc. Bear, Stearns Securities Corp. Benchmark Company, LLC Bloomberg Tradebook LLC Blue Capital Group LLC BNP Paribas Securities Corp. Bulltick, LLC Calyon Financial Inc. Calyon Securities (USA) Inc. Cantor Fitzgerald & Co. Capstone Sales Advisors, LLC Capstone Trading, LLC Casey Professional Services, LLC Casey Securities, LLC CIBC World Markets Corp. Citadel Derivatives Group LLC Citadel Trading Group L.L.C. Citigroup Derivatives Markets Inc. Citigroup Global Markets Inc. Clancy Financial Services, Inc. Collins Stewart LLC Compass Professional Services, LLC Cornerstone Trading, LLC Cowen & Company, LLC Credit Suisse Securities (USA) LLC CTC, L.L.C. Cuttone & Co. Inc. CyberTrader, Inc. Daiwa Securities America Inc. DART Executions LLC Deutsche Bank Securities Inc. Divine Capital Markets LLC Dresdner Kleinwort Securities LLC E*TRADE Clearing LLC Electronic Brokerage Systems, LLC Equate Trading Group, LLC Equitec Proprietary Markets, LLC EWT, LLC Exane, LLC Fimat USA, Inc. First Clearing, LLC First New York Securities L.L.C. First Southwest Company Fortis Clearing Americas LLC G-Bar Limited Partnership Genesis Securities, LLC Geneva Trading LLC GFI Securities LLC Global Execution Brokers, LP Goldman Sachs Execution & Clearing, L.P. Goldman, Sachs & Co. Group One Trading, L.P. Guzman & Company Hamilton Executions, LLC Hapoalim Securities USA, Inc. Hardcastle Trading USA L.L.C. Heights Partners, Inc. HSBC Securities (USA) Inc. Hybrid Trading & Resources, L.L.C. ICAP Corporates LLC IMC Chicago, LLC Ingalls & Snyder, LLC Interactive Brokers LLC International Correspondent Trading, Inc. Israel A. Englander & Co. Inc. ITG Derivatives LLC J.J.B. Hilliard, W.L. Lyons, Inc. J.P. Morgan Securities Inc. Jefferies & Company, Inc. Jefferies Execution Services, Inc. Kellogg Partners Institutional Services Kelmoore Investment Company, Inc. KV Execution Services LLC La Branche Structured Products LLC Legent Clearing Corp. Lehman Brothers Inc. Lek Securities Corporation Linkbrokers Derivatives Corporation Liquidpoint, LLC Louis Capital Markets, LP MAKO Financial Markets, LLC Maxim Group LLC MCM Securities, LLC Merrill Lynch Professional Clearing Corp. Merrill Lynch, Pierce, Fenner & Smith Incorporated Mesirow Financial, Inc. MF Global Securities Inc. MillenCo, L.P. Miller Tabak + Co., LLC Morgan Stanley & Co. Incorporated Nasdaq Options Services, LLC National Financial Services LLC Natixis Securities North America Inc. Neuberger Berman, LLC Nomura Securities International, Inc. NYFIX Securities Corporation OCTEG, LLC OnPoint Executions, LLC Oppenheimer & Co., Inc. optionsxpress, Inc. Optiver US, LLC OTA LLC Pali Capital Inc. PEAK6 Capital Management LLC Penson Financial Services, Inc. Pershing LLC Pictet Overseas Inc. Prebon Financial Products Inc. PTR, Inc. Quiet Light Securities, LLC Raymond C. Forbes & Co., Inc. RBC Capital Markets Corporation Ridge Clearing & Outsourcing Solutions, Inc. Rochdale Securities LLC Ronin Capital, LLC ROQ Capital, LLC Rosenblatt Securities Inc. Samurai Trading, LLC Saratoga Capital, LLC Schonfeld Securities, LLC SG Americas Securities, LLC Shoreline Trading Group, LLC

15 BUILDING UPON OUR PIONEERING FOUNDATION WITH THE FOCUS AND AGILITY REQUIRED TO DEVELOP NEW PRODUCTS, EXPAND INTO NEW MARKETS, AND EVOLVE TO MEET THE NEW REALITIES OF THE GLOBAL MARKETPLACE. Southwest Securities, Inc. BNY ConvergEX Execution Solutions LLC Lek Securities Corporation Susquehanna Investment Group Swiss American Securities Inc. Calyon Securities (USA) Inc. TD Options LLC Cantor Fitzgerald & Co. Merrill Lynch Professional Clearing Corp. TD Professional Execution, Inc. CIBC World Markets Corp. Terra Nova Financial, LLC Citadel Derivatives Group LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated TFS Derivatives Corporation Citadel Trading Group L.L.C. MF Global Securities Inc. Timber Hill LLC Citigroup Global Markets Inc. Morgan Stanley & Co. Incorporated TJM Proprietary Trading, LLC Collins Stewart LLC Nasdaq Execution Services, LLC Track Data Securities Corp. Cowen & Company, LLC National Financial Services LLC TradeKing Credit Suisse Securities (USA) LLC Natixis Securities North America Inc. Tradestation Securities, Inc. Cuttone & Co. Inc. Nomura Securities International, Inc. Tradition Asiel Securities Inc. DART Executions LLC Nunami Services, LLC UBS Financial Services, Inc. Deutsche Bank Securities Inc. NYFIX Securities Corporation UBS Securities LLC Direct Edge ECN LLC OCTEG, LLC Vandham Securities Corp. E*TRADE Capital Markets, LLC OnPoint Executions, LLC VDM Trading, LLC E*TRADE Clearing LLC Oppenheimer & Co., Inc. Vision Financial Markets LLC Edgetrade Inc. optionsxpress, Inc. Wachovia Capital Markets, LLC Electronic Brokerage Systems, LLC OTA LLC Wachovia Securities, LLC EWT, LLC PEAK6 Capital Management LLC Wall Street Access Fimat USA, Inc. Penson Financial Services, Inc. Walleye Trading, LLC Fortis Clearing Americas LLC Pershing LLC Wedbush Morgan Securities Inc. Genesis Securities, LLC Piper Jaffray & Co. Wolverine Execution Services, LLC Global Execution Brokers, LP RBC Capital Markets Corporation Wolverine Trading, LLC Goldman Sachs Execution & Clearing, L.P. Rosenblatt Securities Inc. Goldman, Sachs & Co. Sanford C. Bernstein & Co., LLC Stock Exchange Members as of 12/31/07 Group One Trading, L.P. Saratoga Capital, LLC Hamilton Executions, LLC Shoreline Trading Group, LLC ABS Brokerage Services, LLC Hapoalim Securities USA, Inc. Southwest Securities, Inc. Albert Fried & Company, LLC Hardcastle Trading USA L.L.C. Sun Trading, LLC Allston Trading LLC HSBC Securities (USA) Inc. TD Professional Execution, Inc. Archipelago Securities, LLC Ingalls & Snyder, LLC Terra Nova Financial, LLC Assent LLC Instinet, LLC TFS Derivatives Corporation Automated Trading Desk Brokerage Services, LLC Interactive Brokers LLC Track Data Securities Corp. Automated Trading Desk Financial Services, LLC ISERoute, LLC TradeKing ITG Inc. Tradition Asiel Securities Inc. J.P. Morgan Securities Inc. UBS Securities LLC Jefferies Execution Services, Inc. Vandham Securities Corp. Jump Trading, LLC VDM Capital Markets, LLC Kellogg Partners Institutional Services VDM Trading, LLC Knight Capital Markets LLC Vision Financial Markets LLC Knight Equity Markets, L.P. Wachovia Capital Markets, LLC Lavaflow, Inc. (fka OnTrade, Inc.) Wedbush Morgan Securities Inc. Legent Clearing Corp. Wolverine Execution Services, LLC X-Change Financial Access LLC Banc of America Securities LLC Barclays Capital, Inc. BATS Trading, Inc. Bear, Stearns & Co. Inc. Bear, Stearns Securities Corp. Biremis Corporation Bloomberg Tradebook LLC BNP Paribas Securities Corp. Liquidpoint, LLC HOW DO YOU ESTABLISH A FOUNDATION FOR EXCELLENCE? Samurai Trading, LLC Lehman Brothers Inc. 2007: The Year in Review

16 BUILDING UPON OUR PIONEERING FOUNDATION WITH THE FOCUS AND AGILITY REQUIRED TO DEVELOP NEW PRODUCTS, EXPAND INTO NEW MARKETS, AND EVOLVE TO MEET THE NEW REALITIES OF THE GLOBAL MARKETPLACE. Southwest Securities, Inc. BNY ConvergEX Execution Solutions LLC Lek Securities Corporation Susquehanna Investment Group Swiss American Securities Inc. Calyon Securities (USA) Inc. TD Options LLC Cantor Fitzgerald & Co. Merrill Lynch Professional Clearing Corp. TD Professional Execution, Inc. CIBC World Markets Corp. Terra Nova Financial, LLC Citadel Derivatives Group LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated TFS Derivatives Corporation Citadel Trading Group L.L.C. MF Global Securities Inc. Timber Hill LLC Citigroup Global Markets Inc. Morgan Stanley & Co. Incorporated TJM Proprietary Trading, LLC Collins Stewart LLC Nasdaq Execution Services, LLC Track Data Securities Corp. Cowen & Company, LLC National Financial Services LLC TradeKing Credit Suisse Securities (USA) LLC Natixis Securities North America Inc. Tradestation Securities, Inc. Cuttone & Co. Inc. Nomura Securities International, Inc. Tradition Asiel Securities Inc. DART Executions LLC Nunami Services, LLC UBS Financial Services, Inc. Deutsche Bank Securities Inc. NYFIX Securities Corporation UBS Securities LLC Direct Edge ECN LLC OCTEG, LLC Vandham Securities Corp. E*TRADE Capital Markets, LLC OnPoint Executions, LLC VDM Trading, LLC E*TRADE Clearing LLC Oppenheimer & Co., Inc. Vision Financial Markets LLC Edgetrade Inc. optionsxpress, Inc. Wachovia Capital Markets, LLC Electronic Brokerage Systems, LLC OTA LLC Wachovia Securities, LLC EWT, LLC PEAK6 Capital Management LLC Wall Street Access Fimat USA, Inc. Penson Financial Services, Inc. Walleye Trading, LLC Fortis Clearing Americas LLC Pershing LLC Wedbush Morgan Securities Inc. Genesis Securities, LLC Piper Jaffray & Co. Wolverine Execution Services, LLC Global Execution Brokers, LP RBC Capital Markets Corporation Wolverine Trading, LLC Goldman Sachs Execution & Clearing, L.P. Rosenblatt Securities Inc. Goldman, Sachs & Co. Sanford C. Bernstein & Co., LLC Stock Exchange Members as of 12/31/07 Group One Trading, L.P. Saratoga Capital, LLC Hamilton Executions, LLC Shoreline Trading Group, LLC ABS Brokerage Services, LLC Hapoalim Securities USA, Inc. Southwest Securities, Inc. Albert Fried & Company, LLC Hardcastle Trading USA L.L.C. Sun Trading, LLC Allston Trading LLC HSBC Securities (USA) Inc. TD Professional Execution, Inc. Archipelago Securities, LLC Ingalls & Snyder, LLC Terra Nova Financial, LLC Assent LLC Instinet, LLC TFS Derivatives Corporation Automated Trading Desk Brokerage Services, LLC Interactive Brokers LLC Track Data Securities Corp. Automated Trading Desk Financial Services, LLC ISERoute, LLC TradeKing ITG Inc. Tradition Asiel Securities Inc. J.P. Morgan Securities Inc. UBS Securities LLC Jefferies Execution Services, Inc. Vandham Securities Corp. Jump Trading, LLC VDM Capital Markets, LLC Kellogg Partners Institutional Services VDM Trading, LLC Knight Capital Markets LLC Vision Financial Markets LLC Knight Equity Markets, L.P. Wachovia Capital Markets, LLC Lavaflow, Inc. (fka OnTrade, Inc.) Wedbush Morgan Securities Inc. Legent Clearing Corp. Wolverine Execution Services, LLC X-Change Financial Access LLC Banc of America Securities LLC Barclays Capital, Inc. BATS Trading, Inc. Bear, Stearns & Co. Inc. Bear, Stearns Securities Corp. Biremis Corporation Bloomberg Tradebook LLC BNP Paribas Securities Corp. Liquidpoint, LLC HOW DO YOU ESTABLISH A FOUNDATION FOR EXCELLENCE? Samurai Trading, LLC Lehman Brothers Inc. 2007: The Year in Review

17 WITH VISION, DETERMINATION, AND A COHESIVE TEAM THAT IS DRIVEN BY A SET OF COMMON CORE VALUES.

18 01 IN THE WORDS OF OUR CHAIRMEN We knew that we could bring something new and innovative to the U.S. options market. We had a powerful vision, and the driving force behind us all these years has been our commitment to that vision. William A. Porter ISE Chairman, Creating a company from scratch is not an easy task, especially one that introduces a new way of doing business for an entire industry. ISE s unrelenting determination to change the status quo enabled us to do just that. Ivers W. Riley ISE Chairman, Each individual who makes up the cohesive team at ISE is incredibly focused and will work tirelessly to support their colleagues and better serve their customers. Frank J. Jones, Ph.D. ISE Chairman, Our common core values of entrepreneurship, leadership, valuing people, and integrity are the defining factors in ISE s continuing success. David Krell ISE Chairman, Present

19 02 FRANK J. JONES, Ph. D. DEAR FRIENDS: I am proud to report that 2007 was another year of firsts for ISE we joined with Eurex to become the leading transatlantic derivatives exchange, we successfully completed the rollout of the ISE Stock Exchange, we launched trading in a new asset class with FX options, and we once again set new volume records in our core options business. But, firsts are nothing new to ISE. In fact, continuously striving to establish firsts year after year for our Exchange, and for our industry, is what sets ISE apart was a particularly momentous year for ISE because in many respects it served as a crossroads for the Exchange. David Krell, one of ISE s co-founders and President and Chief Executive Officer since inception, retired at the end of 2007 and transitioned into the role of Chairman of the Board, effective January 1, At the same time, the next generation of leadership took shape as Gary Katz, also one of ISE s co-founders and Chief Operating Officer, prepared to move into the role of President and Chief Executive Officer. The merger with Eurex was also a transformative event and perhaps it best illustrates how 2007 represents both the culmination of a journey that began over a decade ago, and the foundation of ISE s future growth. At this juncture between ISE s past and its future, I d like to look back at that journey a journey that is punctuated by four milestone accomplishments that have truly determined the course of the U.S. options industry. I have had the honor of serving on ISE s Board of Directors since 2000, but I d like to look back to 1997, when David Krell and Gary Katz, along with Bill Porter and Marty Averbuch, came together with a plan to reshape the U.S. options industry. Their vision was to transform the exchange-listed options industry into an efficient market, with multiply listed products, market-driven prices, tight spreads, and accessible and visible liquidity. With drive, determination, and the kind of thought leadership that has set the course of an industry for over a decade, they transformed that vision into reality. The first step toward that reality came in February 2000 when ISE became the first national securities exchange to be approved by the SEC since Not only were ISE s founders willing to challenge the status quo, but they were able to do so successfully within the highly regulated environment of the U.S. securities industry. Their vision and diligence led to the creation of the first new exchange in 27 years, opening the door for ISE s success and paving the way for other organizations to follow suit in the years to come.

20 THE IMPRESSIVE SUCCESS OF THE LAST TEN YEARS WAS THE RESULT OF COUNTLESS HOURS OF HARD WORK AND YEARS OF DEDICATION Another significant milestone in ISE s history of firsts came on May 26, 2000 when ISE launched the first fully electronic options exchange in the U.S. Electronic trading was the tool that allowed ISE to introduce its proprietary market structure, attract new liquidity providers and deliver the efficiency of fair competition. It was a revolutionary introduction that permanently changed the complexion of the industry for all participants. As a result of ISE s thought leadership, in April 2003 we became the largest equity options exchange in the world and remain in that position to this day. ISE set another industry precedent on March 9, 2005 when it became the first securities exchange to complete an initial public offering. ISE always ran a lean and profitable business, so it was a natural step to be the first to fully realize the benefits of raising capital in the public markets to support the company s growth. ISE was once again the leader of what became an industry trend in subsequent years. David Krell and Gary Katz will continue to guide ISE into the next decade with their seasoned expertise and visionary leadership. I look forward to continuing to work with them as ISE begins the next chapter of its history. Though ISE s track record of achievements over the last ten years will be hard to surpass, with our outstanding team and in partnership with our new owners, I am confident that the best is yet to come. Frank J. Jones, Ph.D. Chairman of the Board, Vice Chairman of the Board, Present ISE s flagship achievement was the merger with Eurex, which closed on December 19, With this combination, ISE not only fulfilled the international aspect of its name, but it solidified a relationship that will enable it to accomplish more and grow larger than it ever could alone. While it may be too early to claim that this partnership has already redefined what a global marketplace means for this industry, I am confident that it will. The impressive success of the last ten years was the result of countless hours of hard work and years of dedication on the part of ISE s world-class team of management and staff. On behalf of the entire Board, I would like to thank every individual for their contribution to that success. As I look ahead, I am pleased that, in their new positions,

21 04 DAVID KRELL DEAR FRIENDS: With record trading volumes, the introduction of a new asset class, and expansion of our international footprint, 2007 was a pivotal year for the International Securities Exchange. Over the past decade since ISE s founding in 1997, we have worked to establish a foundation of excellence that would enable ISE to realize the strategic vision we set out for the Exchange ten years ago. By fostering a culture of entrepreneurialism, accountability, and teamwork, and then setting expectations based on these core values, our objectives were very clear to create a multi-asset class, international marketplace characterized by twin hallmarks of efficiency and innovation. In 2007, the International Securities Exchange achieved all aspects of its name, and we solidified a strong foundation for the next decade of ISE s growth. When we launched our options exchange in 2000, ISE s average daily volume (ADV) for the year was approximately 50,000 contracts. In 2007, options ADV grew to a record 3.2 million contracts, a 36% increase over Through our unrelenting focus on customer service, our outreach to new market participants, and ongoing enhancements to our trading functionality, we have been able to consistently grow our core business. Record options volume throughout the year reinforced the value of options as a risk management and hedging tool in a market characterized by rising volatility. On November 8, 2007, we reached a new one-day record volume of 6.9 million contracts. Likewise, our cumulative options volume for the year was a record million contracts. Growth in our options business was supported by the introduction of ISE FX Options on April 17, By expanding our options products to a new asset class, we created another opportunity to support continued growth through innovation. In December 2007, the four currency pairs traded on ISE generated 6,500 contracts in ADV, and open interest reached nearly 300,000 contracts. We also expanded the range of market data products we offer that are based on the proprietary data we capture from our options business. For example, we created the ISE Depth of Market Feed, which provides a consolidated view of quotes and orders at the top five price levels in the order book. By providing transparency beyond the Best Bid and Offer, this valuable tool improves trading efficiency, especially in options trading in pennies where top of book liquidity has declined throughout the industry. We expanded not only our core options business but, in early 2007, completed the rollout of our equities platform, the ISE Stock Exchange, which we introduced in September As the only

22 05...SUCCESS CAN ONLY BE ACHIEVED BY WORKING TOGETHER AS A TEAM. dual-structure exchange platform that offers a fully integrated non-displayed liquidity pool and displayed market, the value proposition offered by the ISE Stock Exchange enabled it to build significant momentum throughout We signed up 54 new Electronic Access Members (EAMs), reached a record daily volume of million shares on September 19, 2007 and traded an average of 52.1 million shares per day in the fourth quarter. To offer our exchange members the benefits of a truly multi-asset class exchange, we used the expertise we developed through our options business to create trading efficiencies for users of the ISE Stock Exchange. On December 19, 2007, we completed our merger with Eurex, putting in place the last key element of our initial strategic vision. Through our combination with Eurex, we have truly become an international securities exchange and fulfilled the aspirations embodied in our name. As the markets continue to globalize, we are very well positioned to benefit from continued expansion alongside our new partner. A key factor in our decision to combine with Eurex was the shared management philosophy and corporate culture between our two exchanges. At the outset, we laid the foundation for the ISE team to operate as entrepreneurs with an ownership mindset. We also stressed the core values of teamwork and humility. Although all individual contributions are greatly valued, success can only be achieved by working together as a team. By setting expectations based on these core values, we fostered a culture where customer service, both to our external constituents as well as to our colleagues within the firm, is a fundamental tenet that is directly linked to our performance. Eurex shares these corporate values, and it is this important link between our two firms that will enable us to build on the strong foundations that we both have in place to deliver on a common vision for the future. Looking back on ISE s accomplishments over the past decade, I am very proud that we have achieved such a great deal in a short period of time. Our vision of establishing a securities exchange that is, in fact, international has come to fruition through the tireless efforts of the superb ISE team and the exceptional support of our exchange members. With this solid foundation in place, I was honored to assume the role of Chairman of ISE s Board of Directors on January 1, 2008 and very pleased that Gary Katz, one of our co-founders, was selected to succeed me as President and Chief Executive Officer. Following this transition, ISE s values and standards of leadership will not change because they are shared by all members of ISE s senior management team, our employees, and our new colleagues at Eurex. We have established a strong and dynamic company as well as a core set of values that, coupled with our unique corporate culture, will continue to be the foundation for an exciting future. David Krell President and Chief Executive Officer, Chairman of the Board, Present

23 BUSINESS HIGHLIGHTS January 24, 2007 Added all of the securities that comprise the S&P 1500 to fully displayed stock market, providing opportunities for continuous price improvement through interaction with MidPoint Match. February 12, 2007 Completed rollout of the Second Market, which was launched in October 2006 in order to create additional liquidity in over 700 options classes that typically experienced lower trading volumes. February 27, 2007 Reached new daily trading volume record of 5.5 million options contracts. March 9, 2007 Traded 2 billionth options contract. May 11, 2007 ETFs sponsored by First Trust Advisors launch based on three of ISE s proprietary indexes: ISE Water Index, ISE-Revere Natural Gas Index, and ISE ChIndia Index. Jan 24 Feb12 Feb 13 Feb 21 Feb 27 Mar 9 Apr 17 Apr 30 May 11 February 21, 2007 Launched an enhanced version of the customized sentiment data offering, ISEE Select. April 30, 2007 Announced that ISE and Eurex entered into a merger agreement. February 13, 2007 Completed the rollout of displayed market. Integrated with its non-displayed liquidity pool, MidPoint Match, traders have access to approximately 6,000 National Market System (NMS) securities. April 17, 2007 Successfully launched ISE FX Options on first four currency pairs: U.S. dollar/ British pound (symbol: BPX), U.S. dollar/ Canadian dollar (symbol: CDD), U.S. dollar/euro (symbol: EUI) and U.S. dollar/japanese yen (symbol: YUK). ISE Options Exchange Average Daily Volume by Year (in millions of contracts) Contracts/Day

24 07 Options Exchange Stock Exchange Market Data Eurex Merger June 25, 2007 Launched the new ISE Electronic Trading Index, a unique benchmark for the specialty sector of the financial services industry. July 27, 2007 Merger agreement with Eurex approved by ISE stockholders at special meeting. September 7, 2007 Reached a new daily volume record of million shares, surpassing the 100 million share milestone. September 19, 2007 Launched a direct XML data feed for ISEE Select. November 13, 2007 Launched Open/Close Trade Profile data offering, providing subscribers with aggregated volume and the number of trades by series for opening and closing transactions that are executed on ISE s options exchange. December 19, 2007 Eurex and ISE completed merger. Jun 25 Jul 27 Aug 9 Aug 17 Sep 7 Sep 19 Oct 10 Nov 8 Nov 13 Dec 19 August 17, 2007 Reached new daily trading volume record of 6.5 million options contracts. November 8, 2007 Reached new daily trading volume record of 6.9 million options contracts. August 9, 2007 Reached a new daily volume record of 53.2 million shares, surpassing the 50 million share milestone. October 10, 2007 Launched ISE Depth of Market Feed, a real-time data feed that provides the aggregated volume of all quotes and orders available at each of the top five price levels for options that trade on ISE. ISE Stock Exchange Average Daily Volume by Quarter (in millions of shares) 2007 Q Q Q Q Shares/Day

25 BOARD OF DIRECTORS As of 12/31/07 International Securities Exchange Holdings, Inc. David Krell Andreas Preuss Jürg Spillman International Securities Exchange, LLC Frank J. Jones, Ph.D. Chairman John F. Marshall, Ph.D. Vice Chairman David Krell Peter Bottini Barbara B. Diamond Leonard Ellis Sean Flynn Jason Lehman Sarah A. Miller Andreas Preuss Richard Schmalensee, Ph.D. Joseph Stefanelli Kenneth Vecchione Information contained in this Annual Report may be subject to detailed Exchange rules that are subject to change. No statement in this Annual Report should be construed as a recommendation to buy or sell a security or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. A copy of this document is available from your broker or ISE. The document discusses exchange-traded options issued by The Options Clearing Corporation and is intended for education purposes. The ISE logo, International Securities Exchange, ISE, ISE Stock Exchange, ISE FX Options, ISEE Select, MidPoint Match, ISE Water, ISE ChIndia, ISE-Revere Natural Gas and ISE Electronic Trading are our U.S. trademarks. All other trade names, service marks, trademarks and registered trademarks are the property of their respective owners. Copyright 2008, International Securities Exchange, LLC. All rights reserved.