Boston Options Exchange

From MarketsWiki

Boston Options Exchange

Founded	Feb. 6, 2004
Headquarters	Boston, Massachusetts; Chicago, Illinois
Key People	Peter Layton, Chairman; Will Easley, Vice Chairman & Acting CEO;
Products	options products
Web site	www.bostonoptions.com/

The Boston Options Exchange (BOX) was launched on Feb. 6, 2004, by Boston Stock Exchange, Inc. (BSE), Montreal Exchange and Interactive Brokers Group LLC, as an all-electronic equity derivatives market and an alternative to the existing market models. BOX was the first options market to offer the possibility of price improvement to investors via an electronic auction process known as the "PIP."

Will Easley, a founder and vice chairman became acting CEO of BOX on June 13, 2008, when Scott Morris resigned as CEO.^[1]

BOX has no designated specialists; competing market makers are responsible for ensuring liquidity. Box uses a maker-taker model, in which the exchange pays a rebate to suppliers of liquidity and charges liquidity takers a fee.^[2]

BOX uses a price/time order matching algorithm. Market maker privileges are limited to the ability to maintain orders on all instruments within a given class and the opportunity to participate in all price improvement auctions in their appointed classes.

Traders can connect with BOX through a number of ISVs that offer front-end applications for BOX participants.^[3]

BOX provides two types of gateways to its trading engine: a) bi-directional order and quote related gateways and b) outbound feed of market data from the BOX trading engine to the user.

1 Background
2 Products
3 PIP
4 2007 Volume
5 References

Background

This page is sponsored by...

BOX has applied to the Securities and Exchange Commission (SEC) for exchange status. Box had been operating as a unit of the Boston Stock Exchange, which agreed in 2007 to be acquired by Nasdaq OMX Group Inc. Under the terms of the deal, Nasdaq would be responsible for regulating BOX, which handles about 4.8 percent of U.S. equity options trading. Nasdaq is a direct competitor to BOX, so to avoid being regulated by a competitor, BOX applied for status as a separate exchange.^[4]

In October 2007, the Montreal Exchange said it was in talks to increase its ownership in the Boston Options Exchange (BOX) by almost 70 percent, giving it a majority interest in the exchange. Montreal Exchange, a founding partner and the technical operator of BOX, plans to boost its position to the maximum 53.2 percent, from a current 31.4 percent.^[5]

In July 2006, the Boston Options Exchange completed migration to its new trading engine platform, Sola, which is licensed from the Montreal Exchange.

Products

As of May 12, 2008, BOX listed nearly 1500 classes for trading.

PIP

In order for a customer order to be "PIPed", his agent/broker must be able to present the order to BOX with the first penny of improvement guaranteed by the agent/broker himself. In other words, the agent/dealer must present BOX with a "facilitation trade" via the PIP mechanism prior to BOX initiating a PIP auction. If no other BOX participant is willing to offer further improvement during the three-second PIP auction, the customer order trades against the contra order provided by the agent/broker at the initiation of the PIP.

However, not all options investors are clients of brokers who are able to provide this service because it does require proprietary trading ability. BOX put into place structures that let investors gain access to the PIP.

Agents/broker dealers and the PIP broker dealers who wish to offer their clients access to the PIP, but are unable themselves to take the counterparty side of the trade necessary to initiate a PIP, can use the BOX "Directed Order" functionality. It allows any BOX participant to instruct BOX to route his orders to any BOX market maker or other BOX participant for possible submission to the PIP.

This simple procedure means that the PIP is accessible to all options investors. When a broker-dealer decides to route an order to another BOX participant willing, in some cases, to offer price improvement, BOX ensures that the customer order's interests are taken into account since:

The receiving BOX participant (generally a BOX market maker) has three seconds to either initiate a PIP or decline.
If he declines (or times out), any order the receiving BOX participant has in the market on that instrument is "frozen" and will be used to facilitate the customer order at the National Best Bid and Offer (NBBO).

2007 Volume

Total average daily trading volume year to date at BOX totaled 610,000 contracts versus 376,000 in 2006. The highest single-day recorded was on Nov. 8, 2007, when 1.23 million contracts changed hands, and the most active month was November when average daily volume reached 750,000 contracts.^[6]