BOX - Boston Options Exchange

Part 2 of 2 Parts:

4. Likewise, there are no “auto-ex kickout” rules on BOX. As you probably know, these rules essentially are designed to identify when arbitrage or other trading opportunities against the specialist are available and then shut down auto-ex and make orders be handled manually. This will not happen on BOX. There is no built in protection or fail-safe for market makers.

5. On all of the other exchanges, customers are prevented from “acting as a market maker”. This is worded very broadly and lets the exchanges pursue enforcement action against any customer posting two-sided quotes. This rule is even used to intimidate successful day traders and arbitragers who are NOT posting two-sided quotes. On BOX, customers can place bids or offers and be protected in time priority. There are no restrictions on how they can trade.

6. On all other option exchanges, customers are prevented from using a computer to generate and transmit orders, putting sophisticated traders at an inherent disadvantage. No such rule on BOX.

7. On other option exchanges, traders must wait 15 seconds before transmitting an order on the same side of the market in the same option. This is to protect specialists and market makers and to limit how quickly public customers can exploit a profitable trading opportunity. The exchanges originally wanted this rule to be much broader and more open ended, but IB fought to have it limited to 15 seconds. There is no 15 second rule on BOX and customers can enter and cancel orders as fast as they want.

8. Customers on the whole will BENEFIT from the PIP process, which allows market makers to trade with a portion of their own order flow, but only with at least a penny of price improvement over the national best bid and offer and only after a 3 second auction. This will clearly benefit customers that are primarily liquidity TAKERS. On other exchanges, specialists and primary market makers internalize a very large portion of their flow and they do it AT THE NBBO with NO PRICE IMPROVEMENT.

For customers who wish to act effectively as market makers and are primarily LIQUIDITY PROVIDERS (i.e. the people on this forum who are complaining about the penny), the BOX rules are still much better than the other exchanges. The posters on this board who complain about their lack of ability to use pennies and compete in PIPs are still far better off than on the other exchanges, where they are not and never will be on RAES or other auto-ex systems. At least on BOX they can post quotes in time priority and participate in trades that take place AT the bid or offer. They cannot do this so easily on other exchanges because they cannot be on the auto-ex “wheel”. As noted above, if a sophisticated small trader or firm really wants to use penny increments on PIP they can become BOX market makers cheaply and easily.

9. I would be happy to hear more from you or answer more questions. My name is Dave Battan and my email is xxxxxxx@interactivebrokers.com and my phone is xxx-xxx-xxxx. Thanks for listening

These messages were copied from
http://www.interactivebrokers.com/discus/messages/4/5594.html?1038849898

registration required, his email address and phone number are on the IB site.
 
So if I want to be a market maker on the BOX, who would I get to clear my trades and what software would I need? How much capital would you need per stock?
 
Quote from just21:

So if I want to be a market maker on the BOX, who would I get to clear my trades and what software would I need? How much capital would you need per stock?
More...

You probably would have to register with the SEC (Form BD I believe) and the Boston Stock Exchange as the SRO. You may want to contact the Boston Stock Exchange's membership department and get the forms to see if it is worth registering as a market maker.
 
The Chicago Board Options Exchange is considering reforming its membership structure and becoming a "for profit" company in a bid to ensure its survival in the increasingly cut-throat global options industry.


The world's largest options exchange is also planning a significant expansion of electronic trading technology in a bid to stave off competition from its electronic trading rivals. Both developments come as the loss-making CBOE continues to suffer from falling stock markets and the possibility of additional competitive threats.

Although the US has five options exchanges, a sixth jointly owned by the Boston Stock Exchange, the Bourse de Montreal and Interactive Brokers Group is expected to start trading early next year.

Bill Brodsky, CBOE chairman and chief executive, said that allowing a "significant step" towards electronic trading and adopting a shareholding structure would strengthen the exchange and allow it to take part in industry consolidation.

"What we're looking at is whether we should change from being a seat-based exchange to a stock-based exchange. It gives us flexibility to do other things, to merge, to do whatever you want to do. We're starting to look at the legal and business aspects of it right now," he said in an interview.

Although the largely "open outcry" CBOE continues to dominate trading of stock exchange index options, it has lost market share in equity options to the International Securities Exchange, which started trading in 2000 and is the only fully electronic options exchange in the US.

In another sign of the CBOE's declining fortunes, the value of its trading seats - which allows the buyer the right to trade on the exchange - has fallen from $735,000 per seat in 1998 to $150,000 currently.

The CBOE's plans come after the Chicago Mercantile Exchange, the largest US futures market, earlier this month sold about 10 per cent of its shares in an initial public offering, after demutualising in 2000.

Members of the Chicago Board of Trade are expected in January to vote on a restructuring plan that would turn it into a shareholder enterprise - although an IPO has been ruled out for now.

Asked whether he was considering an IPO for the CBOE, Mr Brodsky said: "It would be absurd to rule it out, but premature to talk about it."

Mr Brodsky said that the exchange's CBOE Direct electronic trading platform - currently only used on an experimental basis after normal trading hours - would be fully introduced by early next year.

He said he expected "dramatically more" of the CBOE's trades to be conducted electronically as a result. "The new system would allow the electronic accessibility of a screen-traded system along with the depth and liquidity of the floor. It's our response, quite frankly, to ISE," Mr Brodsky added.
 
Exchanges look to make trading faster, cheaper
By KOPIN TAN

THE YEAR WAS 1973. The men gathered in the smoking lounge of the Chicago Board of Trade and, with little pomp or ceremony, began trading options on the 16 hottest stocks of the day. Until then, contracts to buy or sell stocks at preset prices were mere agreements -- nonstandardized, unregulated -- and these men had one goal: to create a market where traders compete to offer the best price, a destination for all option investors.

Now, 29 years after the Chicago Board Options Exchange was founded, the U.S. has five option exchanges and the world's largest listed-options market. But the mid-life crisis the industry faces is just as sizeable, even before its 30th birthday next April. Nowhere is that existential anxiety more keenly felt than at the exchanges, which have weathered three years of sudden change brought on by technology and a crowded field, with more changes to come in 2003.

Because listed options must, by law, trade at an exchange, the old mission statement is still valid. But investors increasingly demand something more: value. "Exchanges can't simply be liquidity centers where people meet to trade, and for which they're paid for being middlemen," says a senior Wall Street trader. Sure, a good price and liquidity are still key. But the race is also on to make trading processes faster, easier, surer, cheaper.

Not surprisingly, the future takes on a techish glow. "We have to allow customers and market makers to access us" in new ways, says Pacific Exchange Chairman Philip DeFeo. The Pacific is seeking regulatory approval for PCX Plus, a "remote access" platform that lets members trade from places other than the exchange floor. By allowing traders to quote prices and make markets from, say, Miami or Scottsdale, the exchange hopes to boost its liquidity pool and rise above the floor's boundaries -- as well as lure more takers for its cheap seats.


The American Stock Exchange, meanwhile, is working toward a third-quarter launch of a screen-based trading system, one flexible enough to accommodate even remote-access trading should that prove the way to go, says Chairman Salvatore Sodano. At the Philadelphia Stock Exchange, which is mulling plans to turn the oldest U.S. exchange into a for-profit corporation, market makers can now post prices on an electronic system without relying on specialists for updates. The exchange hopes that will spur price competition and draw more customers.

Then, there is the CBOE. With more than 1,500 members, management can barely shift its weight without stepping on someone's toes. Still the nation's oldest options market will heave toward a new hybrid platform that strives to marry its vast trading floor with the bells and whistles of electronic trading. "The CBOE created this business 29 years ago," says chairman William Brodsky. "For our 30th year, we're going to reinvent it."

Besides bringing desktop point-and-click to more customers, the hybrid system will facilitate dynamic electronic price quoting. In short, it seeks to replicate on an electronic screen the price discovery process and liquidity offered by the CBOE's more than 1,437 floor traders. Launch date: May 2003.

Even the International Securities Exchange must feel the pressure. The electronic exchange's 2000 arrival prodded floor rivals to adapt, and it saw its equity-option market share jump from 1.12% in 2000 to 9.04% last year, then to about 22% recently. But as the challenger becomes the establishment, that giddy growth spurt has started to plateau; since June, the ISE's market share has held steady, instead of rising like it had for the first 25 months. This even before the proposed Boston Options Exchange -- a newcomer not shy about waving its "electronic" banner like a weapon -- flicks on its switches next year.

"Do you have kids?" asks ISE president David Krell. "Children grow fastest in the first few years. After that they still grow, but not at the same pace." The ISE acknowledges it's entering the next phase, but is plugging away to add customers and sign on more liquidity providers. It also wants a regulatory nod for a one-size-fits-all push, to allow traders to automatically execute any order at the price quoted -- as long as it has a displayed quote of that size.

And like anyone who has turned 30, the industry is learning to cope. "It's been a tumultuous year for everyone in the equity business, and we've used it as a building year to define our strategy," the CBOE's Brodsky adds. "Consolidation is constant. The need for capital is constant. But the most constant thing I know of is change."
 
I am curious to hear what some of the more experienced option traders here think about BOX.

It looks to me like an option ECN, which I would think should be a good thing.

Do you guys think this will get the spreads down to a more managable level?

One reason I sort of lost interest in options was the horrendous spreads involved. And it seemed that if I tried to get in between for a better price, I was ignored and traded through. I never became much of an expert because I didn't do many trades.

My thought is that if there were nickle spreads and good liquidity, option trading would really take off. I know I would do more.

Thoughts everyone....
 
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