The Securities and Exchange Commission's approval of a sixth US option exchange, in the shape of the all-electronic Boston Options Exchange (BOX) and its controversial price improvement feature, has triggered a wave of copycat proposals from encumbent competitors.
A joint venture between the Boston Stock Exchange, the Montreal Exchange and Interactive Brokers Group, BOX is set to shake up the traditional nickel-quoting world of options trading. The BOX model features a three-second "price improvement period" - wherein brokers can trade against their customer orders in penny increments in an effort to lift the best bid/offer price.
In order to compete with BOX and gain access to this untapped source of internalised order flow, both the Chicago Board Options Exchange and Philadelphia Stock Exchange have already asserted that they intend to file with SEC for approval to trade in pennies while quoting in nickels.
While expressing concern and disappointment at the SEC green-light for BOX, CBOE chairman and CEO William Brodsky, comments: "Despite the well-documented concerns about the BOX model, the other exchanges, including CBOE, will be forced to adopt similar measures in order to compete."
Brodsky's statement drew the following response from Philadelphia Stock Exchange chairman and CEO, Sandy Frucher: "If the BOX and the CBOE will be filing to trade in pennies, we will not be left behind."
BOX, which also lists CSFB, JPMorgan Chase, UBS and Salomon Smith Barney among its investors, has taken its cue from the International Securities Exchange, the only other all-electronic US options market which opened in May 2000 and has grown to become the largest market for the trading of equity options.
The remaining floor-based exchanges have respondend to the threat by developing their own hybrid electronic models, such as CBOEdirect HyTS, where trades are handled by remote specialists.