CBOE and CBSX combine option and stock execution

Source: Chicago Board Options Exchange

The Chicago Board Options Exchange (CBOE) and the CBOE Stock Exchange (CBSX) announced today that they are now offering fully automated executions for combined option and stock trades through a single electronic platform.

This new functionality will enable the simultaneous execution of both the stock and option legs of any position trade in a one-to-one ratio - all on the same electronic platform.This new automated feature will be especially advantageous for investors executing "buy-write" or "married put" hedging trades, but can be used for any trade that is combining different stock and option orders.Added benefits for traders include faster executions and the opportunity for price improvement.

"For options traders executing buy-write or other combined stock and option orders, this new automation creates greater efficiency in the overall execution process," said CBOE Chairman and CEO William Brodsky."Over the last five years, CBOE has been an industry leader in developing buy-write benchmarks and product offerings. Creating a means for the electronic execution of these types of trades is the natural extension of our efforts to elevate the strategy's profile and will only serve to foster even greater awareness and use of CBOE's BuyWrite products."

"CBSX is pleased to join with CBOE in offering investors the capability to automate their combined stock and option orders through a single electronic platform," said David Harris, Chief Executive Officer of the CBOE Stock Exchange."We expect that customers will find tremendous advantage in executing their cross-product trades in a fully electronic trading environment.The ability to pair stock and option orders together -- in one transaction and on a single platform -- not only creates obvious trading efficiencies, but also lowers the cost of multi-asset transactions. The automation of combined stock and option trades is an important step in our ongoing mission to create trading efficiencies between asset classes and to reduce the overall costs for investors."

This new CBOE/CBSX technology electronically pairs a single option leg with a stock leg in a one-to-one ratio, thereby effectively automating the process of implementing a trading strategy such as a buy-write or married put.

Upon receipt in the system, eligible incoming orders will initiate a one- to two-second electronic Complex Order Auction (COA).The order is then auctioned as a packaged order with one net price, and traders can respond to the auction in penny price increments.This results in potential price improvement on the option side of the transaction.Orders that are not marketable at the conclusion of the auction route to an exchange system that continuously re-auctions the order if it becomes marketable.When executed, the option leg of the order "prints," or reports, on CBOE, while the stock leg prints on CBSX.

Additionally, it is possible for buy-write or married put pairs to trade against existing liquidity on CBOE and CBSX.This functionality allows CBSX liquidity providers to interact with a unique pool of liquidity takers not found on other equity markets.

This new functionality relies on CBOEdirect, CBOE's state-of-the-art screen based trading system.The system has proven to be one of the most robust trading platforms developed anywhere in the world.It's a highly scalable trading system and its customized and flexible design has enabled CBOE to expand into other markets with minimal investment in technology.CBOEdirect is the trade engine that powers four different exchanges -options trading through CBOE's Hybrid system; futures trading at the CBOE Futures Exchange (CFE); stocks and ETFs at the CBOE Stock Exchange (CBSX); and single stock futures at OneChicago.

A "buy-write," also referred to as a covered call, generally is considered to be an investment strategy in which an investor buys a stock or a basket of stocks, and also sells call options that correspond to the stock or basket of stocks.A "married put" is an investment strategy in which an investor purchases puts while at the same time purchasing an equivalent number of shares of the underlying stock.Both strategies may be used to enhance portfolio returns and reduce volatility.For instance, over the last 12 calendar months, the CBOE S&P 500 BuyWrite Index (BXM) has outperformed the Total Return S&P 500 Index by 14.5 percentage points.

Since 2002, CBOE has launched five different buy-write benchmark indexes, and money management firms have introduced more than 50 new buy-write investment products with an aggregate total of more than $30 billion in assets. Additionally, three consulting firms -- Ibbotson Associates, Callan Associates, and Fund Evaluation Group -- have published studies on the buy-write strategy in recent years.

On September 23, 2008, CBOE began trading options on the CBOE S&P 500 BuyWrite Index (ticker symbol BXO). It is expected that BXO options, which are based on 1/10th the value of the BXM, will allow flexibility in trading and managing risk in covered call portfolios and structured products.

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