Credit Suisse First Boston, JPMorgan, Salomon Smith Barney, and UBS Warburg have all become investing partners in Boston Options Exchange Group, LLC. BOX's formation was announced in February of this year, and the proposed rules under which BOX will operate when it goes live next year will be published shortly for public comment by the Securities and Exchange Commission.
"To have firms of this caliber step up and commit to BOX is a tremendous vote of confidence in the primary principles on which BOX is founded," says Kenneth R. Leibler, Chairman and CEO of the Boston Stock Exchange, one of BOX's founding partner organizations along with Bourse de Montréal and Interactive Brokers Group LLC. "There is no question about the level of interest across the options industry. At present, we have indications from a number of firms active in the industry that they want to be BOX market makers or order flow providers."
"Although ours is a new options market, we will be using a proven trading platform from the beginning," says Luc Bertrand, Chairman of the BOX Board and President and CEO of the Montréal Exchange. "BOX will use a customized version of NSC, Montréal Exchange's trading engine. The NSC platform, developed by ATOS-Euronext, is one of the most widely used trading systems in the world, operating at more than 15 exchanges. We are completely at home with this system and are on familiar terms with its strengths, versatility and reliability." Its founding members believe that BOX will be an exchange like no other if the proposed rules are approved along the lines on which they were drafted. "All along," says Thomas Peterffy, Chairman of Interactive Brokers Group, "our objective has been to create an alternative to the existing market models that will be simpler, faster, more open and less costly for participants. As an all-electronic options market, BOX promises to provide price improvement for customer orders, lower cost executions, no barriers to entry and increased competition."
There are five clear points of differentiation for BOX:
- Fully automated - Trading is entirely and without exception fully automated providing the economies of straight through processing to the brokerage and trading community and ensuring extremely rapid response times. Given this technology, BOX is expected to offer the lowest execution costs.
- No cost barriers to entry - No equity investment is required to participate on the Exchange. Market makers pay a monthly minimum activity fee. Order flow providers pay no annual access fee - trading is done on a "pay as you go" basis.
- Open market structure - With a transparent order book, orders will be handled on a strict price/time priority without a specialist controlling the price. All orders are live and available to all participants with no limitations on the ability of professional or broker/dealer orders to access the order book. All prices on the BOX book are firm for all participants including broker/dealers, customers and away market makers. All trades must be at or better than the National Best Bid or Offer (NBBO).
- Price improvement period (PIP) - BOX includes a unique electronic mini-auction that will attract - subject to price competition - orders that would otherwise simply be printed at the NBBO on other exchanges by a specialist. The price improvement period is of brief duration. It is entirely automated and guarantees that the client's interest takes precedence over all other orders during the process. Through the PIP, the end customer is guaranteed to have a price better than the NBBO.
- Open and equal access - There will be multiple market makers in each issue, encouraging free and open competition. Any qualified participant may be a market maker in any option class. Qualified participants are generally firms already subject to a U.S. equity market self-regulatory organization (SRO). Competing market makers are responsible for ensuring basic liquidity, and their competing with each other will encourage finer pricing and tighter spreads to the ultimate advantage of the investor.
About The Boston Options Exchange (BOX)
The Boston Options Exchange (BOX) will be an equity derivatives market under the full regulatory responsibility of the Boston Stock Exchange subject to the jurisdiction of the U.S. Securities and Exchange Commission. Initially, BOX will list the 250 top classes of equity options with the intention of scaling up to 600. All equity options traded on BOX will be cleared by the Options Clearing Corporation (OCC), giving BOX options full fungibility with contracts traded on other options exchanges.
BOX will be a fully automated equity options exchange using the NSC trading software licensed from ATOS-Euronext in France and operated under a facilities management agreement (using dedicated BOX hardware) by the Montréal Exchange. The NSC platform, developed by ATOS-Euronext, is one of the most widely used trading systems in the world, operating at over 15 exchanges.
Participating firms may connect order routing or trading software to the BOX trading engine via standard, open API (Application Program Interface). Thus a firm may use dedicated and specialized software for its market making activity, connect whatever existing system it may use to provide clients with electronic order routing and trading access or contract with an independent service vendor (ISV) whose software is compatible with the BOX trading engine for any or all of these services. Currently, Montréal Exchange has certified seven ISVs and two proprietary systems for order routing to NSC and two ISVs and one proprietary system for market making functions. All of these systems will be able to access the BOX market with very little additional development effort.
BOX provides a network for connection to its trading engine with local hubs available at launch in Chicago, New York and Montréal. In addition, several independent network providers are also connected to the BOX network and can provide routing services.
