Options exchange faces tough choices Complaining customer: Charles B. Cox III has asked the SEC to investigate alleged unfair practices among market makers on the CBOE trading floor. Photo: John R. Boehm April 22, 2002 By Steven R. Strahler For years, while Chicago's other exchanges bore the brunt of adverse publicity, William J. Brodsky would insist that his Chicago Board Options Exchange confronted bigger competitive challenges than any of them. Time is proving him right. The CBOE's volume is off nearly 20% this year. Seat prices have sunk to a quarter of their March 1998 peak. And its once-commanding marketshare is down to 36% from 50% three years ago. After pioneering trading in stock options in 1973 and monopolizing it for years, the CBOE now finds itself part of a fragmenting industry hurt by a bear stock market and post-Sept. 11 trading lulls. An upstart electronic exchange, not yet two years old, already has 18% of a shrinking pie. Combined with other factors, electronic trading â long on the horizon and resisted by floor traders who make their livelihoods by shouting out buy and sell orders â is shaking the pits. "Things have definitely changed," says Mr. Brodsky, the CBOE's chairman and CEO. In a letter last month, he warned members: "The threat is real, and CBOE must respond accordingly." The new landscape has plowed under the CBOE's traditional layout, where floor-based members are given trading advantages in return for making markets, often thinly traded and thus risky ones, in certain options. Customers, ranging from big Wall Street firms to individual retail investors with newfound leverage, no longer subscribe to that bargain and are taking their business elsewhere. Many floor traders, in turn, feel that technically advanced customers are taking advantage of the system, to their detriment, by pouncing on price discrepancies among posted quotes on various exchanges. "It's a revolutionary time," says Jack Wing, a securities industry veteran and former CBOE outside director. "What once was a relationship of customers is becoming a relationship of competitors." Disappearing DPMs The CBOE's specialist firms, or designated primary market makers (DPMs), are disappearing, dropping to 25 from 57 since early 2000 amid lower trading volume and rising costs. Customers are sending orders to the all-electronic International Securities Exchange (ISE) in New York or, in the case of some big Wall Street firms, executing trades in-house, without using an exchange. They also are complaining to the Securities and Exchange Commission (SEC) and suing exchanges over long-standing practices that floor brokers regard as perquisites. For the fiscal year ended June 30, CBOE net income slumped 34% on an 11% revenue decline, and better results this year are unlikely. One face of the new reality belongs to Charles B. Cox III, a 51-year-old former CBOE member who manages Lightning Trading LLC. He is the type of shrewd customer who once was beholden to the CBOE when it controlled options trading in 27 of the 30 Dow stocks. But in 1999, the SEC ordered options exchanges to share listings that had been previously divvied up among them on an exclusive basis. That severely eroded CBOE margins, as did an industry switch a year later to decimal-based quotes, which narrowed bid-ask spreads â the buy-sell price differential that exchange middlemen pocket as their profit. "The premiums have gone so low. Nobody is making any money," points out Lawrence Blum, a CBOE member and co-founder. Another phobia, for many members, is technology. CBOE has yet to deploy its most advanced trading technology, and its electronic order system is available only 75 minutes a day (before the floor opens) and is limited to just three products. "The CBOE has wonderful technology," grouses Mr. Cox. "They choose not to employ it." Customers like Mr. Cox want to see (and instantaneously act on) pricing and quantity information available to DPMs, reducing their edge or, in their eyes, the privileges associated with market making. Aware of the topic's "political ramifications," Mr. Brodsky last month called for preserving the trading floor and the DPM system but also for better computerized dissemination of the CBOE's market making. "While we had pioneered that in the area of retail order flow," he allows, "the truth is, we weren't showing that to the world." Referring to other promised, but unspecified, technological enhancements, he adds: "Watch us over the next several months. Mark my word." Inferior treatment As it is, Mr. Cox complains that his orders get short shrift on exchange floors, including the CBOE's. Compared with instantaneous order fills at the ISE, he contends, other exchanges fail to honor quotes and often cancel trades when the market moves against insiders. "The CBOE and other exchanges in some instances hold the orders for up to two minutes" â an eternity in option circles â "as they decide whether it is to their advantage to give you an out or an extension," he says. (Replies Mr. Brodsky, "If someone has a complaint of that nature, they should get to us right away.") Mr. Cox has complained â to the SEC, which he says sent investigators here last summer. The agency declined comment. His allegations echo those in two pending lawsuits filed last year by customers who accused options exchanges of restraining price competition by failing to execute orders promptly at posted prices. The CBOE, a defendant in both suits, declined to comment on the allegations. ©2002 by Crain Communications Inc.
I've been told that the PHLX will also be making some favorable changes in the next few months. It's nice to see some justice being served! (One step at a time)
Do this- don't send any orders there whenever possible. I only deal with them ("them" being anybody except ISE) as a last resort. The CBOE is definitely where I've gotten screwed the most by those fat bastards. If I can avoid sending an order to CBOE, even if it costs me an extra $10 on ISE, it's worth it, since my order will probably get held up at CBOE and I'll lose that money anyway. No order flow = they don't eat.
And don't send any orders to the S&P pit anymore.. A pit trader told me that the average spread overthere is .5 points , that's double of the E-mini .25 points. Screw all those crooks, just send your options orders to ISE and futures orders to Globex and we will win finally. The future is electronic anyway....:0))))
End Game The International Securities Exchange last week got the go-ahead from regulators to "de-mutualize," or convert to a for-profit company, clearing the way to raise capital by selling equity stakes or do an initial public offering down the road. Why? The ISE sees the writing on the wall. Option-exchange seat prices may continue shrinking. (Paul Liang, owner of the most such seats in the nation, saw the value of his asset plunge from $70 million at the market's peak to around $15 million today). The Boston Options Exchange, or BOX, is gunning for a place as the second U.S. electronic options marketplace after the ISE, which has grown rapidly since its mid-2000 launch and now is the third largest of the five U.S. options exchanges. Rumors abound that yet another all-electronic, free options exchange is getting ready to file with regulators. Options are increasingly a commoditized business. Charles Schwab recently gave up dealing directly with floor-based, market maker-driven options exchanges and outsourced its options business to Goldman Sachs. Schwab last month signed a deal routing its sought-after options business to Goldman-SLK, Wall Street's biggest specialist firm, which will then route it to whichever of the five exchanges offers the best price. However, Goldman specialists can also fill the order in-house, a controversial practice known as "internalization." The Chicago Board Options Exchange took disciplinary action against Credit Suisse First Boston, in essence for violating exchange rules preventing brokers from trading against customer orders. "These are big issues, and the SEC hasn't come fully to grips with this. They have to look at it more carefully," says CBOE Chairman Bill Brodsky. The upshot? Goldman effectively controls Schwab's option business. "The options market is going to a more efficient model. There will be different firms, those with specialist operations or routing flow, providing this service," says Scott Prince, co-head of Goldman's global equity derivatives business. The bottom line: Wall Street specialist firms, and not exchanges, have emerged as portals for option orders.
http://www.bostonoptions.com/index_launch.php Is this the same on other us option exchanges? All orders submitted to the BOX market are priced in increments of $0.05 for those orders less than $3.00 and in increments of $0.10 for those orders equal to or greater than $3.00. thanks mksl
yes, (the same at other exchanges) the two things i get out of the website are: 1) The price improvement section is different and could be a major plus for the Exchange (depending on what the EXACT rules are) 2) Under Market Model, they state that "Out Trades are virtually unknown" under Fully Automated with Straight Through Processing - which to me implies that there won't be many busted trades and all orders will receive auto executions It is too early to comment until the rules become public knowledge.........