In the last week I spoke to a contact at the BOX and have learned the following: 1) The rules of the BOX are currently in negotiations with the SEC and is taking longer than expected. They expect these rules to be published sometime in Oct/NOV. Then the SEC will ask for comments from the industry/public. This period usually last for 45 days. 2) trading will probably not begin until about Feb 2003 3) My concern about the PIP rules is justified. It appears that the BOX is pushing NOT to "show the client side" in the PIP process. IMO, if this goes through as planned, the BOX may in fact make the overall marketplace worse as other Exchanges WILL follow with similar rules. There would exist a HUGE advantage for the membership of the Exchange by in affect creating a two tier level marketplace which would act similar to an OTC market 4) It may be quite easy to become a market maker for the BOX 5) There will be NO restriction on customer orders (no 15 second rules, two sided rules etc) I have expressed to IB and to the BOX my views on their proposed PIP rules. From IB's point of view, "they don't make the rules at the BOX, as it involves all the funders, new shareholders and the SEC". Also, IB is solely responsible for enhancements 4) and 5). Problem with the PIP rules Currently when a firm wants to take the other side of customer order flow, they would have to abide by Exchange rules. These rules force the firm to show the customer side of the order when it isn't equal to either the bid/ask. For example, on the ISE if the NBBO is $8 bid $8.50 ask and a customer enters an order to sell at $8.00 then the order will simply trade at $8.00. However, if the order is to sell at $8.10 then even if the corresponding broker would pay $8.10 the customer order to sell IS displayed immediately so all market participants can trade it. The corresponding broker has to wait X amount of seconds before they can buy it. In the BOX's proposed rules, this same customer order to sell at $8.10 would NEVER be displayed for all participants and it would simply trade at $8.10 despite never posting a bid or ask at that price. In affect this creates a vehicle to internalize in such a way that acts like an OTC market (only markets makers for that class would know about this order flow and would be able to participate) This rule will also give market makers of the BOX an advantage in terms of "information". That is, they will know before all market participants of orders that can have significant impacts on either the implied volatility of that option class or on the price of the underlying. Let's say that you are attempting to buy VOL and you are posting a limit order to buy ATM puts. If an order came in to sell 500 contracts of the ATM calls at the bid (or below bid), all market makers for that class would be privy to this info for a unspecified number of seconds (2-10 secs) and would be able to pick off any juicy bids on other strikes. This advantage could also affect equity traders as option orders often do affect the price of the underlying. Orders to buy/sell deep calls/puts will also put market makers at a distinct advantage over equity traders. In fact the SEC, in the past, has been forcing Exchanges to post all customer orders immediately. The ISE, PSE currently do and the other Exchanges have said they would. This allows all market participants the opportunity to trade against all customer orders. The BOX's proposal will only allow selective customer orders (the ones that are NOT worth trading) to be displayed. IMO, the BOX's main attraction for dealers will be their internalization rules and these rules will make it difficult for traders such as myself to compete with the members of the BOX. becoming a market maker is a possibility.......... I don't blame IB for this as it is out of their hands. I simply hope that the SEC will either force the BOX to show the client side of ALL customer orders, especially the ones that firms want to internalize. If they fail to get this in the upcoming proposed rules then our only hope for change would be to let the SEC know our views during the "public comment" period.
Future All-Electronic Markets: BOX a Definite, Eurex Investigating The International Securities Exchange was the pioneer, but soon it will not be the only all-electronic options exchange in the United States. The Boston Options Exchange (BOX), a fully-automated options market jointly owned by the Boston Stock Exchange (BSE), the Bourse de Montreal and Interactive Brokers (IB), expects to make its debut next year. Moreover, Eurex, the all-electronic German-Swiss derivatives market, is devising a strategy to throw its hat into the electronic U.S.-options ring. BOX, which initially plans to list the 250 most actively traded U.S. options, has already filed its market model and rules with the Securities and Exchange Commission. Pending regulatory approval, the market could be operational by the second quarter of 2003. Eurex, meanwhile, is currently weighing two options for breaking into the American-options arena: launching its own all-electronic options market or partnering with an existing U.S. exchange. The owners of BOX will each play a key role in the launch and evolution of the exchange. The BSE will act as BOX's regulatory-services provider; IB, a direct-access broker, will be responsible for the exchange's market design; and the Bourse de Montreal will provide the technological infrastructure -- including the core trading engine -- for BOX. BSE officials, through an exchange spokeswoman, decline to comment on BOX. But Rosanna Teti, vice president of business solutions and information technology at the Bourse de Montreal, says that BOX will employ a competitive market-maker model. Instead of having a single specialist, she says, BOX will have multiple market makers trading each option listed on the exchange. "It's a first-in, first-out model ... where, basically, the best trade wins," says Teti. The Bourse de Montreal, an all-electronic, Canadian-derivatives exchange, employs a very similar market model. Moreover, Teti says, the exchange just converted from a floor-based market to a fully-automated exchange last year -- so it is very familiar with both the business and technology challenges the BOX will face. "The challenge to building a trading system for this type of model is that there is no limit, in terms of number of market makers. So the challenge, technology-wise, lies in capacity," she says. "Market makers, as you know, have the obligation to continuously provide two-sided markets, and you can imagine how many quotes they (might generate) in the span of a second. We tackled that challenge for Montreal, but the challenge will be greater at BOX." In fact, Teti says, the Bourse de Montreal expects BOX to be "10 times bigger" than its own exchange, in terms of volume. The BOX will use a customized version of NSC, the Bourse de Montreal's trading engine, to handle that volume. The Bourse de Montreal licenses NSC from ATOS Euronext, the IT arm of the pan-European, all-electronic Euronext exchange. But Teti says that Montreal is tweaking the system for BOX, to both ensure that it can handle large volume and certify that it is in compliance with the exchange's specific rules for options trading. In addition to the trading engine, the Bourse de Montreal will also provide networking and connectivity solutions to BOX. "We will be responsible for the whole infrastructure, beginning to end, that is necessary to operate an electronic market," says Teti. BOX, she says, will also use an open application-programming interface that will allow exchange participants to electronically link to the market via the front end of their choice. Meanwhile, a Eurex spokesman says the derivatives exchange is currently talking to its U.S.-based customers to understand their options needs. It is possible, he says, that Eurex will launch a standalone, all-electronic U.S. options exchange, using the internal matching engine through which it currently trades European-equity options and futures contracts. But it is equally possible that Eurex will partner with an existing U.S. stock exchange to establish a niche in the American-options market. Eurex's review of this market, says the spokesman, is still in its "very early" stages, and the exchange is not leaning in any particular direction. However, it is certain that Eurex will try to leverage its existing derivatives contracts, regardless of which venue it chooses to make its U.S.-debut. "Our powerful indices and options contracts in Europe are the main focus we would also have for the United States," the spokesman says. While Eurex has not yet finalized its strategy, the BOX is now merely awaiting approval from the SEC. Exactly when the commission will make its ruling on BOX remains unclear, but Teti says Bourse de Montreal is planning to deliver all of its technology to the new exchange before the end of the second quarter of 2003.
Be nice; it works out to the traditional exchanges being pushed into honoring their quotes or they are going to fade away ...
A year ago I would have guessed consolidation of the 4 majors into a super electronic exchange. Trying to head off ISE or Boston. Now further fragmentized markets are inevitable.
What you will end up with is a fair market; instead of the crookedest (is that a word???) market in the world ...
I hope your right. It's gotten to a point where in the last six months I've gone from a dozen options trades a day, to a dozen a month. I told you last month, and I was serious, i resent even paying commissions on them. As far as I'm concerned it's a dealer market. They should just be happy to clip me my nickel......