On Aug. 2, around 26 million options orders were made and filled the way they have been for more than a decade now, with robots on either side and filled within nanoseconds. Yet that same day, the Securities and Exchange Commission approved a request by BOX Options to open a live trading floor in Chicago. Testing of the new floor is now underway with a launch expected sometime this fall.
“The very first question I get asked by everybody is, why did you do this? Everybody is trading in high speed, the trading floors are closing, why in in the world would you open a trading floor?” said Edward Boyle, CEO of BOX Options in Chicago.
The answer is not nostalgia for a bunch of guys in loud sports jackets. Instead the exchange wants to grow. BOX is one of the smallest U.S. options venues, with a roughly 2% share in the highly fragmented U.S. market. Boyle believes opening a trading floor will help BOX to compete with the four other options exchanges that never entirely shut their open outcry trading floors.
“Really, the simple answer is, as an exchange operator, we want access to this segment of the market,” Boyle explained. He noted that open outcry trading remains 10-15% of the U.S. options market, and commented that the 40-person trading floor he is now planning is the only way for the 13-year-old exchange to reach that segment.
Boyle explained that open outcry is needed due to the unique market structure of options. Complex orders are difficult to execute electronically because they may consist of ratios or multiple legs or be contingent on certain market conditions.
Large options orders are also not recorded the same way as most other asset classes. ”Institutional sized orders, unlike other asset classes, particularly equities, which is what options are most closely aligned with, have no TRF [trade reporting facility]. There’s no printing of a trade once you match a buyer and a seller, Boyle said.
“For example, if there were a buy side and sell side broker who agree on a trade, in most markets—equities, FX, bonds—they are allowed to send that trade directly to the tape and clearing. In options that is not the case,” Boyle said. “The trade must be exposed to the market place and any participant can join the trade or use that information to affect a trade. Again this is where human interaction is better able to meet the clients’ needs and prevent disruption to the marketplace."
