Boston Wins Again

The occasion of the Boston Option Exchange's first anniversary this week is not only a logical time to review how the sixth option exchange in the U.S. is faring, but also a springboard for discussing the industry's most pressing topics and trends.

The BOX has done an admirable job building its business and has put up respectable numbers in its rookie year. It logged more than 25 million contracts in its first year, more than the International Securities Exchange, or ISE, traded in its first year. The BOX now claims about 5% market share, which is close to the venerable American Stock Exchange in the 350 equity options it currently lists.

Still, these aren't quite headline-worthy milestones to the average investor. And technologically, being the second all-electronic options exchange some three years after the first one emerged, and in a landscape where all exchanges now execute most of their orders electronically, doesn't exactly grab people by the lapels, either.

But the BOX does have two distinctive features that are noteworthy and are making a considerable impact on the options industry. The BOX's open market-maker system potentially offers a more competitive landscape. In addition, its price improvement period (PIP) is, if not the best, the only alternative currently offered to finally eliminating payment for order flow (PFOF). Critics and opposing opinions abound, but that's what makes a horse race. A race is about competition, and competition leads to better performance. Through this logical if somewhat tenuous inference, I conclude that the BOX's open-market-making and PIP system is an improvement over current practices.

Open Call for Market-Makers

Most existing exchanges are in the process of demutualizing, or separating equity stakes from trading rights. But the BOX, thanks to its relatively recent birth, was able to launch as a for-profit organization without embedded members whose interests don't align with industry trends.