A Penny for Your (Options) Business

After focusing on how the Boston Options Exchange (BOX) spent its first-year separating itself from other exchanges, today I'll focus on the exchange's innovative, and highly contentious, price improvement period (PIP) process.

This may be the most proactive measure taken by an exchange yet to avoid participating in payment for order flow (PFOF), and it looks poised to become the new way that exchanges do business.

The irony is that most exchanges have complained about PFOF for years, even petitioning the Securities and Exchange Commission to ban the practice, and now they may find that PIP, which they also fought fiercely against, actually might provide a method for weaning themselves from paying for order flow.

The best part is that this remedy not only should save the exchanges and market-makers money, but it also provides customers with a more competitive market.

PIP PIP Hooray

The price improvement period is a process in which BOX market-makers have a three-second window to compete for filling an order by improving on the existing national best bid offer (NBBO) in penny increments. For a more complete explanation of the PIP process, click here. ...