The CBOE has transformed with technology and major product licenses. It still holds an important place in the world of options, but it finds competition nipping at its heels. Who benefits? Retail investors.
Nearly a dozen options exchanges—and counting—are elbowing for space in this growing market.
As participants continue to apply, even the word “exchange” means something quite different today than it did in the early 1970s when exchange-traded options and their bell-bottomed crusaders clocked in on the floor of the Chicago Board Options Exchange (CBOE).
Trading and fashion have come a long way. On one hand, technology has transformed the industry, including for the old bricks-and-mortar institution of the CBOE. Electronic trading, rather than floor-based executions, drives the lion’s share of options transactions today. For individual investors, that generally means greater access to trading products that were once off limits. And the bell-bottoms? Heck, these days, you can trade without any pants at all from the comfort of your home.
Traditional mart CBOE remains a major player with a hefty slice of market share thanks to its exclusive listings of two popular products. Options on both the S&P 500 Index (SPX) and CBOE Volatility Index (VIX) trade only on the Chicago exchange.
But SPX and VIX options are the exception. In fact, the majority of stock, exchange-traded fund, and index options are multiply-listed, as the industry likes to say. In other words, the contracts trade across a number of different exchanges at the same time.
In addition to the CBOE, 11 other exchanges compete for market share. The all-electronic International Securities Exchange (ISE) was launched in March 2006 and has become an important player in the space. The American Stock Exchange (AMEX), BATS Global Markets (BATS), and the Philadelphia Stock Exchange (PHLX) handle a good chunk of the options biz as well (see figure 1). The next layer to consider is how many exchanges does your brokerage interact with; TD Ameritrade, for instance, routes orders to nine options exchanges as of our publishing.
FIGURE 1: HOW THE COMPETITION STACKS UP. A snapshot of options volume totals by exchange for trading day March 18, 2015. Source: Options Clearing Corporation. For illustrative purposes only.
Each exchange believes it is unique, and some are launched to offer new technologies for faster and more efficient trading. While the CBOE maintains a hybrid market that includes both floor-based pits and electronic trading, the trend in recent years has been to offer fully automated trading for both simple and advanced options strategies. That’s another potential equalizer for investors large and small.
Individual investors generally need not worry about the increasing numbers of options exchanges and subsequent fragmentation (another big buzzword in options market politics). Once a buy or sell order is sent, it’s routed to the exchange to be executed at the best possible price. Customers can also manually route orders to the exchange of their choice with brokerage technology, including that at TD Ameritrade.
Given technological advances, as well as the wide range of new product offerings in the works all the time, some might even argue that there has never been a better time to add puts and calls to a diversified trading plan.
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