Boston Options Exchange (BOX), electronic price improvement

The Boston Options Exchange (BOX), co-founded by the Boston Stock Exchange, the Montreal Exchange and Interactive Brokers Group, began its rollout in February 2004 to become the 6th U.S. options exchange.

BOX, the second U.S. electronic options exchange, has since attracted other investors: Credit Suisse First Boston, JP Morgan, Salomon Smith Barney, UBS Warburg and most recently Citadel Investment.

BOX introduced a unique feature: the price-improvement period or PIP, a three-second auction that allows brokers to improve the price of their orders by at least one penny above the national best bid/offer. It was an important development in options trading, while moves in nickel and dime increments. Although controversial at first, the PIP has led the ISE to propose a similar price-improvement facility.

Another key feature of BOX is that it does not have a specialist system or barrier of entry. Instead, multiple market-makers compete for orders. BOX, which does not offer payment for order flow, has captured a 5 percent market share of U.S. equity options.

Its competing market-maker system helped the young exchange capture a substantial market share in newly launched and multiply listed options on the “Spiders,” the exchange-traded fund (ETF) that tracks the S&P 500 index.