The CBOE functions in many ways, exactly like other exchanges, except it has one major difference. The CBOE does not use a specialist system like the one used on all other exchanges. The specialist system requires that the specialist member maintain a fair and orderly market in the security in which they specialize and that they buy and sell for their own account. However, on the CBOE, the duty of maintaining a fair and orderly market is given to an exchange employee known as an order book official. The personnel trading on the options floors are:
- An Order Book Official or Specialist
- A Market Maker / Registered Option Trader / Local/ Designated Primary Market Maker
- Spread Broker
- Commission House Broker
- $2 Broker
Order Book Official / Board Broker
The Order book official on the CBOE is an employee of the exchange who maintains a fair and orderly market for the options they are assigned. The order book official also maintains a book of limit and stop orders left with them and will execute them when the order’s conditions are met. The order book official may only accept orders left with them by members for the account of public customers. Member firms may not leave orders for the official to execute for the member’s own account. The order book official may not trade for their own account or be associated with a member firm. A board broker is an exchange member who has been appointed to maintain a fair and orderly market in options.
The specialist is a member of any other option exchange that is required to maintain a fair and orderly market for the options in which they specialize. The specialist is required to buy and sell from their own account in absence of public orders and must execute stop and limit orders left with them. Specialists, unlike order book officials, are members of the exchange not employees of the exchange and, unlike order book officials, are required to trade for their own account.
Designated Primary Market Makers
An option market maker / designated primary market maker is an individual member of the exchange who is required to maintain a two-sided market in the options they trade. A two-sided market consists of both a bid and an offer. An options market maker must display a two-sided market at all times. An options market maker may also be called a registered options trader or a local. These members trade for their own profit and loss. Option market makers must meet the financial requirements of the exchange and qualify through examination to be a member of the exchange. Market makers are also required to register in the options they trade and may not be affiliates with the option’s board broker in the options they trade. The main function of the market maker in the market place is to improve liquidity and to narrow option spreads.
Commission House Broker
A commission house broker is an employee of a member organization and will execute orders for the member’s customers and for the member’s own account.
Two Dollar Broker
A two-dollar broker is an independent member who will execute orders for commission house brokers when they are too busy managing other orders. A floor broker may not accept an order directly from a public customer unless they are registered and approved by the exchange to do so.
A spread broker is an independent member who specializes in executing multiple option orders such as spreads and straddles for a fee.
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