What Is the Boston Options Exchange (BOX)?

The term Boston Options Exchange (BOX) refers to a derivatives exchange owned and operated by the TMX Group. The exchange is automated and is located in Boston. Established in 2002, trading on the BOX commenced in February 2004. The exchange started as a joint effort by the Montreal Exchange, Boston Stock Exchange, and Interactive Brokers Group to provide an alternative to existing options markets. The exchange is now called the BOX Exchange.

Key Takeaways

  • The Boston Options Exchange is a derivatives exchange owned and operated by the TMX Group.
  • Established in 2002, trading began on the exchange in 2004.
  • BOX was the first options exchange to offer price improvement to traders through a process called price improvement period.
  • The exchange sends out the five best bids and offers on each option, providing participants with anonymity and transparency.

How the Boston Options Exchange (BOX) Works

The BOX Exchange is an automated exchange that offers investors trading on more than 2.000 option classes. It was created as the Bostons Options Exchange in 2002—a result of the partnership between the Montreal Exchange, the Boston Stock Exchange, and Interactive Brokers Group. The aim was to provide investors with another way to trade options on the open market. Trading officially began on the exchange on Feb. 6, 2004. Technical operations are handled by the TMX Group, which is now the parent company of the Montreal Exchange. The name was changed to BOX Exchange in 2018.

BOX was the first options exchange to offer price improvement to traders through a process called price improvement period or PIP. Although all investors can be PIPed, they must have brokers that are willing and able to offer a facilitation trade. Because not all brokers offer this to their clients, some investors do not have access to the price improvement offered on the BOX.

It provides options trading. Vanilla options, such as puts and calls, give the holder the right, but not the obligation to sell or buy the underlying asset at a specified price—called the strike price—before the option expires. In their most basic functions, puts are used to hedge a long position or to speculate on the price decline of the underlying asset. Calls are used to speculate on the price rise of an underlying asset or to hedge short positions.

The exchange sends out the five best bids and offers on each option, with anonymity and transparency to its participants. Traders can also utilize complex orders for advanced strategies. Participants can also tailor their risk management strategy by contacting BOX. Each firm can set their own risk parameters to meet their individual needs.

Special Considerations

The BOX Exchange tries to bring new innovation to the options market. In addition to PIP, the exchange also uses a price/time priority algorithm to match orders, with all participants treated equally. It gives traders low-cost access to trading, where participants do not require an equity membership to trade on the exchange. Participants are broker-dealers, who can then offer BOX trading to their clients. Participants benefit from low-latency trades on an automated trading system. Market makers provide liquidity in the various options.

Orders of 500 contracts or more are executed against other large orders on the BOX Exchange so they don't affect the regular bid and ask process.

Large traders who trade 500 contracts or more are able to access block order auctions. These allow large orders to execute against other large orders, without affecting the regular bid and offer process. This helps avoid erratic price swings, as a large order could significantly impact the bid or ask price if it is not matched to a block order with a similar size.