What IS CFLEX?

CFLEX is an electronic trading platform for customized options, run by the Chicago Board Options Exchange (CBOE) since 2007. It allows traders to trade options with customizable variables automatically electronically and anonymously instead of having to handle each trade by hand because of the unique terms of each option.

CFLEX is an extension of CBOE's flexible options exchange (FLEX) system for entering into and reporting non-standard options positions on the exchange floor.

Key Takeaways

  • CFLEX is an electronic system for entering and reporting non-standard options trades.
  • These customized options contracts do not have regular quote streams but publish quotes by request.
  • Launched in 2007 by the CBOE, CFLEX is a technological upgrade to its existing FLEX system.

Understanding CFLEX

CFLEX is operated by the CBOE, a premier options exchange that began in 1973 and was the first marketplace for traders and investors to trade derivative securities that were listed on the exchange. In 1993, CBOEcreated its FLexible EXchange (FLEX) options product, with the ability to choose one's own particular terms in an options trade. Before FLEX, all customized options trades had to be performed manually and over the counter (OTC) because they were non-standardized and each has its own unique terms. Aside from allowing both the buyer and seller to customize contract terms to their liking, FLEX options provide other benefits. These benefits include protection from counterparty risk associated with over-the-counter trading. Trades are guaranteed by the Options Clearing Corporation (OCC) as are other exchange-traded options.

CFLEX allows traders to trade complicated options easily and simply through the internet. To trade through CFLEX, a trader needs to sign a user agreement with CFLEX and then begin trading using the internet-based platform either as a browser-based application or as an internet API. CFLEX offers traders the ability to trade anonymously in real time with a price-time matching algorithm and live order books. It also hosts a secondary market to change terms or cancel out an order with another order, a feature that serves the function of closing a position, but for options, which sometimes cannot technically be closed the way stocks can.

Customizing Options Contracts

Options are a type of derivatives contract because they are derived from direct securities such as stocks and bonds. You buy or sell a direct security outright. Buying a derivative gives you the right, but not the obligation, to buy or sell a direct security at a certain time for a certain amount, and selling a derivative sells your right to do the same. Derivatives contracts have details that are are far more complex than a simple bid price or ask price for traditional assets like stocks. Exchange-traded options are standardized in these respects to maintain efficient and transparent trading.

Selling options with customized details required processing each sale manually, because it required finding a buyer, in some cases finding a seller, and matching all these custom details. When some options became listed on the exchange with standardized details, they were able to be traded electronically. However, technology and the imaginations of options traders didn't catch up with the possibility of using electronic trading to trade customized options until 2007.