Where Do Options Trade?
July 18, 2006
The beginnings of organized options trading can be traced back to the early 1970s. Prior to that time, option quotes were simply listed in newspapers by put and call dealers. It was an unorganized, unregulated, and inefficient system. In 1973, however, the Chicago Board Options Exchange [CBOE] developed the first organized marketplace for stock options. Since the inception of that first exchange, five others have entered the scene and the number of options traded each year has skyrocketed. For instance, in 1974, a total of 5.7 million option contracts traded during that entire year. According to the Options Clearing Corporation [OCC], in the year 2005, more than 1.37 billion puts and calls traded hands.
Indeed, since the inception of the first options exchange in 1973 a lot has changed. Today, six separate options exchanges match buyers and sellers. Although the CBOE is the oldest, and still the largest, five other options exchanges are in competition with the exchange. The American Stock Exchange [AMEX], the Philadelphia Stock Exchange [PHLX], and NYSE ARCA (formerly known as the Pacific Stock Exchange [PCX]) also offer options trading today.
The two newest options exchange are the Boston Options Exchange [BOX] and the International Securities Exchange [ISE]. The BOX is an electronic exchange that started trading options in February 2004. Launched in May 2000, the ISE was the first new US-based exchange in more than 25 years. In addition, ISE represented the first all electronic options market. Like the BOX, it does not have a trading floor, but offers members screen-based trading. The exchange has been growing steadily since its inception and is now the largest US exchange for trading puts and calls.
Prior to August 1999, near the time when ISE announced its existence, specific stock options traded on only one exchange. For example, the option strategist looking to buy calls on Dell Computer (DELL) would have no choice but to send (through a broker) the order to the Chicago Board Option Exchange. From that point forward, however, stock options started trading on multiple exchanges. For example, today, options on Dell Computer trade on all six exchanges. When options on a particular stock trade on more than one options exchange, it is said to have “multiple listing.”
Ultimately, option strategists have no contact with the options exchanges. Once an order is submitted to the broker, it is out of the option trader’s hands. The broker selects where to send the order. At the same time, however, since an option can trade on as many as six separate exchanges, one option contract can have five different price quotes. For instance, the bids and offers for DELL options might be different on the American Stock Exchange than on the PHLX.
Theoretically, the broker will send the order to the exchange displaying the best prices. Unfortunately, this does not always happen. Therefore, although option orders are entered through a broker, and not the exchange itself, it is still worthwhile to check quotes across all exchanges to verify that the broker is shopping for the best possible prices. In addition, many brokerage firms now offer direct access to the options market, which allows traders to direct the order to a particular exchange. If you trade often and can watch the market throughout the day, the ability to route orders to the best market might be a feature worth looking into.
Frederic Ruffy
Senior Writer
Optionetics.com ~ Your Options Education Site
Exchanges:
American Stock Exchange, Inc.
86 Trinity Place
New York, New York 10006
(212) 306-1452
www.amex.com
Boston Options Exchange
(866) 768-8845
www.bostonoptions.com
Boston Stock Exchange, Inc.
One Boston Place
Boston, MA 02108
(617) 723-9500
www.bostonstock.com
Chicago Board Options Exchange, Inc.
400 LaSalle Street
Chicago, IL 60605
(312) 786-7705
www.cboe.com
Chicago Stock Exchange, Inc.
400 LaSalle Street
Chicago, IL 60605
(312) 663-2222
www.chicagostockex.com
Cincinnati Stock Exchange, Inc.
205 Dixie Terminal Bldg.
Cincinnati, OH 45202
(513) 621-1410
www.cincinnatistock.com
International Securities Exchange
60 Broad Street
New York, NY 10004
(212) 943-2400
www.iseoptions.com
Nasdaq Stock Market
One Liberty Plaza
165 Broadway
New York, NY 10006
www.nasdaq.com
NYSE Arca
(Formerly Pacific Stock Exchange)
301 Pine Street
San Francisco, CA 94104
(415) 393-4000
www.arhipelago.com
New York Stock Exchange
20 Broad Street
New York, NY 10005
(212) 656-3000
www.nyse.com
Philadelphia Stock Exchange, Inc.
1900 Market Street
Philadelphia, PA 19103
(215) 496-5000
www.phlx.com
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