A recent analysis of trends in U.S. options trading highlighted that some market participants may not be fully familiar with the diverse models utilized by the 17—soon to be 18—active options exchanges. Unlike the U.S. approach creates a more level playing field for retail investors and non-professionals by reducing the importance of speed and size. Because customer orders are typically smaller and cannot compete with larger broker-dealer orders, they are placed in a separate category. Many exchanges offering customer priority also provide price improvement auctions, such as the NYSE American CUBE, which allow market makers to guarantee retail orders an execution at or better than the NBBO.
Additional Priority Overlays
Various exchanges also permit market makers to trade against customer flow. This includes percentage-based allocation of order volume as well as specific rules that allow small orders to be executed entirely against designated market makers.
The table below outlines the current U.S. options exchanges and their primary attributes.
U.S. Equity Options exchange models
Group
Exchange
Allocation priority
Customer priority?
Pricing
Has complex book?
Has PI auction?
Has floor?
Has lead / primary market maker
NYSE
Arca
Price/Time
No
Make/Take
Yes
No
Yes
Yes
American
Pro-rata
Yes
Classic
Yes
Yes
Yes
Yes
Nasdaq
BX
Hybrid
Yes
Make/Take
No
Yes
No
Yes
GEMX
Pro-rata
Yes
Make/Take
No
Yes
No
Yes
ISE
Pro-rata
Yes
Hybrid Make/Take
Yes
Yes
No
Yes
MRX
Pro-rata
Yes
Make/Take
Yes
Yes
No
Yes
NOM
Price/Time
No
Make/Take
No
No
No
No
PHLX
Pro-rata
Yes
Classic
Yes
Yes
Yes
Yes
CBOE
BATS
Price/Time
No
Make/Take
No
No
No
No
C2
Pro-rata
No
Make/Take
Yes
No
No
No
CBOE
Pro-rata
Yes
Classic
Yes
Yes
Yes
Yes
EDGX
Pro-rata
Yes
Classic
Yes
Yes
No
Yes
MIAX
Emerald
Pro-rata
Yes
Make/Take
Yes
Yes
No
Yes
Miax
Pro-rata
Yes
Classic
Yes
Yes
No
Yes
Pearl
Price/Time
No
Make/Take
No
No
No
No
MEMX
MEMX
Price/Time
No
Make/Take
No
No
No
No
BOX
BOX
Hybrid
Yes
Hybrid Make/Take
Yes
Yes
Yes
No
1. This does not include options on futures, which trade on the various U.S. futures markets.
2. One exchange offers intraday auctions.
3. The Black-Scholes model only properly prices European options – options that can only be exercised on the day they expire, but modifications to the model allowed it to be applied to American options, which can be exercised at any time.
4. The NYSE joined the fray – much later – in 1984 but dropped out of options trading in 1997. The key figures of the NYSE options market were partners in the International Securities Exchange (ISE), which launched in 1997.
5. When the order cannot be allocated in whole numbers, the remaining contracts are usually allocated price/time. For example, in the above case, if there were 19 orders on the book, order 1 receives nine contracts, order 2 seven and order 3 just one. Then the remaining four contracts would be allocated based on the times the three orders were received.
6. Hybrid allocation priority means that some symbols are pro-rata and some are price/time. Hybrid pricing means there may be make/take, take/make pricing or a classic fee structure depending on the order type.
