Price Improvement

A key feature of the BOX market is the Price Improvement Period (PIP) auction, an automated trading mechanism (patent pending) which permits brokers to seek to improve executable client orders. BOX Participants executing agency orders as Order Flow Providers (OFPs) and wishing to improve the client’s price by taking the other side as principal signal this intent to the BOX market-place via a special order message submitted to the BOX trading engine; market makers on the class as well as other BOX trading Participants can then compete for this order by bettering the price. At the end of a very short period, the client side of the trade is matched with the best prices available.

The starting price for the PIP must be better than or equal to the National Best Bid and Offer (NBBO). Any request to initiate a PIP at a price below the NBBO is rejected by the BOX trading engine.

Furthermore, as the order entered by the OFP to better his client's execution price cannot be cancelled during the PIP and must be for the entire quantity of his customer's order, the customer’s order is guaranteed an execution price at least equal to the NBBO.

Once the BOX trading engine receives a request to initiate a PIP from an OFP and it is determined to be valid against NBBO, a message is broadcast to all BOX Participants. This message includes the instrument code (e.g., a September Call on XYZ with a strike of 35), the quantity and side of the market (i.e., buy or sell) of the customer order ("PIP Order"), the initial price, and the time at which the PIP will terminate.

During the PIP, the price increment for Improvement Orders is one cent. Note, however, that in the PIP, the penny increment is available only to:

• Market Makers
• The Participant who has initiated the PIP
• Improvement Orders on behalf of Customers

The PIP auction runs for one second. During the auction, any BOX trading Participant may enter orders. The PIP is not a separate auction, but is fully integrated into the BOX Book for the series to be traded.

Given this relatively rapid time frame, it is expected that the vast majority of PIP competing orders will be managed by automated processes which have been configured to monitor and respond to PIP Orders. Extensive testing indicates that the BOX trading engine processing times and the comparable cycle on trading Participants' systems allows for a large number of iterations during the one second PIP.

At the conclusion of the PIP, the PIP Order is matched on a price and time priority basis with the orders on the opposite side of the market (the "Improvement Orders"). There are, however, several exceptions to time priority which are described in greater detail below. These are exceptions to time priority only, not price priority, and therefore have no effect on the final price of the PIP Order. These are described in greater detail in Description of Price Improvement Period.

To facilitate communication between a BOX Participant wishing to offer price improvement to his clients but unable, himself, to take the contra side of a PIP Order, BOX has implemented a functionality called "Directed Orders". This allows one BOX Participant to direct an order to a BOX Market Maker, electronically, with the receiving party eventually initiating a PIP.

For information regarding actual price improvement trades, click here.

There is a patent pending regarding the PIP.