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CBOE Banks on Hybrid 2.0

After recently completing the rollout of its first Hybrid system, the Chicago Board Options Exchange (CBOE) is rolling out the second phase of its hybrid market.

Advanced Trading Spring 2005After recently completing the rollout of its first Hybrid system, the Chicago Board Options Exchange (CBOE) is rolling out the second phase of its hybrid market. Hybrid 2.0. will expand the Hybrid system, which currently includes 1,600 options and 25 indexes, to include electronic designated primary market makers that are able to stream their quotes from remote locations and trade through the system. Approval from the SEC to add remote market makers is expected in the first quarter.

CBOE officials say the exchange's Hybrid initiative has resulted in tighter bid-asked spreads and larger order sizes, and that CBOE is now on the national best bid and offer (NBBO) 91 percent of the time in equity options that trade on Hybrid 2.0 classes.

According to the CBOE, 82 percent of all of its equity orders are executed electronically, which amounts to 46 percent of its order flow. The remainder of its order flow (54 percent) is executed via the traditional floor in open outcry.

"I predict [electronic order flow] will go up as we add more spread technology," William Brodsky, the CBOE's chairman and CEO, told attendees at a luncheon in New York in January. An option spread trade involves the purchase and sale of options within the same class (e.g., buying the IBM Jan. 80s series and selling the IBM Jan. 90s series). Currently, spread orders are routed electronically to the CBOE, but they are traded in open outcry. In the future, CBOE will add functionality to allow both legs of a spread order to sit in the electronic order book; Hybrid will scan the market continuously to see if it can execute a trade electronically. Firms still will have the option to trade via open outcry.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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