BOX Options Exchange LLC, owned by the operator of the Toronto Stock Exchange and seven brokers including Citadel LLC and Interactive Brokers Group Inc., filed to become a U.S. securities exchange.
TMX Group Inc. (X), which owns 53.8 percent of BOX, will limit its equity stake in the self-regulatory organization, the entity registered with the U.S. Securities and Exchange Commission that will operate the market, to 40 percent and its voting share to 20 percent, BOX Chief Executive Officer Anthony McCormick said in a phone interview. The Toronto company will continue to own the same portion of the BOX parent, he said.
The Boston-based electronic options exchange, introduced in 2004, accounted for 3.8 percent of trading last month in U.S. options on stocks and exchange-traded funds, according to data from Chicago-based OCC, which clears and settles all trades on U.S. equity derivatives exchanges. The new status would give BOX greater control over its own operations and allow it to streamline its transaction-services processes.
“There are efficiencies you can drive by running an SRO rather than renting an SRO,” McCormick said. “All the other exchanges have their own SROs. It’s problematic to be regulated by a competitor and it’s a status we’d hoped to achieve.”
BOX currently uses the exchange license of Nasdaq OMX BX, owned by New York-based Nasdaq OMX Group Inc. (NDAQ), to run its options market. The company has wanted to get its own license since at least 2008, McCormick said. One obstacle was the large ownership stake of Toronto-based TMX, he said, because regulators don’t want SROs to be more than 40 percent-owned by another exchange. There are nine options exchanges in the U.S.
The SEC must approve the filing, submitted on Dec. 28 and dated Jan. 26, for BOX to get its own exchange license. The commission asked for public comments on BOX’s plan.
BOX Holdings Group LLC will own and operate the options trading platform instead of the current BOX Options Exchange Group LLC, according to data supplied to the SEC. A board of mainly independent directors will eventually be named for the BOX self-regulatory organization, McCormick said. TMX may sell some of its equity interest in the BOX business to other brokers to attract more orders to the venue, he said.
The chairman for the company’s business is Peter Layton, chief executive officer of Tallgrass Group LLC. Tom Kloet, CEO of TMX Group, and Thomas Peterffy, chairman and CEO of Interactive Brokers (IBKR), the two largest shareholders, are on the board, along with two other executives from those companies.
Officials from Citadel, Citigroup Inc., Credit Suisse Group AG, JPMorgan Chase & Co., UBS AG and Morgan Stanley are board members, in addition to Will Easley, managing director of Aragon Solutions Ltd. and vice chairman of BOX. Easley’s company also has a stake in BOX. The 25-person company aims to hire more staff and offer jobs to some of the people at Nasdaq OMX who handle BOX’s regulatory affairs, McCormick said.
While BOX may consider an initial public offering of stock or sale “down the road,” that’s not currently in its plans, McCormick said. The company isn’t likely to introduce an equities exchange once it gets its license, he said.
“We want to operate an exchange that handles options on stocks and” exchange-traded funds, he said. “We’re interested in servicing the retail sector and giving retail customers greater price improvement. We don’t anticipate an equities exchange.”
The exchange restarted a program today charging customers 75 cents a contract instead of the previous 30 cents in certain options when they seek better prices through BOX’s so-called price-improvement auction, McCormick said. The SEC, which halted the initiative in September, said on Jan. 30 that BOX could begin a 13-month pilot program to test the pricing over objections from rival venues and market makers, who said 75 cents was too high and would hurt trading and participants.
BOX pioneered price-improvement auctions in 2004 to allow orders from customers to seek executions at higher levels than the best nationally available bid and lower than the best offer among venues. Most options exchanges followed BOX over the years with similar auction mechanisms.
The SEC said it approved the program despite criticism last year from Citadel, IMC Financial Markets and the International Securities Exchange, which asked the regulator to suspend the plan. The commission said data BOX provided didn’t show a “decline in the execution quality of orders” submitted to the auction, and its promise to give the agency quarterly reports from the pilot study would present brokers with information they didn’t previously have. That could affect their decisions about where to send customer orders to get the best overall executions for clients, the SEC said.
$600,000 in Savings
Christopher Nagy, managing director for order strategy at TD Ameritrade Holding Corp. in Omaha, Nebraska, told the SEC its customers saved more than $600,000 in August through executions in BOX’s price-improvement auction, according to a September letter it sent the agency. The retail broker urged the SEC not to suspend trading that month and in a subsequent letter said it “strongly supports” the BOX proposal.
The price-improvement auction on BOX has saved customers $367 million since it began in 2004, McCormick told the SEC in a letter dated Dec. 9. He added that he hopes to boost BOX’s share of equity options volume to between 4.5 percent and 5 percent by the end of this year.
“I’m hopeful it will go up,” he said. “We won’t get to 10 percent, but I hope we can add a percentage point or more.”
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