International Option Exchanges
Options exchanges are primarily responsible for providing a location and framework for the trading of standardized options contracts. It is the physical or virtual marketplace for the trading of options. Very often, such options are traded on exchange along with futures and other derivatives. Such option exchanges manage their trading in a similar manner as a stock exchange handles its bondsBondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually. and stocks.
Some of the popular International Option Exchanges are:
- #1 – Chicago Board Options Exchange (CBOE)
- #2 – Boston Options Exchange
- #3 – Montreal Stock Exchange
- #4 – Eurex Exchange
- #5 – NYSE Arca
- #6 – International Securities Exchange (ISE)
#1 – Chicago Board Options Exchange (CBOE)
Established in 1973, the CBOE is an international option exchange that concentrates on options contract for individual equities, interest rates, and other indexes. It is the world’s largest options market and includes the majority of the options traded. It is also considered a market leader in the development of new financial products and technological innovation, especially with electronic trading.
Trading on this exchange is executed through their Hybrid system enabling the customers to trade – either electronically or the erstwhile Open Outcry method. This method is a traditional one involving shouting and the use of hand signals to transfer information, especially about buy and sell orders. Most of the trades are executed electronically, which constitutes a very large portion of their business through some of the large and complex institutional orders requiring the skill of the floor brokers are executed with the open outcry method. This is to gain potential price movement.
The CBOE designed its volatility index for creating volatility products. VIX is the ticker symbolTicker SymbolTicker Symbol is the use of letters to represent shares that are traded on the stock market. It is mainly a combination of two or three alphabets that is unique and easy for investors to identify and buy/sell that particular stock. for the CBOE Volatility Index. It shows the market’s expectation of 30-day volatility. It is composed using the implied volatilities for a wide range of S&P 500 index options Index OptionsIndex option refers to a financial derivative instrument that tracks the performance of an underlying index like DJX. The holder of this instrument bears the to exchange it for a predetermined exercise price at a future date but isn't obliged to do so.. Such volatility is calculated from both call and put optionsPut OptionsPut Option is a financial instrument that gives the buyer the right to sell the option anytime before the date of contract expiration at a pre-specified price called strike price. It protects the underlying asset from any downfall of the underlying asset anticipated. and is used as a measure of market risk.
The movements of the VIX significantly depend on market reactions. For instance, on June 13, 2016, VIX climbed in excess of 23%, closing at a high of 20.97, which indicated its highest level in over a time period of 90 days. The spike in the VIX occurred due to the global sell-off of the US equity trades. This was an indication to the investors around the globe that there was uncertainty in the market and thus decided to take the gains or realize the losses, which caused a greater aggregate equity supply and reduced demand and, in turn, increasing market volatility.
This exchange is also very popular for allowing the investors to practice their trades before they can be placed so their individual strategies can be tested without risks. Some of the key features of their virtual trading platforms are:
- Virtual Trade Stocks, Options, Spreads, Straddles and Covered call trades (also, see Options Trading)
- Experimentation with advanced order strategies like Triggers and One-cancels-other (OCO)
- We are availing the quotes at any time from any of the screens using the integrated quote window.
- Analysis of the performance by making a download of the existing positions.
- Live chat support availability for regular guidance at any point
#2 – Boston Options Exchange
Also known as BOX Options Exchange, it is an automated exchange owned and operated by TMX Group, which is a Public financial services company operating out of Canada. As an equity options market, it provides services of matching electronic orders to the traders and stockbrokers.
This exchange offers options derivatives on around 1500 different securities. It generates orders which are completely tradable and also offers multiple competing market makersMarket MakersMarket makers are the financial institution and investment banks which ensures enough amount of liquidity in the market by maintaining enough trading volume in the market so that trading can be done without any problem.. It also provides SOLA, which is a popular trading platform that matches or improves prices of options contracts and gives responses to orders in less than 20 milliseconds.
This exchange was the first one to offer the movement of the prices to the traders through a process called PIP (Price Improvement Period). The investor is required to have a broker who is willing and able to offer a facilitation trade – a trade in which the broker guarantees the first penny of the movement in the price. It is to be noted that only investors whose brokers offer this service can have access to the PIP.
A key feature of the BOX market is the PIP auction, which is a patented automated trading mechanism permitting the brokers to seek and improve executable client orders. The participant executing agency orders as Order Flow Providers (OFP’s) and desiring to improve the client’s price by taking the opposite side as Principal signal. This intent to the market is placed with the help of a special order message submitted to the BOX trading exchange. Market makers in the class, as well as other trading participants, can then compete for their orders by offering a better price. At the end of a very short period, the client-side of the trade is matched with the best available prices.
#3 – Montreal Stock Exchange
It is a derivatives exchange located in Montreal (Canada), which trades in Futures contracts and options on equities, indices, currencies, ETF’s, Interest rates, and Energy stocks. It is also known as MX (Bourse de Montréal, formerly Montreal Stock Exchange (MSE)).
The equity options trading on this exchange covers most of the larger Canada traded firms but is not as broad-based as the US options markets. The interest rate derivatives cover the short-term acceptances of the bankers, which include the overnight rate till the 3-month rate and 2 and 10 year Canadian Government Bonds.
The three most attractive individual products of the exchange are:
- S&P Canada 60 Index Futures (SFX)
- Three months of Canadian Bankers’ Acceptance Futures (BAX)
- Ten year Government of Canada Bond Futures (CGB)
In 2007, Montreal added 30 year Government bonds. It also introduced a new futures product based on the performance of FTSE Emerging markets in 2014. The exchange also introduced a licensing agreement for the exchange and also the Canadian Derivatives Clearing Corporation (CDCC) for offering the trading and clearing of Canadian Dollar swap futures and options.
The MX Clearing House and the CDCC provide central counterparty clearing services to its participants. It holds the top investment rating and a very established reputation. The CDCC has also completed regulatory rule changes allowing the clearing house to offer risk management services in partnership with the OTC marketOTC MarketOTC markets are the markets where trading of financial securities such as commodities, currencies, stocks, and other non-financial trading instruments takes place over the counter (instead of a recognized stock exchange), directly between the two parties involved, with or without the help of private securities dealers..
The Market Data services of the MX manage the sale and distribution of market data. It also certifies the vendors on board and establishes internal and external distribution and subscription fee policies for real-time and delayed market information. The market data is available in the following forms:
- Real-Time/Immediate basis
- Delayed basis of a minimum of 15 minutes
- End of Day Summary basis
#4 – Eurex Exchange
It is an international exchange which is prominent in the trading of European based derivatives and its largest European Options and Futures Markets. It is located in Eschborn, which is located near Frankfurt (Germany). This exchange deals in a wide variety of products ranging from Swiss and German debt instrumentsDebt InstrumentsDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans., European stocks, and various other stock indexes. All the transactions executed on this exchange are cleared through the Eurex Clearing, which operates as a Central Counterparty (CCP) for multiple asset class clearing of the above-mentioned products as well as the OTC products.
This exchange is ranked as the world’s third-largest derivatives exchange by volume of contracts and has nine worldwide branch offices.
The open outcry style of trading was a preferred method during the 1990s, and this exchange was one of the first to offer a fully electronic trading platform in comparison to other traditional platforms. It had introduced the T7 trading architecture, which is a reliable and robust trading system establishing a connection between buyers and sellers across 35 countries. This also led to the speedier execution of trade without personal interaction of the parties with the capacity to trade more than 7 million contracts per day.
Eurex has a low cost and open electronic access system providing an integrated and automated joint Clearing House. Their listed futures covers a large number of international benchmark products, such as the most liquid fixed income marketsFixed Income MarketsFixed Income Market is where fixed income securities like government bonds, corporate bonds and treasury bills are traded. In his market, the investors receive a regular income, whether on a monthly, quarterly, half-yearly or yearly basis, and repayment of principal amount on maturity. around the globe. Some of the products offered by this exchange are:
- Interest Rate DerivativesInterest Rate DerivativesInterest rate derivatives are the financial instruments that track the fluctuations of the underlying interest rates. These underlying interest-bearing assets can be a single interest rate or a bunch of different interest rates. (Euro Bond Futures)
- Equity DerivativesEquity DerivativesEquity Derivative is a class of derivatives whose value is connected to the price variations of the underlying asset & it is generally used for hedging risk or speculating moves in indexes. It has 4 major types, i.e., Forwards & Futures, Options, Warrants, & Swaps. (Equity Options and Single Stock Futures based on European, US, or Brazilian holdings)
- Equity Index Derivatives
- Equity Index Dividend derivatives
- Volatility Index Derivatives
- ETF Derivatives
- Credit Derivatives
- Commodity DerivativesCommodity DerivativesCommodity derivatives refer to those financial instruments that use the price or price volatility of the underlying commodities as the base for change in their price to amplify, hedge, or invert, in a way that the investors can track these underlying assets' performance. It includes commodity futures and commodity swaps.
- Inflation & Property Derivatives
- Weather Derivatives
Eurex Bonds is an ECN (Electronic Communications Network) for the purpose of wholesale trading, especially in fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments. securities and Treasury discount papers. The trading of these Eurex bonds provides a direct link between the futures market and cash market, enabling electronic basis trading with the help of a central order book.
Eurex Repo is a separate segment in the electronic trading solution for Repos. This segment is one of the leading electronic repo market providers and operates the Swiss Franc and Euro Repo Markets. It offers the entire value chain from Trading to Clearing & Settlement.
The participation in the Eurex Repo Market and Eurex Bonds is generally open to all the banks and financial service providers. These participants are subject to their country of domicile and the financial market supervisory authority for trading purposes. For private investors, Eurex repo is an interbank market, and hence trading facility is not available.
#5 – NYSE Arca
This is a popular international stock exchange for the trading of stocks and options owned by the International Exchange with its headquarters in Chicago. It was initially known as the Archipelago Exchange. The 2006 Merger of the Archipelago Holdings and the NYSE formed a new Parent Company or holding companyParent Company Or Holding CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies. known as the NYSE Group. This was a publicly-traded, profit-oriented organization combining traditional open outcry methods with electronic trading to form a hybrid system. Thus, NYSE Arca comprises NYSE Arca Equities for the trading of exchange-listed equity securities and the NYSE Arca options for the trading of equity options.
The NYSA Arca options offer a trading platform that blends a traditional open outcry trading floor Trading Floor Trading Floor is a place where traders buy and sell shares, fixed income securities, commodities, foreign exchange, bonds, options, etc. It is the market segment in which dealers trade financial instruments in various exchanges, for example, Bombay Stock Exchange (BSE) and the New York Stock Exchange (NYSE).with electronic trading technology, offering to trade in options contracts on Domestic stocks, American Depository Receipts (ADRs), broad-based industry and sector indices, and also exchange-traded products (ETPs).
NYSE Arca Options offers a time-price priority trading model and an anonymous, flat, and open market structure. The exchange operates a maker/taker pricing model, charging a fee for liquidity-removing trades and providing a rebate for liquidity-adding transactions. Trades are guaranteed, centrally cleared, and margined by the Options Clearing Corporation (OCC). Their liquidity fee/rebate structure is similar to other electronic communication networks whereby charges for removing liquidity from their books are $3 per 1000 shares, and the addition of liquidity is $2 for every 1000 shares.
#6 – International Securities Exchange (ISE)
This is a wholly-owned subsidiaryA Wholly-owned SubsidiaryWhen a company’s almost all of the outstanding shares are owned by another company (parent) then it can be said that it is a wholly-owned subsidiary of that company and it is controlled by the parent company. For example, Walt Disney Entertainment owns 100% of Marvel Entertainment which produces movies. of American multinational financial services corporation NASDAQ, Inc. It was acquired in 2016 for $1.1billion, becoming a publicly-traded companyBecoming A Publicly-traded CompanyPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market.. It is also a member of the Options Clearing Corporation (OCC) and the Options Industry Council (OIC). It was launched as the initial fully electronic options exchange in the US. It developed a unique market structure for advanced screen-based trading. It also offers equity and index options, including proprietary index products, as well as FX options based on foreign currency pairs. ISE also offers market data tools designed for sophisticated investors seeking information on investor sentiment, volatility, and other data for options. The ISE operates 3 US options exchanges, namely:
- ISE Gemini
- ISE Mercury