On Monday, October 1, Cboe plans to further expand the Russell 2000 Index (RUT) options marketplace by adding their listing to its BZX Options exchange. Options on the RUT currently are listed on Cboe Global Markets’ Options Exchanges (Cboe and C2), where market participants enjoy the advantages of trading RUT on a hybrid basis between Cboe’s electronic and open outcry markets. The additional BZX listing will expand the trading choices and capabilities of customers and liquidity providers.

BZX Exchange: Price-Time Trade Matching Algorithm:

Cboe’s BZX options exchange is an electronic market that automatically matches orders using a price-time trade-matching algorithm.  So what does this mean?  A price-time algorithm gives priority to an order based on a first-come, first-serve basis. The first active bid at the highest price is given priority over subsequent bids at the same price, and the first active offer at the lowest price is given priority over subsequent offers at the same price.

Cboe and C2 Exchanges: Pro-Rata Trade Matching Algorithm:

Alternatively, the electronically routed options orders coming to Cboe and C2 use a pro-rata trade matching algorithm when trades are made.  In other words, trades are allocated among those quotes and orders at the best bid/best offer prices based upon the relative size of each party’s order.

Example - RUT Price/Time vs Pro-Rata Trade Match:

Price-Time: Using the RUT Oct19 1725 call market as an example, the displayed market is 19.60 bid and 20.30 offer.  A new bid is entered 19.80 on 100 contracts becoming the best bid. This order takes priority and the price/time trade match algorithm must match sales against this order until a better bid comes in or until the full size of the order that established that bid is fulfilled.

Pro-Rata: To illustrate once again using the RUT Oct19 1725 call, the market is 19.60 bid and 20.30 offer.  A new bid is entered 19.80 for 100 contracts, becoming the best bid.  However, assume another 19.80 bid for 50 contracts joins that bid.  A sell order that is not large enough to fulfill both buy orders will instead partially fill against both, allocated 66% to the first and 33% to the latter, using a pro-rata matching algorithm.

As such, while the pro-rata matching algorithm creates an incentive to be at the best price with the most size, the price/time trade match algorithm creates an incentive to be FIRST at the best bid/offer, as offsetting trades must complete this order prior to any others at the same price.

Overview of RUT listing on BZX:

RUT listing on BZX will include the following:

  • RUT AM-settled (Standard) expiring 3rd Fridays
  • Single-leg orders (no complex orders)
  • Regular Trading Hours: Monday – Friday 8:30 a.m. to 3:15 p.m. (Chicago time)
  • All non-expiring RUT options will trade until 3:15 p.m. (Chicago time). The closing time for expiring RUT options is 3:15 p.m. (Chicago time) on the business day prior to the expiration day.
  • Settlement and Exercise is cash-settled to an AM-settlement with a European-style exercise.
  • The exercise settlement value, RLS, is calculated using the opening sales price in the primary market of each component security on the expiration date.
  • Expirations are the 3rd Friday of each month.
  • Minimum Price Increment for Orders: $0.05 under $3.00, and $0.10 above $3.00

Functionality Comparisons:

For additional information on the Russell 2000 Index options and Cboe’s BZX Options Exchange please visit the following sites:

Options on Russell 2000 Index: www.cboe.com/RUT

Cboe Options Exchanges: https://markets.cboe.com/us/options/overview/