Yet Another New Options Exchange

EDGX Options Excgange

Olive Crusher, ca 79 AD
Olive Press. ca 79 AD. Wikipedia

The new BATS options market, EDGX Options, went live, Nov 2, 2015. BATS already operates one options exchange (BZX Options), but this time they are going after a different piece of the options-trading business. There is a great deal of competition and the success of any new exchange is never guaranteed. The most recent options exchange to get started is the Miami Exchange (MIAX). It opened for trading three years ago and captured roughly 7% of the market for equity stock options (Oct 2015 data).

 The launch involved trading in only a few classes, but by the end of November, the exchange-listed options on more than 3,300 stocks.They recently claimed that 9% of the options market traded on this exchange. That's a very impressive beginning.

Risk management: Per their website, "BATS offers customers a suite of risk management tools designed to mitigate risk for customers, allowing us to keep markets safer. We believe that a multi-layered approach to risk management, with various risk checks in place both at the customer and exchange level through the life of an order, is fundamental to ensuring markets remain resilient." On a personal note, I want to emphasize my belief that carefully managing risk is essential for any trader who wants to earn money on a consistent basis.

It's unfortunate, but this new place to enter our option orders is not going to make any significant difference to us -- the retail options trader, unless the markets turn out to be very deep with narrow bid/ask spreads.

The exchange owner (BATS) promises that the markets will be very liquid, but I would not want to wager that the markets will be tight.

The one point that we can take away from the opening of this new exchange is that the options industry is a healthy and thriving business and that more big-time investors continue to invest their money in operating an exchange.

The CBOE (Chicago Board Options Exchange) is still the primary market-place for options trading -- when both index and stock options are counted. That is the result of the CBOE dominating the index option market (>98% of the volume) with its traded-on-only-one-exchange SPX  (options on the S&P 500 Index) options.

When it comes to stock options, several exchanges currently divide a significant piece of the trading pie: The Philadelphia Options Exchange (PHLX), ISE (International Securities Exchange), NYSE ARCA (the result of several mergers, including the New York Stock Exchange, Euronext, and the Archipelago Exchange) are three of the top exchanges. 

It will be very difficult for EDGX to take away much of their business.

Option Exchanges (as of Nov 2015)







ISE Gemini

MIAX Options

Nasdaq BX

Nasdaq NOM

Nasdaq PHLX

NYSE Amex Options

NYSE Arca Options 

A decent history of option trading can be found in The Options Playbook by Brian Overby. Although options trading can be traced back to biblical times with the the purchase and sale of options on oil presses (when you control the presses, you control the production of olive oil). However, modern option trading began early in the 17th century, when speculation in tulip bulbs was rampant.

Tulip options were used as a method for reducing the cost of an investment in those costly bulbs. In other words, options made it easier to speculate on the future price of those bulbs.

Once options became listed for trading on an exchange (The CBOE opened its doors in April 1973), trading volume has exploded to unanticipated levels. On its first day in business, the CBOE handled a volume of 911 call options (put options did not begin trading until 1977). Today, volume exceeds four billion contracts every year.