Boston Options Exchange Price Improvement Period
In order for a customer order to be "PIPed," the customer's agent/broker must be able to present the order to BOX with the first penny of improvement guaranteed by the agent/broker himself. In other words, the agent/dealer must present BOX with a "facilitation trade" via the PIP mechanism prior to BOX initiating a PIP auction. If no other BOX participant is willing to offer further improvement during the three-second PIP auction, the customer order trades against the contra order provided by the agent/broker at the initiation of the PIP.
However, not all options investors are clients of brokers who are able to provide this service because it does require proprietary trading ability. BOX put into place structures that let investors gain access to the PIP.
Agents/broker-dealers and the PIP broker-dealers who wish to offer their clients access to the PIP, but are unable themselves to take the counterparty side of the trade necessary to initiate a PIP, can use the BOX "Directed Order" functionality. It allows any BOX participant to instruct BOX to route his orders to any BOX market maker or other BOX participant for possible submission to the PIP.
This simple procedure means that the PIP is accessible to all options investors. When a broker-dealer decides to route an order to another BOX participant willing, in some cases, to offer price improvement, BOX ensures that the customer order's interests are taken into account since:
- The receiving BOX participant (generally a BOX market maker) has three seconds to either initiate a PIP or decline.
- If he declines (or times out), any order the receiving BOX participant has in the market on that instrument is "frozen" and will be used to facilitate the customer order at the National Best Bid and Offer (NBBO).