Chicago Board Options Exchange: Explained | TIOmarkets
BY TIO Staff
|June 27, 2024The Chicago Board Options Exchange (CBOE) is a leading exchange platform in the United States, primarily known for its trading in options contracts and volatility products. Established in 1973 by the Chicago Board of Trade (CBOT), the CBOE was the first marketplace for trading standardized options contracts. Over the years, it has evolved into a multi-asset class exchange platform, offering a wide range of products including equity options, index options, exchange-traded funds (ETFs), and volatility products.
The CBOE operates under the holding company CBOE Global Markets, which also owns the stock exchange operator BATS Global Markets. The CBOE is regulated by the Securities and Exchange Commission (SEC) and its operations are overseen by the Options Clearing Corporation (OCC). The CBOE's trading platform is fully electronic and it provides a transparent, efficient, and liquid marketplace for traders and investors.
History of the Chicago Board Options Exchange
The CBOE was established in 1973 by the Chicago Board of Trade (CBOT), one of the oldest futures and options exchanges in the world. The CBOT created the CBOE to provide a marketplace for trading standardized options contracts, which were a relatively new financial instrument at the time. The CBOE was the first exchange of its kind and it played a crucial role in the development and popularization of options trading.
In the early years, the CBOE only offered call options contracts. However, it quickly expanded its product offerings to include put options contracts in 1977. In 1983, the CBOE introduced the CBOE Volatility Index (VIX), a popular measure of market volatility. The CBOE continued to innovate and expand its product offerings over the years, introducing index options, ETF options, and volatility products.
Transition to Electronic Trading
The CBOE started as a traditional open outcry exchange, where traders would shout their buy and sell orders in a trading pit. However, with the advent of technology, the CBOE began transitioning to electronic trading in the late 1990s. The transition was completed in 2003 when the CBOE launched its fully electronic trading platform, CBOEdirect.
CBOEdirect was a major milestone for the CBOE as it allowed for faster and more efficient trading. The platform also enabled the CBOE to expand its operations and reach a larger number of traders and investors. Today, all trading on the CBOE is conducted electronically through CBOEdirect.
Products Traded on the Chicago Board Options Exchange
The CBOE offers a wide range of products for trading, including equity options, index options, ETF options, and volatility products. These products provide traders and investors with a variety of ways to speculate on the direction of the markets, hedge their portfolios, and generate income.
Equity options are options contracts on individual stocks. They give the holder the right, but not the obligation, to buy or sell the underlying stock at a specified price before a certain date. Index options are similar to equity options, but they are based on stock indices like the S&P 500 or the Dow Jones Industrial Average. ETF options are options contracts on exchange-traded funds, which are investment funds that trade on stock exchanges.
Volatility Products
One of the unique product offerings of the CBOE is its volatility products. The most well-known of these is the CBOE Volatility Index (VIX), which is a measure of expected market volatility. The VIX is often referred to as the "fear gauge" because it tends to rise when investors are uncertain or fearful about the future direction of the markets.
The CBOE offers several products based on the VIX, including VIX options and futures. These products allow traders to speculate on the direction of market volatility or to hedge their portfolios against volatility risk. The CBOE's volatility products are widely used by institutional investors, hedge funds, and other sophisticated traders.
Regulation and Oversight of the Chicago Board Options Exchange
The CBOE is regulated by the Securities and Exchange Commission (SEC), the main regulatory body for securities exchanges in the United States. The SEC oversees the operations of the CBOE and ensures that it complies with all applicable laws and regulations. The SEC also reviews and approves any new products or services that the CBOE wishes to offer.
In addition to the SEC, the CBOE's operations are overseen by the Options Clearing Corporation (OCC). The OCC is the world's largest equity derivatives clearing organization and it provides central counterparty clearing and settlement services for the CBOE. The OCC guarantees the performance of every options contract traded on the CBOE, ensuring that all trades are settled in a timely and efficient manner.
Market Surveillance and Compliance
The CBOE has a robust market surveillance and compliance program to ensure the integrity of its marketplace. The CBOE's Market Regulation Department monitors trading activity on the exchange to detect and prevent potential market manipulation or other fraudulent activities. The department uses advanced surveillance technology and employs a team of experienced market regulators to carry out its mission.
The CBOE also has a comprehensive compliance program to ensure that its members comply with all applicable rules and regulations. The CBOE's Compliance Department provides guidance and education to members on compliance matters and conducts regular audits to ensure compliance.
Membership and Access to the Chicago Board Options Exchange
Access to the CBOE's trading platform is available to both individual and institutional traders. However, to trade on the CBOE, one must be a member of the exchange or trade through a member firm. The CBOE offers several types of memberships, including trading permit holder (TPH) memberships and market-maker memberships.
TPH memberships allow individuals or firms to trade on the CBOE's platform. Market-maker memberships allow individuals or firms to act as market makers on the CBOE, providing liquidity to the market by continuously offering to buy and sell contracts at specified prices.
Trading on the CBOE
Trading on the CBOE is conducted electronically through its trading platform, CBOEdirect. The platform provides a transparent and efficient marketplace for trading options contracts and other products. Traders can access the platform through a variety of interfaces, including web-based platforms and direct market access (DMA) systems.
The CBOE's trading hours are from 8:30 a.m. to 3:15 p.m. Central Time, Monday through Friday. The CBOE also offers extended trading hours for certain products, allowing traders to react to market events outside of regular trading hours.
Impact of the Chicago Board Options Exchange on the Trading Industry
The CBOE has had a significant impact on the trading industry since its establishment in 1973. As the first exchange to offer standardized options contracts, the CBOE played a crucial role in the development and popularization of options trading. Today, options trading is a major part of the financial markets, with millions of contracts traded daily on exchanges around the world.
The CBOE's introduction of the VIX and its volatility products has also had a major impact on the industry. These products have provided traders and investors with new ways to speculate on market volatility and hedge their portfolios against volatility risk. The VIX has become a widely watched market indicator and the CBOE's volatility products are widely used by sophisticated traders.
Continued Innovation
The CBOE continues to innovate and expand its product offerings to meet the evolving needs of traders and investors. In recent years, the CBOE has introduced new products such as weekly options, binary options, and flex options. The CBOE has also been a leader in the development of electronic trading technology, providing a fast and efficient trading platform for its members.
Through its commitment to innovation and its dedication to providing a transparent and efficient marketplace, the CBOE has established itself as a leading exchange in the trading industry. As the financial markets continue to evolve, the CBOE is well-positioned to continue its role as a leading innovator and provider of trading solutions.
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