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BOX Newsletter 3, January 21, 2004

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SEC Approves BOX Rules, Launch Targeted for End of January 2004

The Securities and Exchange Commission (SEC) approved the BOX trading rules as proposed by the Boston Stock Exchange (BSE) on January 14, 2004. BOX presently plans to commence trading on its first five options classes at the opening on Friday morning, January 30, 2004. To view the press release issued by the Boston Stock Exchange regarding the BOX approval by the SEC, click here.

The first five classes to be listed are INTC, GE, ERICY, HON and AZN which together represent roughly 8% of overall US equity options trading. The first two classes will have twelve market makers competing while the remaining three classes will have five market makers each. It is expected that these numbers will double during the second phase of the market maker roll-out (four months after initial launch).

Roll Out of Trading on BOX

Following the listing of the first five options classes on the first Friday of trading, the remaining 242 options classes to be listed will commence trading on a rolling schedule over the following nine Mondays such that BOX expects to have nearly 250 classes trading before the end of April, 2004. The other US automated exchange took approximately one year to list a comparable number of classes as shown in the table at left.

During the first ten weeks of trading, as BOX deploys its technical infrastructure, there will be from five to twelve market makers per options class. Shortly afterwards, additional market maker appointments will be added, bringing the total number of market makers per class to an average of roughly twelve, varying from nine to 25.

BOX Frequent Questions

BOX Project Timeline

BOX Market Operations

Are BOX traded options fungible with the other five exchanges?

Yes, all BOX options are guaranteed and cleared by the Options Clearing Corporation (OCC) which is also the clearing house for the other five equity options exchanges. As such, a trader may initiate an options position on one exchange and unwind the trade later at any of the other exchanges as well as at the exchange of the original trade.

Will BOX be a part of Intermarket Linkage?

Yes, BOX has been designed from the start to participate fully in IML. The BOX trading engine filter all in-bound agency orders to ensure that they do not trade at a price worse than the National Best Bid and Offer (NBBO).

Where can I see the BOX markets?

The BOX best bid, best offer and last trade data is sent to the Options Price Reporting Authority (OPRA) in real-time. Investors can therefore in almost all cases view BOX market data alongside that of the other options markets in order to compare quality of market prior to making each order routing decision.

Who are the BOX Market Makers?

BOX will not publicly identify the firms which are acting as market makers on BOX prior to the launch of trading. There are, however, thirty firms committed for the BOX launch as market makers.

How do BOX Market Makers compete?

A key feature of the BOX market model is an open and competing market maker structure as opposed to the specialist-based model used by the other five exchanges. During the first phase of roll out, each option class will have from five to twelve market makers; during phase two, a large number of additional market makers will join those from phase one.

At that point, BOX options will have anywhere from ten to 24 market makers, providing perhaps the most competitive environment in the US options industry. Each of them will compete on equal footing with the others, BOX's unique price/time priority matching algorithm rewarding the most competitive.

Jan 04: BOX trading rules approved by SEC

Nov 03: 100th Participant application;
Second trading simulation

Sep 03: SEC public comment period ended, over 200 letters, 95% favourable;
SEC approves BOX market maker allocation

Aug 03: IML certification; first Participants and ISVs software certification; third SEC rule filing

July 03: First simulations with Participants

June 03: BOX MOC and BOXR sites operational; OCC certification; 2nd trading engine capacity upgrade

May 03: Trading engine production site operational; PoPs in SFCA, Chicago and NYC

Apr 03: Intermarket Linkage connectivity begins

Feb 03: Additional hardware to upgrade capacity; development with OCC and OPRA begins

Jan 03: First SEC filing of trading rules; trading engine upgrade for added capacity; 50th Participant application received

Dec 02: Test platform available for Participants, ISVs

June 02: Four new BOX shareholders

Feb 02: Creation BOX LLC

Sep 01: First contacts of three BOX founders

BOX's Market Operations Center is located near Boston and has responsibility over the following:

Product referential maintenance, including:
Communication and information of Option Participants for all trading-related questions and in the case of technical outages resulting in a disruption of the regular trading cycle
Execution of "sensitive" or confidential services at the request or on behalf of the Option Participants such as:

BOX MOC hours of operation are 7.45 am to 6.00 pm (eastern) and our contact details as follows:

Toll-Free Call: 866 768 8845
Regular: 781 759 1410
Fax: 781 994 1454
E-mail address boxmoc@bostonoptions.com

Details of BOX RegulatoryFilings and Their Approvals

The BOX project involved five rule filings before the SEC, each of which has now been approved. The approval orders may be viewed by clicking on the links provided below:

"Market Maker Appointment Allocation Plan" provides the procedures governing the allocation of Market Maker appointments during the launch phase. This plan was approved by the SEC in the autumn and implemented in October, 2003. Over thirty BOX Participant firms participated in the allocation process and will act as Market Makers on BOX once trading commences.

"BSE Delegation Plan" describing the regulatory relationship between the BOX market and the Boston Stock Exchange

"BOX Formation Agreement" signed by the founding partners at the creation of BOX LLC

"BOX Fee Schedule" provides the fees payable to BOX by BOX Participant firms. Firms or individual who are not themselves BOX Participants should consult with their broker regarding the commissions or fees to be paid to the broker for trading on BOX

"BSE Trading Rules" covering the trading operations of the BOX options market. The full text of these rules may be obtained here.

For a view of how the PIP actually works, click here to transfer to a demo on the BOX website (select the choice "PIP Demo" on the menu at the right on the website page).

Boston Options Exchange Highlights & Advantages

	Fully Automated - Fully electronic equity options exchange.			Low Entry Costs - No seats to buy or rent.
	Price and Time Priority - orders will be handled on a strict price/time priority without a specialist controlling the price. There is no wheel for "allocating" trades that disincents competition.			Price Improvement Auctions – BOX includes a unique electronic mini-auction that will attract, subject to price improvement, orders that would otherwise be printed elsewhere at the NBBO.
	Multiple, Competing Market Makers - BOX places no limits on the number of market makers who may continuously quote on a given options class. They compete equally on a price and time basis.			Anonymous - BOX does not provide information on broker identification when an order is displayed in the order book. Furthermore, BOX does not provide counterparty identification for trade executions. This anonymity encourages competition, rather than the "herd mentality" which discourages price competition at some exchanges.
	Simple Cost Structure - traders only pay when they trade, there are no annual fees. No trade execution fees for public customer orders.			Transparent - Order book broadcasting five best price limits allows traders to see market depth.
	Open Architecture – Each trader may connect whatever trading system he wishes.			Equal Treatment of Orders - BOX does not discriminate order priority on the basis of the type of account. All orders on the BOX book are available to all traders on a first come, first served basis with no limitation on professional order executions.

Target for Opening - First Quarter 2004
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