Price Improvement

A key feature of the BOX market is the PIP, an automated trading mechanism (Patent Pending) which permits brokers to seek to improve executable client orders. BOX Participants executing agency orders as Order Flow Providers (OFPs) and wishing to improve the client’s price by taking the other side as principal may signal this intent to the BOX market-place via a special order message submitted to the BOX trading engine; market makers on the class as well as other BOX trading Participants may then compete for this order by bettering the price. At the end of a very short period, the client side of the trade is matched with the best prices available.

Price Improvement to Customer is Assured
The starting price for the PIP must be better than the National Best Bid and Offer. Any request to initiate a PIP at a price equal to or outside NBBO will be rejected by the BOX trading engine.

Furthermore, as the order entered by the OFP to better his client's execution cannot be cancelled during the PIP and must be for the entire quantity of his customer's order, the customer order is guaranteed an execution price better than that posted on any other market.

Visibility of PIP
Once the BOX trading engine has received a request to initiate a PIP from an OFP and it has been determined to be valid against NBBO, a message is broadcast to all BOX Participants. This message includes the instrument code (eg, a September Call on XYZ with a strike of 35), the quantity and side of the market (eg buy or sell) of the customer order, the initial price and the time at which the PIP will terminate.

Price Increment During the PIP
During the PIP, the price increment for orders is one cent rather than the usual five or ten cents. Note however that the penny increment is available only to:

• Market Makers on the class to which the PIP instrument belongs
• the OFP who has initiated the PIP and
• in certain cases, public customer orders or professional orders on behalf of BOX Participants which are already on the BOX book at a limit price equal to NBBO on the professional side of the PIP

All other parties may enter orders during the PIP, but in the usual five and ten cent increments.

Duration of PIP
The PIP cycle runs three seconds. During the period from the start of the PIP to its end, any BOX trading Participant may enter orders. The PIP is not a separate auction, but is fully integrated into the central limit order book for the instrument to be traded.

Given this relatively rapid time frame, it is expected that the vast majority of PIP competing orders will be managed by automated processes which have been configured to monitor and respond to PIP orders. Extensive testing indicates that the BOX trading engine processing times and the comparable cycle on trading participants' systems will allow for a large number of iterations during the three second PIP. A longer duration for the PIP would make the "non-cancellable" feature of the PIP difficult to impose, to the ultimate disadvantage of the customer order.

Conclusion of PIP and Matching of Orders
At the conclusion of the PIP, the customer order will be matched on a price and time priority basis with the orders on the opposite side of the market (the "improvement orders"). There are however several exceptions to time priority which are described in greater detail below. These are exceptions to time priority only, not price priority, and therefore have no effect on the final price to the customer order. These are described in greater detail in Description of Price Improvement Process.

Directed Orders
To facilitate communication between a BOX Participant wishing to offer price improvement to his clients but unable himself to take the professional side of a PIP initial order, BOX has implemented a facility called "directed orders". This allows one BOX Participant to direct an order to another BOX Participant electronically with the receiving party eventually initiating a PIP.

For information regarding actual price improvement trades, click here.