Chicago Board Options Exchange (CBOE)

What it is:

The Chicago Board Options Exchange (CBOE) is an exchange used for trading standardized options contracts, including stock options, LEAPS, interest rate options, foreign currency options, and index options.

How it works/Example:

Originally created in 1973 as an extension of the Chicago Board of Trade (CBOT), the Chicago Board Options Exchange (CBOE) became the first exchange to offer standardized options trading.

Trading hours on the CBOE are from 8:30 a.m. to 3:02 p.m.(Central) for equities and 8:30 a.m. to 3:15 p.m. (Central) for indexes. The CBOE orders are typically entered through a broker-dealer or through an online trading network. The CBOE's Order Routing System collects and distributes orders for up to 2,000 contracts to floor traders, trading booths, or to the CBOE's order book official.

Most CBOE options are traded in an open outcry system where exchange members act as market makers. This is why the CBOE calls market makers "the backbone of the CBOE's trading system;" Their willingness to risk their own capital provides liquidity to CBOE option trading. Floor brokers on the CBOE act only as agents tasked with executing orders for clients.

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The Options Clearing Corporation (OCC) issues the options traded on the CBOE and clears the transactions conducted on the exchange. The existence of the OCC allows options traders to buy and sell without knowing the original opposite party.

A company may list its own stock options on the CBOE if certain share count and ownership requirements are met.

Why it Matters:

The CBOE is the 2nd largest options market in the world behind the Korea Stock Exchange (KSE). The exchange volume at CBOE easily exceeds 306 million contracts per year.

In 2003, the CBOE traded 31% of the contracts listed on American exchanges, accounting for over 283 million options contracts, over 15.5 million transactions, and over $148 billion of securities. If you are trading options as part of your investing strategy, you are likely dealing with the CBOE on at least some of your transactions.

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Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.