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April 3, 2008

CBOE Automates Buy Writes

By James Ramage

It's now faster and cheaper to buy a stock and write a call option on it. At least, that's what the Chicago Board Options Exchange said. Its stock market unit, CBOE Stock Exchange, has begun automating buy-writes.

Buy-writes are big business at the CBOE, says David Harris, CBSX's CEO. Before the exchange automated the process, buy-writes were done on two different markets: The options order would get exposed to the CBOE floor, and the stock would print on another exchange.

The CBSX was created last year to keep that stock trade in-house. Now the CBOE is leveraging its separate options and stock exchanges on a single platform for buy-writes. When a broker-dealer sends a customer's buy-write order-an options and stock package that the CBOE regards as a single order-a group of liquidity providers offers price improvement on the options side while the stock side is printed on the CBSX.

"It's an efficiency matter because we're making the process electronic," Harris said. "And it's a cost matter, because it'll be cheaper to do these transactions on CBOE/CBSX than any other place." The CBOE charges 5 cents for every 100 shares-or 5 mils a share-for the service, Harris said. The transaction fee is capped at $25.

The ISE has had automated buy-write transactions for three years now, with the stock side executing through NYFIX. Soon the ISE will give customers the option to execute the stock side through its own exchange.

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