BOX Courts High-Frequency Traders

The Boston Options Exchange is rolling out the red carpet for high-frequency traders.

The industry’s second smallest exchange is betting that new rules and a faster trading platform will entice more proprietary trading houses to move their business to the exchange.

"We are moving towards appealing to the proprietary trading community," Alan Grigoletto, a BOX senior vice president in charge of business development and marketing, said at this year’s Options Industry Conference.

Part of the plan involves removing certain protections for BOX market makers. To encourage quote competition from prop traders, BOX recently jettisoned an old rule that prevented non-market makers from making two-sided markets.

Previously, order flow providers–brokers representing customers or broker-dealer prop houses–could not post limit orders on both sides of the market on a continuous basis, effectively acting as dealers.

Now they can. "We can now have broker-dealers on both sides of the quote simultaneously," Grigoletto said. "That’s good for high-frequency style trading."

As an additional enticement to the HFT crowd, BOX is switching the location of its matching engine and revamping its underlying architecture. On May 10, BOX moved its matching engine into the Equinix NY4 data center in Secaucus, N.J. That’s home to the International Securities Exchange’s matching engine as well as a number of high-frequency players.

Proximity to the BOX’s matching engine is intended to reduce turnaround time for high-frequency traders. BOX is also reducing its response time with a complete overhaul of its architecture. The system will now handle one million quotes per second, Grigoletto said, and provide consistent response times of less than one millisecond.

BOX is the second smallest options exchange, after newcomer BATS, with a market share of about two percent.