Cboe EDGX Options: Customer-Priority Market

Key Takeaways

• Cboe EDGX Options uses a customer-priority, pro-rata allocation model.
• Public customer orders are filled ahead of professional orders at the same price.
• It runs a price-improvement auction that lets agency orders seek a better price.
• It uses a maker-taker fee model and complements Cboe's price-time BZX Options venue.

What It Is

Cboe EDGX Options is a registered options exchange in the Cboe family. It launched in 2015 as a Bats market and was rebranded after Cboe acquired Bats Global Markets in 2017. It trades listed equity and index options.

Its defining trait is allocation. When several resting orders sit at the best price, EDGX Options does not simply fill the one entered first. It gives customer priority to public customer orders, then splits the remaining fill pro rata, in proportion to each participant's displayed size. This contrasts with a pure price-time market, where the earliest order at a price trades first.

The Intuition

Options markets serve two very different groups: public customers placing retail or investor orders, and professional liquidity providers quoting all day. A pure time-priority model rewards whoever is fastest, which tends to favor professionals with the quickest systems.

A customer-priority, pro-rata model tilts the balance toward the public customer. By filling customer orders first and then sharing the rest by size rather than speed, the venue gives ordinary investors a structural edge and rewards market makers who quote large size. The aim is better execution for customers and deeper quoted size from professionals.

How Cboe EDGX Options Works

When an incoming order meets resting interest at the best price, EDGX Options allocates in tiers. Public customer orders at that price are satisfied first. Whatever remains is divided among the other participants in proportion to their quoted size.

Pure price-time:   first order at the price trades first
Customer priority + pro-rata:
   1. fill public customer orders first
   2. split the rest by each provider's displayed size

EDGX Options also offers a price-improvement auction, historically called the Bats Auction Mechanism. A member can submit a customer order into the auction, broadcast it to other members, and let them respond with better prices. If a responder improves on the existing market, the customer gets a better fill than the displayed quote. The venue uses a maker-taker fee model, paying rebates to add liquidity and charging fees to remove it, and it is built to complement Cboe's BZX Options, which uses pure price-time priority instead.

Worked Example

Suppose a call option shows a best offer of 1.20, with three market makers each quoting 50 contracts there, and one public customer also offering 50 contracts at 1.20. A buyer arrives wanting 100 contracts.

Under customer priority, the public customer's 50 contracts fill first. That leaves 50 contracts to allocate among the three market makers. Pro-rata splits those 50 by displayed size. Since the three makers quoted equal size, each receives roughly one third of the remaining 50, about 16 to 17 contracts apiece.

On a pure price-time venue, the outcome would differ. The order entered earliest at 1.20 would fill first, regardless of whether it came from a customer or a professional, until the buyer's 100 contracts were satisfied.

Common Mistakes

1. Assuming first-in-first-out everywhere. EDGX Options is not strict time priority. Public customer orders fill first, and the rest is shared by size, so being fastest does not guarantee the fill.

2. Confusing it with BZX Options. Both are Cboe options venues, but BZX Options uses pure price-time priority while EDGX Options uses customer priority and pro-rata. The allocation models are different.

3. Ignoring the auction. The price-improvement auction can deliver a better fill than the displayed quote. Skipping it can mean accepting a worse price than was available.

4. Overlooking the size incentive. Pro-rata rewards quoting large size, since a bigger displayed quote earns a bigger share of the residual fill. Small quotes get a smaller slice.

5. Treating allocation as price. Allocation decides who fills at the best price, not what that price is. The national best bid and offer still governs the price you can trade at.

Frequently Asked Questions

What is Cboe EDGX Options in simple terms? Cboe EDGX Options is a U.S. options exchange that fills public customer orders first and then shares the rest by quote size, rather than by who was fastest. It also runs an auction that can improve a customer's price.

How does Cboe EDGX Options affect investment decisions? For options traders, the customer-priority model can improve fill quality on public orders, and the price-improvement auction can beat the displayed quote. Brokers may route customer options orders here for that reason.

What is a real-world example of Cboe EDGX Options in action? When a buyer hits the best offer where a public customer and several market makers are quoting, the customer's contracts fill first, then the remainder is split among the makers in proportion to their displayed size.

How can investors use Cboe EDGX Options effectively? Public customers benefit automatically from priority, and orders sent through the price-improvement auction can capture a better price than the displayed quote, so ask your broker how it routes options orders.

How is Cboe EDGX Options different from Cboe BZX Options? EDGX Options uses customer priority and pro-rata allocation, favoring public customers and large quoters. BZX Options uses pure price-time priority, filling the earliest order at a price first regardless of who entered it.

Sources

1. Cboe. "EDGX Options Exchange Fee Schedule." https://www.cboe.com/us/options/membership/fee_schedule/edgx/
2. Cboe. "U.S. Options Auction Process Specification." https://cdn.cboe.com/resources/membership/US_Options_Auction_Process_Specification.pdf
3. Cboe. "Options Exchange Fee Schedule." https://www.cboe.com/us/options/membership/fee_schedule/
4. NYSE. "U.S. Equity Options Market Models." https://www.nyse.com/data-insights/us-equity-options-market-models

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.