From the June 01, 2011 issue of Futures Magazine • Subscribe!

A PIP by any other name

BOXing options exchanges

imageOn the same day the BOX Options Exchange announced it had received a patent related to its price improvement period (PIP) auctions, May 10, it filed a complaint for patent infringement against the Chicago Board Options Exchange (CBOE), the International Securities Exchange (ISE) and Nasdaq OMX Phlx.

The PIP auction was highlighted by BOX as a unique differentiator from the crowded field of equity options exchanges when it launched in 2004, but as is often the case in the listed options universe, competitors launched similar features. Box claims that the CBOE’s "Automated Improvement Mechanism (AIM)," ISE’s "Price Improvement Mechanism (PIM)" and Phlx’s "PIXL" all violate the "364" patent just granted.

Other players in the listed option space have secondary auctions but were not named in the suit. Lisa Fall, BOX’s General Counsel, says, "We reserve the right to add other defendants to the suit, but for right now these are who we are focusing on."

Fall says, "The basis of our suit is that the AIM, Pixl and PIM infringe on at least one of the elements of the patent."

BOX CEO Tony McCormick said in a release, "Receipt of this patent solidifies BOX’s position as the recognized innovator of price improvement in the electronic marketplace."

BOX does not name a dollar figure in its suit, but Fall says, "Box views this patent as an asset and we want to maximize it. Whether [through] damages, royalties or a licensing fee, we will be having those discussions with our counterparts."

BOX estimates that it has saved investors more than $335 million through price improvement via its PIP. However, if their suit is successful and competitors either are forced to pay damages or royalties, it could add costs to option traders.

As of press time, the exchanges named in the suit had not responded.

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