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CBOE, IEX and Other US Venues

The US equity markets are far more complex than the NYSE and NASDAQ alone. Beyond these two primary exchanges exist options exchanges, regional stock exchanges, alternative trading systems (ATS), and dark pools. This ecosystem of venues creates opportunities for competition and innovation while introducing complexity and fragmentation. Understanding how these venues operate and interact with the primary exchanges is essential to understanding modern market structure.

Quick definition​

Beyond the NYSE and NASDAQ, the US has numerous trading venues including the Chicago Board Options Exchange (CBOE), regional exchanges (EDGX, EDGA, BYX, BZX), and alternative trading systems. These venues compete for order flow while participating in a consolidated quotation system that ensures investors see the best available prices across all venues. CBOE primarily focuses on options trading, while regional exchanges and alternative systems trade stocks alongside the primary exchanges.

Key takeaways​

  • US equity markets are fragmented across multiple venues competing for order flow
  • Options exchanges like CBOE operate distinctly from stock exchanges, with different rules and participant structures
  • Regional exchanges (EDGX, BYX, BZX, EDGA) provide alternative venues where brokers can route orders for stocks trading on NYSE and NASDAQ
  • IEX represents a newer alternative exchange emphasizing speed-parity and long-term investment focus
  • The National Best Bid and Offer (NBBO) system ensures investors get consolidated pricing across all venues, though fragmentation creates complexity

Options exchanges and the CBOE​

Options trading occurs on specialized exchanges distinct from stock exchanges. The largest options exchange is the CBOE (Chicago Board Options Exchange), though options also trade on other venues like the International Securities Exchange (ISE), the Nasdaq Options Market (NOM), and others. These options exchanges operate under different regulatory frameworks than stock exchanges because options require different risk management and surveillance.

The CBOE was founded in 1973 and created the first standardized equity options contracts. Before the CBOE, options trading was minimal and nonstandard. The CBOE's innovation—standardized contracts, centralized clearing, and specified expiration dates—transformed options from esoteric instruments into widely-used hedging and speculation tools. Today, options represent enormous trading volume and provide important price signals to the underlying stock market.

Options exchanges differ fundamentally from stock exchanges. Rather than matching buyers and sellers of equities, options exchanges match buyers and sellers of derivative contracts. When you buy a call option on Apple, you're buying a contract that gives you the right (not obligation) to buy 100 shares of Apple at a specified price on or before an expiration date. The options exchange matches your purchase order against a seller's sell order.

Multiple options exchanges compete for the same options. An Apple call option can trade on CBOE, ISE, NOM, PHLX (Philadelphia Exchange), and other venues. Like stock exchanges, options venues must report trades and contribute to a consolidated tape. Brokers can route orders to whichever options exchange offers the best price, and regulation requires they do so.

The CBOE also operates equity exchanges (CBOE BZX and CBOE BYX), which trade stocks. These venues compete with NYSE and NASDAQ for stock order flow. They operate as for-profit ventures seeking to attract volume through competitive pricing and technological innovation. However, the CBOE remains primarily known for options trading, where it maintains dominant market share.

Regional exchanges and market fragmentation​

Regional exchanges including EDGX, EDGA (both owned by Nasdaq, Inc.), CBOE BZX, CBOE BYX, and others operate as alternative venues where stocks trade alongside their primary listing exchange. A stock listed on NYSE can and does trade on NASDAQ (for stocks, not its own volume on NYSE), EDGX, CBOE BZX, and other venues simultaneously.

This fragmentation resulted from regulatory changes beginning in 1998 that opened trading in individual stocks beyond the stock's primary listing exchange. The intent was to increase competition and reduce transaction costs through price competition. The result was a fragmented market where investors can execute the same trade across many venues.

Regional exchanges operate similarly to primary exchanges—they maintain order books, match buy and sell orders, report trades to the consolidated tape. However, they typically operate with lower fees than primary exchanges to attract order flow. This competitive pricing benefits investors by driving down transaction costs. However, fragmentation creates complexity because order flow scattered across many venues can be harder to consolidate into deep liquidity pools.

EDGX and EDGA together operate significant market share in US equities. These venues offer sophisticated order types, fast execution, and competitive pricing. They appeal to institutional investors and brokers seeking to execute large orders efficiently. The Nasdaq-owned exchanges benefit from integration with Nasdaq's other systems while maintaining operational independence.

CBOE's equity exchanges (BZX and BYX) similarly compete for order flow. They provide market making opportunities, advanced technology, and alternative order routing options. Institutional trading desks often execute portions of orders across multiple venues simultaneously to optimize execution.

The Nasdaq operates NASDAQ Execution Services (NES) and NASDAQ OMX (BX) in addition to its primary NASDAQ exchange. These venues serve similar competitive purposes. Most major brokers maintain relationships with multiple venues and route orders based on best execution logic.

IEX: challenging traditional market structure​

IEX (Investors Exchange) emerged in 2016 as a new alternative exchange founded with explicit criticism of traditional equity market structure. The founders—prominent technologists and traders—argued that high-frequency trading had distorted markets, enriching algorithmic traders at the expense of ordinary investors. IEX proposed a different market structure based on "speed parity" and transparency.

IEX's key innovation is a mechanical time delay built into its order routing. Brokers connect to IEX through fiber optic lines, but IEX deliberately introduces a 350-microsecond (millionth of a second) processing delay. This delay is designed to prevent high-frequency traders from gaining information advantages through speed. The delay is disclosed, meaning traders know about it and accept it. The result is that high-frequency traders find IEX less attractive for arbitrage strategies that depend on exploiting microsecond timing advantages.

This design choice makes IEX unique among exchanges. All other venues optimize for speed, continuously investing in faster systems and connectivity. IEX instead optimizes against speed-based information advantages. The philosophy is that investors should compete on fundamental research and analysis, not on ability to exploit microsecond timing advantages.

IEX gained notoriety after Michael Lewis's 2014 book "Flash Boys" highlighted how high-frequency traders used speed advantages to exploit slower investors. Several of the "flash boys" were involved in founding or funding IEX. This positioning—as the "anti-high-frequency-trading" exchange—generated significant attention and attracted investors who viewed traditional market structure as unfairly favoring algorithmic traders.

IEX went public in 2023 and continues to grow market share, though it remains smaller than NYSE, NASDAQ, and regional exchanges. The exchange has attracted significant institutional flow and has become particularly important for long-term investors seeking to trade without speed-based disadvantages. IEX's success demonstrates that market structure matters—different venues attract different types of traders by offering different characteristics.

Market fragmentation and best execution​

The existence of multiple trading venues for the same stocks creates a regulatory and operational challenge called "order routing" and "best execution." When a broker receives a buy order, it cannot simply route the order to any convenient venue. Regulation requires brokers to seek the best available price across all venues.

This requirement translates into the National Best Bid and Offer (NBBO) standard. Brokers must monitor the best bid price and best ask price across all venues and route orders accordingly. If the best price is on a regional exchange, the broker should route there. If the best price is on NASDAQ, the broker should route to NASDAQ. The requirement ensures that investors get the best available price rather than being filled at worse prices on their broker's preferred venue.

In practice, brokers use sophisticated algorithms to route orders. For most routine trades, best execution is relatively straightforward—brokers route to venues offering the best prices. For large orders, brokers may split orders across venues to achieve better overall execution. For orders with specific characteristics (speed, anonymity, etc.), brokers may route to venues offering those characteristics while maintaining best execution.

Market fragmentation creates complexity that benefits some traders while potentially disadvantaging others. Sophisticated traders and institutions that monitor multiple venues and pay for low-latency connectivity can sometimes find better execution opportunities. Retail traders relying on their broker's order routing systems may not capture all available benefits from fragmentation. However, the requirement to meet NBBO means all investors get reasonable execution across the system.

Market making across venues​

Market makers operate across multiple venues, quoting prices on multiple exchanges simultaneously. A major market maker in Apple stock maintains quotes on NYSE, NASDAQ, EDGX, and other venues. This distributed market making creates depth across venues but also introduces the possibility of quote competition—market makers adjusting prices across multiple venues as conditions change.

Market makers profit from the bid-ask spread—buying at lower prices and selling at higher prices. By making markets across multiple venues, they increase their opportunity to capture trades. If an order arrives on one venue at prices they don't like, they can often manage risk by executing an offsetting trade on another venue.

This multi-venue market making has benefits and drawbacks. Advantages include deeper overall liquidity and more competitive pricing as market makers compete across venues. Disadvantages include complexity and potential for inconsistent pricing as markets move. During volatile periods, spreads can widen differently across venues as market makers adjust quotes rapidly.

The SEC monitors market-making practices to ensure they don't become manipulative. Practices like "spoofing" (placing orders with no intent to execute), "layering" (placing orders at multiple price levels to create artificial activity), or "quote stuffing" (rapid order placement and cancellation to overwhelm competitors) are prohibited. Surveillance systems track these patterns and compliance teams investigate suspicious behavior.

How orders route through the system​

Understanding how an order flows through the modern market system helps clarify the role of various venues. Suppose you place a market buy order for 1,000 shares of Apple through your brokerage app. Several things happen nearly simultaneously:

First, your broker receives the order and routes it to an execution venue. The choice of venue depends on your broker's order routing logic. Large institutional brokers may split orders across multiple venues. Smaller brokers may have relationships with specific market makers or venues. The goal is achieving best execution.

The order enters the order book (or is immediately matched against existing orders) at the chosen venue. The venue's matching engine searches for counterparties. If 500 shares are available at the best ask price of $175.00, those 500 shares fill at that price. The remaining 500 shares may fill at $175.01 or higher prices as the order moves up the order book seeking counterparties.

Once the order fills, the venue reports the trade to the consolidated tape—the public record of all trades. Market data systems broadcast this information showing that shares traded at specific prices. Your broker reports the execution back to you showing the price and number of shares filled.

The trade settles two business days later (T+2). The clearing house ensures that shares are transferred from the seller's account to your account, and money transfers from your account to the seller's account. The clearing house also manages counterparty risk in case either party fails to settle.

Throughout this process, multiple venues, market makers, and clearing systems coordinate to execute the order fairly and efficiently. The system works well most of the time, but fragmentation creates complexity that occasionally creates problems during extreme market conditions.

Alternative Trading Systems (ATS)​

Beyond exchanges, trading also occurs on Alternative Trading Systems (ATS)—non-exchange trading venues sometimes called "dark pools." These systems match buy and sell orders but operate under less stringent requirements than exchanges. They don't have to maintain public order books or provide pre-trade transparency (the ability to see the best available prices before trading).

Dark pools serve legitimate purposes. Large institutional traders often use dark pools to execute large orders without moving market prices. A pension fund wanting to buy a million shares of a stock might use a dark pool rather than a public exchange, where the large buy order might push prices higher as other traders see the demand. Dark pools allow institutional investors to execute large trades while minimizing market impact.

However, dark pools also create controversial dynamics. Retail investors cannot access dark pools—they trade on exchanges and alternative systems open to the public. This creates a two-tiered market structure where institutions get better execution through dark pools while retail investors trade on public venues. Some argue this unfairly advantages institutions at the expense of retail investors.

Regulation requires dark pools to report trades eventually (usually within a few seconds) and to meet certain transparency and fairness standards. However, dark pools don't publish pre-trade prices or order books the way exchanges do. This lack of transparency is the source of the "dark" characterization.

The SEC has proposed and adopted rules requiring dark pool operators to maintain fairness standards and prevent manipulation. However, the fundamental characteristic remains—dark pools allow large traders to execute without moving markets, a service valuable to institutions but controversial given the information asymmetry it creates.

Real-world examples of venue dynamics​

During normal trading, the system works smoothly. An Apple order placed on IEX might execute partially on IEX, partially on NASDAQ, and partially on a regional exchange, all in milliseconds. The investor gets the best available prices across all venues without needing to think about venue selection.

During the 2020 COVID-19 market crash, venue dynamics became critical. Extreme selling pressure overwhelmed market makers and spreads widened dramatically. Some venues experienced liquidity disappearing suddenly as market makers withdrew quotes. Circuit breakers triggered, pausing trading. When trading resumed, the NBBO system helped coordinate pricing across venues. The fragmented structure, which typically provides benefits, created confusion during extreme stress. However, the system ultimately held and prices eventually recovered to orderly levels.

The "flash crash" of May 6, 2010, provided another important lesson. In that event, a large sell order on a futures exchange triggered cascading selling in the stock market. Prices declined 9% in minutes before rebounding. The SEC investigation revealed that orders routed through multiple venues, creating a complexity where large selling overwhelmed market makers and feedback loops accelerated selling. Reforms implemented after the flash crash included circuit breakers, position limits on large traders, and improved surveillance. These reforms have been credited with preventing similar cascades since then.

IEX's growth provides another example of venue competition. Despite being a newer exchange without the history or prestige of NYSE or NASDAQ, IEX has attracted significant order flow by offering a different market structure. This demonstrates that exchanges compete not just on price but on structure and philosophy. Investors preferring to avoid speed-based trading disadvantages have responded by increasing their use of IEX.

Common mistakes about secondary venues​

Mistake #1: Thinking IEX is slower for normal trading. IEX's 350-microsecond delay is irrelevant for most traders. For retail investors placing market orders, the delay makes no practical difference. The delay matters only to high-frequency traders trying to exploit microsecond timing advantages, which they often avoid IEX to escape.

Mistake #2: Assuming all venues have identical prices. While NBBO ensures you get good prices, the specific venue where your order executes can matter for certain order types or conditions. Sophisticated traders care about venue selection; retail traders typically get comparable execution across venues due to NBBO protections.

Mistake #3: Thinking dark pools are secretly trading against you. While dark pools do create information asymmetries, they serve legitimate purposes for large traders. The SEC regulates dark pools to prevent outright fraud, though the lack of transparency remains controversial.

Mistake #4: Believing regional exchanges are lower quality than primary exchanges. Regional exchanges maintain comparable regulatory standards and often provide equal or better execution. They compete on service and price, not quality. Many institutional investors actively route orders to regional exchanges.

Mistake #5: Assuming NBBO eliminates benefits from order routing optimization. While NBBO ensures decent execution, optimal order routing (understanding venue characteristics and using different venues for different trade types) can still provide benefits, particularly for large or complex orders.

FAQ​

Q: Why do we need so many exchanges if NBBO ensures best execution? A: Competition among venues drives down fees, improves technology, and creates innovation. Venues with different characteristics (speed, anonymity, order types) appeal to different traders. The fragmentation creates complexity but also promotes competition that benefits investors.

Q: Can I route my order to a specific exchange? A: Most retail brokers don't allow direct exchange selection—they route based on best execution logic. Institutional traders often specify venues or use sophisticated routing algorithms. Some brokers offer "directed" execution where you can specify exchange routing, though this may cost extra.

Q: What's the difference between dark pools and exchanges? A: Dark pools don't publish pre-trade pricing or order books; exchanges do. Dark pools cater to large traders wanting to minimize market impact; exchanges are open-access public venues. Both report trades to the consolidated tape eventually.

Q: Is CBOE just an options exchange? A: Primarily, but CBOE also operates equity exchanges (BZX and BYX) for stock trading. However, CBOE is best known for options trading and maintains the largest options exchange in the US.

Q: How does IEX's time delay work if I'm a regular investor? A: For regular investors placing market orders, the time delay is imperceptible. It affects only traders trying to exploit microsecond timing advantages. Most retail investors would not notice the difference.

Q: Do all stock brokers have access to all exchanges? A: Most major brokers have access to all major venues, but the specific venues they connect to may vary. Brokers typically route orders based on best execution across the venues they access, though they may have preferred relationships with certain venues.

Q: What happens to my order if a venue has a technical problem? A: Brokers route to other venues. If your broker's primary routing venue is down, the broker automatically reroutes to alternatives. Market participants maintain redundant connections, so technical failures at one venue rarely prevent execution.

Q: Are options safer than stocks because they trade on separate exchanges? A: No. Options and stocks are different securities with different risks. The fact that they trade on different venues is mainly operational; it doesn't affect the inherent risk profile of options versus stocks.

  • Best execution: The regulatory requirement that brokers seek the best available prices across all venues when routing customer orders
  • Order routing: The process of directing customer orders to venues for execution, based on execution quality and other factors
  • Consolidated tape: The public record of all trades across all venues, providing transparency into trading activity and prices
  • Market impact: The price movement caused by large orders, particularly relevant for institutional traders trying to execute large positions
  • Liquidity aggregation: Combining liquidity across multiple venues to execute larger orders than available on any single venue
  • Venue selection: Strategic choice of where to route orders based on characteristics (speed, anonymity, order types, etc.)

Summary​

The US equity market is highly fragmented across multiple venues including the NYSE, NASDAQ, regional exchanges (EDGX, CBOE BZX/BYX), alternative systems like IEX, and dark pools. This fragmentation reflects regulatory changes that opened trading to competition while maintaining consolidated price discovery through the NBBO system. Options trade on dedicated options exchanges like CBOE, while stocks trade on stock exchanges and alternative venues.

IEX represents a newer approach to market structure, emphasizing speed parity and reducing high-frequency trading advantages. The fragmented structure creates benefits (competition, innovation, choice) and drawbacks (complexity, information asymmetries). Regulation requires brokers to achieve best execution across all venues, protecting investors from the worst impacts of fragmentation.

Understanding the ecosystem of venues matters because it explains why you might get different execution on different orders and how the system processes trading at scale. The complexity is mostly invisible to retail investors thanks to NBBO protections and broker order routing, but institutional investors actively navigate venue selection and fragmentation to optimize execution.

Next​

Expand your understanding globally by examining major non-US exchanges. The London Stock Exchange chapter explores the world's oldest exchange and how international markets operate distinctly from US venues.