Order Book Official and Functions

What Is an Order Book Official?

An order book official (OBO) is the trading floor participant responsible for maintaining a list of public market or limit orders of a specific option class using the "market-marker" system of executing orders. The purpose is to maintain a fair and orderly market in the assigned options, including executing orders sent in by member firms.

As physical trading floors increasingly give way to electronic markets and screens-based trading, the role of the OBO has greatly diminished. Today, most order books are maintained by algorithms or software developed by exchanges or trading platforms.

What the Order Book Official Does

Order book officials are employees of the exchange and cannot trade for their own accounts. Their sole responsibility is to maintain the market for their assigned listed options, including executing orders remaining on the book.

This differs from a designated market maker (DMM), formerly known as a specialist on the NYSE or other exchanges, who as members of the exchange must trade their own account in addition to the OBO functions of maintaining a fair and orderly market and executing orders on the book.

The OBO is also responsible for maintaining a book of limit and stop orders left for him /her by the public. Members may not leave such orders. When the order's specific conditions are met, that order is then executed.

The term is sometimes used in reference to a current list of public market or limit orders for a given exchange. For example, a list of specific public orders awaiting execution on the Chicago Board Options Exchange (CBOE) could be referred to as the "order book official".

Order Book Official and Market Makers

Trading on an options exchange includes many different functions. Unlike other exchanges, like a stock exchange, the CBOE divides the designated market maker (specialist) role into two separate functions. A market maker, who acts as a dealer with his /her own inventory, and an order book official, who handles the book of customer limit orders.

Market makers (MMs) post and maintain continuous two-sided markets, i.e., bids and offers, for a given options contract and trade for their own accounts. MMs also cannot deal directly with the public, and must wait for orders to come into the floor via broker or exchange official.

The order book official keeps track of these orders for an assigned group of options and makes sure the market remains fluid and fair. OBOs may not act as dealers and do not hold inventory. A floor broker is a middleman acting as an agent for clients, indirectly giving them the best access possible to the exchange floor. The floor broker does not hold inventory.

Public orders take priority over orders from market makers and floor brokers.

Example of What an Order Book Official Does

Today, most orders are submitted electronically to an exchange. The order book official monitors the orders and executes trades as the order specifications are reached. This too is nearly all done electronically.

Assume an investor wants to buy an option contract in Apple Inc. (AAPL). They choose their expiry date and strike price. Assume AAPL stock is trading at $220, and the investor wants a call option that expires in 2.5 months with a strike price of $220. The current bid for the option is $10.65 while the current offer is $11.10.

The investor doesn't want to pay that much, so they place an order to buy at $10.25. This will go on the order book as a limit order. It will be executed if someone is willing to sell to the investor's buy order at $10.25.