ISE Cancels Jumbo S&P 500 Options Debut on Liquidity Concern

International Securities Exchange, the second-biggest U.S. options market, withdrew plans to trade larger-size options on the SPDR S&P 500 ETF Trust amid concerns the contracts may threaten market liquidity.

The options are 10 times larger than the existing product, which is the most-active U.S. equity derivative and based on the Standard & Poor’s 500 Index. BOX Options Exchange today became the first to trade so-called jumbo options on the S&P 500 ETF, which was approved May 3 by the Securities and Exchange Commission. Options on the SPDR S&P 500 ETF Trust are known by the ticker symbol SPY. ISE made the decision public in a letter to members today.

“The decision the ISE made not to list the jumbo SPY makes a very good statement as to why the product makes no sense,” Mark Caffray, who brokers contracts on the Chicago Board Options Exchange Volatility Index and the S&P 500 at Chicago-based PTR Inc., said in an interview. “Institutional clients don’t need it and it just adds confusion for retail customers.”

ISE canceled its plans after getting feedback on the new product from market makers and brokers who use the New York-based exchange to trade equity derivatives, Boris Ilyevsky, managing director of the ISE Options Exchange, wrote in the letter.

Liquidity Concerns

“We have concerns about the potential negative impact this product could have and, therefore, have chosen not to join BOX in opening them for trading,” Ilyevsky wrote. The jumbo options “would not create incremental volume and, even worse, could harm liquidity,” he said.

The contract is designed to give institutional investors another way to trade the S&P 500 at a time when many asset managers are increasing their use of ETFs as part of their investment strategies. Institutions often use larger-size contracts like S&P 500 index options that enable them to acquire or sell bigger positions without signaling their intentions and moving the market.

“Our plan is to monitor jumbo SPY’s volume trends and to continue to be ready to trade the product if it does gain industry acceptance,” Ilyevsky wrote. “We have taken all the necessary steps in order to list jumbo SPY options, including submitting an initial rule filing to the SEC that is already posted on our website and ensuring our technical readiness.”

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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