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CBOE Sets Fees for Electronic S&P 500 Options on C2 Exchange

An exchange run by CBOE Holdings Inc. said it will charge retail traders and fund managers 44 cents a contract to buy or sell the SPXpm, an electronic option based on the Standard & Poor’s 500 Index.

Market makers will pay 17 cents per contract while brokers and active traders deemed professionals will pay 40 cents, C2 Options Exchange said in a filing today to the U.S. Securities and Exchange Commission. These groups will also pay a 10-cent surcharge per contract to offset C2’s licensing fees for the index. The SPXpm options will begin trading on Oct. 4.

The SPXpm aims to compete with equity derivatives on the SPDR S&P 500 ETF Trust, the most active U.S. contract, and attract different users to equity derivatives based on the S&P 500 Index, which currently change hands only on the Chicago Board Options Exchange. The SPXpm contract will settle based on the prices of the underlying stocks at 4 p.m. New York time, unlike the standard options on the S&P 500, or SPX, which settle based on the price of the component stocks at 9:30 a.m.

“Ultimately it will succeed, but it will take quite a while to build awareness among retail customers,” Randy Frederick, director of trading and derivatives at San Francisco-based broker Charles Schwab Corp. said in a phone interview. Retail customers have tended to use options on the S&P 500 exchange-traded fund instead of those on the index itself because they’re smaller contracts, he said. “The fact that they’re going to Friday p.m. settlement will make more sense to retail clients,” he said.

S&P 500 Options

Options on the S&P 500 ETF, which can trade on all nine U.S. options exchanges, were the most popular contract in the first half of this year, accounting for 13 percent of the industry’s volume, according to data compiled by Chicago-based OCC, which clears and settles all options trades. CBOE’s S&P 500 index-based options were the next most active, with 3.8 percent.

Unlike most CBOE products, which can be bought and sold either in the exchange’s hybrid system -- both electronically and in open outcry -- or only through automated processes, the SPX is handled mainly by humans in the exchange’s trading pit in Chicago. The pit holds more than 200 traders and market makers.

Market Share

CBOE and C2 had 26.2 and 1.3 percent of total U.S. options volume last month, respectively, and CBOE accounted for more than 95 percent of the industry’s index volume, according to OCC data. CBOE’s exclusive license with McGraw-Hill Cos. to trade options on the S&P 500 ends in 2018.

C2 told the SEC that since the SPXpm contract represents 10 times the size of options on the SPDR S&P 500 ETF Trust, whose ticker is SPY, the per-contract transaction fees for the C2 product “provide significant cost savings to investors when compared to SPY options.” The exchange said NYSE Euronext’s NYSE Arca options market charges customers 45 cents per contract for options on the S&P 500 ETF.

Retail investors usually aren’t swayed by the fees exchanges charge for executions, Frederick said. Most pay brokers a commission to buy and sell options and aren’t responsible for the per-contract fee assessed by exchanges. Their brokers pay those trading charges as they decide where to send orders to get the best possible transaction -- based on price, speed and other attributes -- for their clients.

Bigger Asset Managers

To appeal to bigger asset managers including mutual and pension funds, C2 won’t charge for more than 10,000 SPXpm contracts per order. This will help draw orders from users of the over-the-counter markets and those submitting large orders in exchange-listed S&P 500 derivatives, C2 said.

The CBOE’s S&P 500 products will appeal to different users, with electronic traders adopting SPXpm while those who need to “negotiate large, complex orders” continuing to buy and sell in the CBOE trading pit, William Brodsky, chairman and chief executive officer of CBOE Holdings, said in a Sept. 2 statement. The SEC cleared the product over objections from New York-based International Securities Exchange, which said it will spur late-day volatility and investor confusion.

The SPXpm product will operate for a 14-month pilot. The exchange will submit confidential annual and interim reports to the SEC analyzing trading patterns in SPXpm and shares in the S&P 500 stocks. This will help regulators assess the effect of afternoon settlement on S&P 500 index options, the SEC said.

“C2 has a tremendous opportunity to capture over-the-counter business in S&P 500 options,” Thomas Foertsch, president of Exchange Capital Resources, a Chicago-based company that advises trading firms on operational and market structure issues, said earlier this month. Foertsch worked at the CBOE from 1983 until 2009 and ran day-to-day operations for SPX on the trading floor starting in 1989.

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