BOX Exchange Gets SEC OK to Trade Jumbo S&P 500 ETF OptionsNina Mehta and Nikolaj Gammeltoft
BOX Options Exchange, the third-smallest of 11 U.S. options venues, will be the first to begin trading larger-size contracts on the most-active U.S. equity derivatives product, according to a company executive.
BOX will list and trade contracts based on 1,000 shares of the SPDR S&P 500 ETF Trust starting May 10, according to Ed Boyle, senior vice president for strategy at the Boston-based exchange. The so-called jumbo options, approved May 3 by the Securities and Exchange Commission, will be 10 times larger than existing contracts on the Standard & Poor’s 500 Index exchange-traded fund, known by the ticker symbol SPY.
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.
“We see customer demand for the product because it offers flexibility to institutions and traders looking for larger notional size in trades,” Boyle said by phone. “It also provides additional price competition across indexes and ETFs.”
The contracts, which will be a separate product from the regular-size options based on 100 shares of the S&P 500 ETF, also offer an alternative to indexes such as the S&P 500, which trades exclusively on the Chicago Board Options Exchange, Boyle said. The benchmark index is known by the symbol SPX.
“The proposed jumbo SPY is roughly the same notional amount as the big SPX cash contract, so I’d expect it would take volume from SPX as well as SPY,” Gerald Hanweck, who runs New York-based consulting firm Hanweck Associates LLC specializing in options, said in an interview.
Some 18 percent of institutional investors in the U.S. now have ETFs among their holdings, up from 14 percent in 2012, according to a report today from research firm Greenwich Associates. Almost a quarter of corporate and public pension funds use ETFs and 47 percent of U.S. endowments rely on the products, the report said, based on interviews with 179 institutions. Half plan to increase their allocations to ETFs by next year.
If daily average volume exceeds 20,000 contracts by the end of the year, BOX will consider the jumbo SPY options a success, Boyle said. The exchange may ask the SEC for permission to introduce jumbo options on other actively traded ETFs including those based on the Dow Jones Industrial Average and Nasdaq-100 Index, he said. Options on the S&P 500 ETF averaged 2.73 million contracts daily in April, according to data compiled by Chicago-based Options Clearing Corp.
Other options exchanges are likely to list and trade jumbo SPY options, Boyle said. BOX, owned by the operator of the Toronto stock market and a group of brokers, asked permission to trade the product in January. The SEC approval came over objections by CBOE Holdings Inc., NYSE Euronext and Nasdaq OMX Group Inc.
The exchanges said the proposed product could cause investor confusion, create a two-tier market between the larger and regular-size contracts, and create discrepancies in prices. Exchanges compete with one another and often offer products a rival trades to avoid losing market share.
Nasdaq OMX PHLX plans to introduce jumbo options on the S&P 500 ETF on May 16, pending SEC approval, according to Robert Madden, a spokesman for Nasdaq OMX. Eric Ryan, a spokesman for NYSE Euronext, declined to comment. Gail Osten, a spokeswoman for CBOE, said the company had no immediate comment.
BOX’s pricing, which will be announced in the middle of this week, will not be the standard taker/maker structure the venue uses for many options, Boyle said. The taker/maker regime pays firms to trade with bids and offers on the exchange and charges those providing quotes. The minimum price variation will be the same for jumbo options and the current product, he said.
BOX had 2.2 percent of U.S. volume in April, according to data from OCC.
“I don’t see any reason to trade it, nor do any traders I have spoken to,” Mark Caffray, who brokers contracts on the CBOE Volatility Index and S&P 500 at Chicago-based PTR Inc., said in an e-mail. “The place for liquidity and volume will continue to be in the SPX and the regular SPY.”
Efforts to trade options tied to a larger number of shares have fizzled in the past. The American Stock Exchange offered contracts based on 1,000 shares of the SPDR S&P MidCap 400 ETF Trust in the late 1990s, according to Michael Bickford, who was senior vice president for options at Amex before NYSE Euronext bought it in 2008. The so-called grand options weren’t popular and were de-listed around 2000, he said. They traded on what is now known as NYSE Amex Options alongside S&P MidCap 400 ETF contracts based on 100 shares.
Since then the options business has changed. Most options are now listed on multiple exchanges and can be traded on any venue. New rules oversee electronic linkages among markets and dictate how orders must be handled by an exchange.
“I’m not saying the product will be successful, but I think people would be interested to hear what the value proposition is,” Peter Cecchini, global head of institutional equity derivatives at New York-based Cantor Fitzgerald LP, said in an interview. “I’m interested.”
The strike prices, or levels at which a contract can profitably be converted into shares in the underlying ETF, and the bids and offers will be the same for the jumbo and regular-size contracts to limit investor confusion, BOX said. The larger product will use the symbol SPYJ.
Approval for the jumbo contracts follows the introduction of mini versions of higher-priced options to cater to individual investors. Exchanges began offering products one-tenth as large as regular-size contracts for Google Inc., Amazon.com Inc., Apple Inc., SPDR Gold Shares and the S&P 500 ETF in March. Those contracts are based on 10 shares of the underlying stock or ETF.
Mini options traded 1.24 million contracts in April, or more than 56,000 contracts per day, according to data compiled by OCC. They averaged 1.5 percent of the volume in the options that have mini versions, the data showed.