The Securities and Exchange Commission put off a decision on whether to approve a request by the BOX Options Exchange to introduce a “jumbo” options contract based on the SPY exchange-traded fund that is 10 times larger than the standard SPY option.
The SEC has delayed its decision from March 21 to May 5, after encountering objections from competitor exchange operators such as NYSE Euronext, Nasdaq OMX Group and CBOE Holdings.
BOX first proposed the new derivative—which is geared to institutional investors—in February. It would be similar to the standard SPY contract in all respects except that it will be based on 1,000 shares instead of 100. Otherwise, the strikes and expiration dates are the same. BOX did not disclose the size of the minimum trading increment. The trading symbol would be SPYJ, as in “jumbo.’’
Since then, the options exchanges have written letters to the SEC asking it to disapprove the product. They argued it could both confuse retail investors as well as render them second-class citizens.
“There is an acute risk of the BOX proposal creating a two-tiered market for SPY ETF options: one market for institutional investors and another, separate market for retail investors,” NYSE said in its letter.
NYSE is concerned that some trading will migrate from the 100-share SPY contract to the 1,000-share SPY contract, thereby reducing liquidity in the former.
NYSE also frets over the size of the minimum trading increment for the jumbo SPY. If it is greater than the penny-per-share now used for the standard SPY contract, market makers might switch their loyalty to the new contract. That could harm pricing in the 100-share contract.
Finally, all three exchanges told the SEC that the addition of a new SPY contract would confuse investors. Because the SEC recently approved a new “mini” option on the SPY that covers only 10 shares, the approval of the jumbo SPY ETF option would present traders with three similar looking products.
That could lead to trades made in error, the exchanges noted.
CBOE asked the SEC to consider the BOX’s proposal carefully as current trends could lead to an explosion in look-a-like options. CBOE worries that the marketplace could become “saturated” with several contracts on the same security.
The BOX proposal is not the first 1000-share options contract to be introduced. NYSE Amex Options launched one on the S&P 400 MidCap SPDR ETF in 1996. That product was eliminated in 2000, following complaints about investor confusion, NYSE told the SEC.
Also, in 2010, Amex considered the introduction of a jumbo SPY ETF contract—exactly same as the BOX proposal. That plan was scrapped.
For BOX, the SPY proposal is the first major product initiative since industry veteran Ed Boyle joined the exchange in January as senior vice president of business development and strategy. Perhaps coincidentally, Boyle was in charge of NYSE Euronext’s options business in 2010.
