'Jumbo' SPY options make debut, but liquidity a concern to some

Fri May 10, 2013 5:09pm EDT
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By Doris Frankel

(Reuters) - A new "jumbo" option contract on the popular S&P 500 tracking ETF debuted on the BOX Options Exchange on Friday, but at least one rival has opted not to list the product for now because of concerns it will hurt liquidity in existing options on the fund.

The new product, known as the Jumbo SPY Options, is ten times the size of a traditional options contract on the fund, and is designed for institutional investors who prefer larger-sized contracts when executing their strategies.

Its introduction comes at a time when competing exchanges are trying to innovate and meet the demand of their customers.

"There are 11 option exchanges competing for order flow and innovation is the lifeblood of their future growth," said Andy Nybo, head of derivatives at research firm TABB Group.

BOX received the go-ahead from the U.S. Securities and Exchange Commission this week to trade the Jumbo SPY contract. Other option venues can list the contract after submitting a rule filing to the Securities and Exchange Commission.

Jumbo SPY options are based on 1,000 shares of the SPDR S&P 500 exchange-traded fund (SPY.P: Quote), the largest U.S. ETF by assets, compared to the standard contract based on 100 shares. They are targeted for customers who are looking for a larger notional contract size, BOX said.

However, the International Securities Exchange said on Friday it chose not to join BOX in opening them for trading. ISE's primary concern was that this would divide trading between the standard SPY options and the jumbos, therefore weakening the liquidity in one of the most actively traded issues in options.

"We believe Jumbo SPY would not create incremental volume and, even worse, could harm liquidity in SPY," said Boris Ilyevsky, ISE managing director, in an email to members.   Continued...