Daily Rules, Proposed Rules, and Notices of the Federal Government
Options on the SPY ETF ("SPY options") are American-style, p.m.-settled options that physically settle into shares of the underlying SPY ETF.
Thus, the Exchange's proposal, as amended, seeks to amend Commentary .07 to NYSE Amex Options Rule 904 to eliminate position limits for SPY options on a fourteen-month pilot basis set to end October 15, 2013. The Exchange states that it will perform an analysis of the initial pilot program after a twelve month period (the "Pilot Report"), which will be submitted to the Commission within thirty (30) days of the end of the Pilot Period. The Pilot Report will compare the impact of the pilot program, if any, on the volumes of SPY options and the volatility in the price of the underlying SPY contract, particularly at expiration. The Pilot Report also will detail the size and different types of strategies employed with respect to positions established in SPY options; note whether any problems, in the underlying SPY ETF or otherwise, arose as a result of the no-limit approach; and include any other information that may be useful in evaluating the effectiveness of the pilot program. In preparing the Pilot Report, the Exchange will utilize various data elements such as volume and open interest. If the pilot is not extended or permanently approved by the end of the Pilot Period, the position limits for SPY options will revert to the limits in effect at the commencement of the pilot program.
The Exchange believes that SPY options with no position limit will (1) offer investors another investment option through which they could obtain and hedge significant levels of exposure to the S&P 500 stocks, (2) be available to trade on the Exchange (and presumably all other U.S. options exchanges) electronically, and (3) provide investors with added flexibility through an additional product that, in the Exchange's view, may be better tailored to meet their particular investment, hedging, and trading needs, because, among other things, they are p.m.-settled.
The Exchange cites the current treatment of SPX index options
The Exchange argues that, if no position limits have been found to be warranted on both SPX and SPXPM index options, the same treatment should be extended to SPY options so that inconsistent position limits do not produce competitive advantages and disadvantages among contracts. The Exchange cites observations regarding competition among economically equivalent products, appearing in a 2005 paper by Hans R. Dutt and Lawrence E. Harris,
The Exchange cites the Commission as noting, in its approval of the elimination of position and exercise limits with respect to SPX index options, that the markets for the securities underlying the S&P 500 Index are deep and liquid, and maintaining that this reduces concerns regarding manipulation or disruption in the underlying markets.
The Exchange also believes that the SPY ETF's market capitalization is at a level consistent with that which the Commission has previously determined to be sufficiently large, in tandem with the depth and liquidity of the markets for the SPY ETF, to reduce concerns regarding manipulation.
The Exchange further cites the Dutt-Harris Paper in addressing possible concerns that the elimination of the position limit on SPY options could raise the risk of market manipulation. The Exchange believes that the Dutt-Harris analysis, which focuses on concerns relating to manipulation of cash-settled derivatives, suggests that whatever manipulation risk does exist in a cash-settled, broad-based product such as the SPXPM index option, the corresponding risk in a physically-settled, but equally broad-based product such as the SPY option, is likely to be equally low, if not lower.
In assessing the appropriateness of eliminating position limits for SPY options, the Exchange also notes its rules setting forth reporting requirements for large options positions and, among other things, the Exchange's ability to impose higher margin requirements upon accounts that it determines to be under-hedged.
Finally, with respect to concerns that the elimination of position limits for SPY options could result in, or increase, market-on-close volatility, the Exchange believes that the ability to hedge SPY options with shares of the SPY ETF reduces the likelihood of such volatility.
The Commission received two comment letters on the proposal. One letter supported the proposed elimination of position limits on SPY options.
After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.
Position and exercise limits serve as a regulatory tool designed to address manipulative schemes and adverse market impact surrounding the use of options. Since the inception of standardized options trading, the options exchanges have had rules limiting the aggregate number of options contracts that a member or customer may hold or exercise.
In general, the Commission has taken a gradual, evolutionary approach toward expansion of position and exercise limits for option products overlying certain ETFs where there is considerable liquidity in both the underlying cash markets and the options markets, and, in the case of certain broad-based index options, toward elimination of such limits altogether.
The Commission has carefully considered the Exchange's proposal. The Exchange argues that SPY options are ultimately derivative of the S&P 500 Index, and should therefore be treated, from a position limit perspective, similarly to index options based on the S&P 500 which have no position limits, such as SPX and SPXPM. However, in reviewing the Exchange's arguments, the Commission considered certain noteworthy differences that exist, in its view, between SPY options and those index option products.
Among other things, SPX and SPXPM are cash-settled options on the S&P 500 Index. SPY options, on the other hand, are physically-settled options on a single security--the SPY ETF. Moreover, SPY options settle into shares of the SPY ETF, a single security, the performance of which, in turn, generally corresponds to the performance of the S&P 500 Index. Thus, unlike SPX and SPXPM, SPY options are indirectly based on the performance of the individual components of the S&P 500 Index.
Nevertheless, in spite of such differences, the Commission believes that SPY options have certain characteristics that serve to mitigate the concerns that position limits are designed to address. As the Exchange has represented, SPY options are the most actively traded options in terms of ADV. That, in combination with the depth and liquidity of the markets for the underlying SPY ETF as well as the component securities of the S&P 500 Index, and the surveillance capabilities of the Exchange, support the elimination of position limits for SPY options while still helping to ensure that large positions in such options will not unduly disrupt trading in the options or in the underlying SPY ETF. Given the Exchange's belief that eliminating position limits will afford investors more flexibility in meeting their particular investment, hedging, and trading needs, the Commission believes that it is consistent with the Act and appropriate, at this time, to allow SPY options to be traded on the Exchange without position limits on a pilot basis. The Commission believes that eliminating position limits on the highly liquid SPY options represents the next step of a measured approach to position limits on these options.
As an initial matter, the Commission notes that certain characteristics unique to SPY options, taken together, significantly mitigate concerns regarding manipulation or potential disruptions of the markets for SPY options or the underlying SPY ETF. Importantly, and as supported by the figures the Exchange has provided, the markets for SPY options, the underlying SPY ETF, and the component securities upon which the S&P 500 Index is based are extremely deep and liquid.
The Commission also believes that the Exchange's reporting requirements and surveillance systems should enable it to detect and deter any trading abuses that might arise from the elimination of position limits for SPY options.
In this regard, the Commission believes that financial requirements imposed by the Exchange and the Commission help allay concerns that an Exchange member or its customer may try to maintain an inordinately large, unhedged SPY option position. Current margin and risk-based haircut methodologies serve to limit the size of positions maintained by any one account by increasing the margin and/or capital that a member must maintain for a large position held by it or by its customer.
As the Exchange notes, NYSE Amex Options Rule 906(a) requires Exchange members to report to the Exchange any account with an aggregate position (whether long or short) of 200 or more options contracts where the underlying security is a stock or ETF share.
The Commission believes further that, to the extent that the elimination of SPY option position limits results in movement of trading interest from the OTC market onto the Exchange,
Notwithstanding the protections discussed above, the Commission believes that a prudent approach is warranted with respect to the Exchange's proposal to eliminate position limits for SPY options. In this regard, the Commission believes that the risks of manipulation and potential market disruption are significantly mitigated as discussed above. To the extent the potential for adverse effects on the markets for the SPY ETF or the S&P 500 component securities underlying the SPY ETF continues to exist, the Exchange's proposal to implement this change on a pilot basis should help to address this concern. Accordingly, the Commission is approving the proposal, as amended, on a fourteen-month pilot basis.
The Commission expects that, throughout the Pilot Period, the Exchange will monitor for any problems and collect and analyze on an ongoing basis the data and information that the Exchange ultimately intends to include in the Pilot Report. The Commission also expects that the Exchange will take prompt action, including timely communication with the Commission and with other marketplace self-regulatory organizations responsible for oversight of trading in component stocks, should any unanticipated adverse market effects develop.
The Commission finds good cause to approve the filing, as amended by Amendment No. 1 to the proposed rule change, prior to the thirtieth day after the date of publication of notice of filing thereof in the
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods:
* Use the Commission's Internet comment form (
* Send an email to
* Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.