SEC prefers more open options trade
Reuters, 04.29.04, 1:07 PM ET
By Doris Frankel
CHICAGO, April 29 (Reuters) - A U.S. regulator has suggested stock index options such as the Standard & Poor's 500 should be listed on multiple exchanges, a move which would challenge the last options redoubt dominated by Chicago.
If U.S. regulators were to force an opening of index options to all U.S. exchanges, it would end the exclusive listing of the most lucrative contracts on the Chicago Board Options Exchange, which pioneered the trading of stock index options more than 20 years ago.
"Our very, very strong preference is for the multiple listing of all products," Annette Nazareth, director of the U.S. Securities and Exchange Commission's division of market regulation, told the biggest meeting of the U.S. options industry in Phoenix last week.
CBOE has already lost its dominance of equity options trading on individual stocks to the all-electronic International Securities Exchange, known as ISE.
So it is no surprise that the Chicago exchange is fighting tooth and nail to stop the ISE and other electronic competitors from listing the lucrative index options contracts, which have been a growing market in recent years.
The CBOE has exclusive rights to trade the two most active index futures contracts -- the S&P's 500 index <.SPX>, with more than 14 million contracts traded so far this year, and the S&P 100 index <.OEX>, with about 6 million contracts.
Index options are similar to options on individual stocks in that the holder of the option has the right to buy or sell the underlying index at a predetermined price.
But they differ from stock options in that they are based on indexes created by developers like S&P and Dow Jones & Co. (nyse: DJ - news - people), which decide how to license them.
Exclusive agreements between exchanges and developers irk rival markets like ISE and the Pacific Exchange, who have a very small share of the index options market. Those exchanges say multiple listings increase competition, narrow the bid/ask spread and improve liquidity.
The ISE in late 2002 asked the SEC for the products to be listed on all exchanges. The regulator has not yet issued a formal ruling, although there is a precedent because it requires competition in listing of options on individual stocks.
"We are asking the SEC to expand the benefits of multiple listing to all products just like they did with equity options. We are willing to pay a licensing fee like anybody else," said Steve Sears, ISE's director of Research and Corporate Affairs.
But it is not entirely clear that the SEC has the full legal authority to throw the market open to competition. The CBOE argues that options based on an index are covered by U.S. copyright and patent law rather than securities law.
"It's true for the most part, the SEC's jurisdiction does not extend to patents and copyright. However, if the patent or copyright impacted the national marketplace for securities, then the SEC may have jurisdiction," said Scott Early, a Chicago-based partner for Foley & Lardner, a firm specializing in securities law.
The CBOE argues it has paid dearly for these licenses and spent substantial time and money in the marketing and educating to make these contracts popular with investors.
"These products are not in the public domain," CBOE Chairman and Chief Executive William Brodsky said at the Phoenix conference. "I challenge our competitors to grow the business, to innovate on their own."
At stake could be the next boom in options trading. In 2001, the American Stock Exchange gave up exclusive rights to list options based on the Nasdaq 100 Tracking Stock, known as QQQ, which tracks the 100 biggest stocks on the Nasdaq. Volume skyrocketed when QQQs were listed on other exchanges, and so far this year they have been the most active options class with 40.8 million contracts traded.
Copyright 2004, Reuters News Service |
