CBOE Holdings will launch trading of its proprietary option on the S&P 500 Index on its new C2 exchange in the first quarter of next year.
The decision has been much anticipated and eagerly awaited by many in the options industry. Traders expect the SPX, as it is called, to be a volume leader on C2 as it is on the CBOE.
For many it will be easier to gain access to SPX quotes on C2 than those in the CBOE pits. Plus, it may be more cost effective to trade than its CBOE counterpart as well as competitor products such as options on the SPDR exchange-traded fund.
CBOE chief executive Bill Brodsky confirmed the exchange operator’s plans yesterday. “While CBOE’s market model for SPX options continues to be extraordinarily successful for our institutional and complex options business,” Brodsky said at a Bank of America Merrill Lynch conference, “we believe that an all-electronic version of SPX options will attract new users and complement our traditional offering on the floor.”
The SPX could become one of the most actively traded options at C2, given its appeal to money managers. It already trades about 600,000 contracts per day at CBOE. “This is what everyone is waiting for,” Bob Fitzsimmons, head of agency brokerage ITG Derivatives, said.
In making the SPX available for trading on C2, the CBOE opens the contract up to more traders. Due to the way the so-called “Best of Both Worlds” system works in the CBOE’s SPX pit, many traders face obstacles interacting with SPX lead market makers.
The all-electronic C2 contains no such restrictions and is designed to facilitate more traders, especially market makers and proprietary traders. And for customers, at 10 cents per contract, the trading charges are significantly lower than for most products at other exchanges.
And while there may be some shift in SPX trading from the CBOE pits to C2, much of the impact is expected to be felt in the trading of options on the SPDR, the exchange-traded fund based on the S&P 500 Index.
For the CBOE, launching SPX trading on C2 is a direct assault on the trading of SPDR options on the exchanges of its competitors. The option on the SPDR ETF is one of the most liquid options and is traded across all eight options exchanges. Many traders use it as a proxy for the S&P index when hedging a portfolio.
Because SPX allows traders to command 10 times as much notional value as the option on the SPDR ETF, it is expected to be the product of choice for some money managers, as it will reduce their trading costs.
“It’s a huge contract that is geared toward the buyside,” Fitzsimmons said. “And now they can trade one-tenth the number of contracts. It should be a very attractive offering.”
(It should be noted that trading the SPDR is free for customers on some exchanges, such as NYSE Amex Options, whereas CBOE has charged large-lot traders in the past. The CBOE has not divulged its pricing plans for SPX.)
CBOE launched C2 in October to compete with exchanges using maker-taker pricing. As trading in penny increments as come to dominate, the practice of paying liquidity providers and charging liquidity takers has swept the industry. At least half of all options volume trades on a make-take basis now.
C2 is a make-take exchange. However, its allocation model is not based on price and time priority. Like Nasdaq OMX PHLX and the International Securities Exchange C2 blends make-take pricing with pro rata allocations for dealers. In other words, market makers are likely to be significant players at C2. About 40 “leading” firms have signed up to trade at C2 so far, according to the exchange.
