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Ready or Not, Here Come SPY Options

The International Securities Exchange plans to offer them, and the CBOE must adjust its policy again.

Following up

my Columnist Conversation post late Wednesday, it is now official: The International Securities Exchange (ISE) announced yesterday that it's preparing to launch options on the popular

S&P Depositary Receipts


, and trading could begin as early as this Friday or early next week.

This would be a hugely positive development for both the options industry and investors, as this product is likely to quickly become one of the most popular and actively traded options contracts.

But the introduction does not come without controversy. The ISE and other exchanges have been petitioning the

Securites and Exchange Commission

for years to gain the right to trade SPY options, on the grounds that the Chicago Board of Options Exchange's (CBOE) exclusive licensing agreement with Standard & Poor's parent



was anticompetitive and not consistent with the trend toward multiple market listings and linkage between exchanges. The CBOE and S&P countered that they possessed a perfectly legal contract based on intellectual property rights.

We Don't Need No Stinkin' License

But consistent with the ISE's proactive, progressive, take-no-prisoners approach that has made it the market-share leader, the exchange is apparently ready to list SPY options without completely resolving the legal or licensing issues. My guess is that a recent decision in which a federal district judge ruled against the

Nasdaq Stock Market

, saying it could not prevent Archipelago from trading the

Nasdaq 100 Trust


ETF on its electronic platform, bolstered the ISE to just forge ahead and not wait for a court decision on this issue or a resolution to the ongoing Justice Department investigation.

As I've written before,

the lack of options on the SPDRs and the CBOE's policy of protecting its exclusive trading rights, struck me as unduly stubborn and short-sighted even though it had legal standing. The start-up and marketing costs have long since been paid for, and more revenue can be generated by expanding the trading and licensing rights. The CBOE was actually seeing volume growth fall far short of the volume seen for products such as options on the QQQQs, which have become the runaway volume leader. What we should see now, as I suggested in that column, is an increase in overall volume for


options exchanges as this conspicuously absent contract becomes available for trading.

SPX Brokers Stand to Lose

Even as other exchanges begin listing SPY options once they find out the water's safe, I expect that the ISE will quickly garner a dominant market share, because it's the first mover and is committed to the best electronic trading platform.

This means that the CBOE -- and more specifically its live, on-floor brokers in the

S&P 500

index (SPX) option pit -- stands to lose the biggest. That's because even as the exchange is scrambling (that word seems to be a theme of its operations ever since the ISE came into existence) to prepare for listing SPY options, it will come at the cost of lost leverage to make a better deal to share trading rights on S&P products, which will surely siphon volume away from its near monopoly on index products.

To me, the CBOE seems to have misplayed its hand. Six months ago, all of the other option exchanges were willing to pay for trading rights and share in revenue; now with the ISE forging ahead, the CBOE stands to get nothing but new costs and legal bills as it tries to defend its turf.

Retail Traders Will Be Happy Participants

The fact that the SPY contract is priced at about one-tenth of the S&P Index (around $118 compared with 1,180) means that the dollar amounts are much more welcoming to retail investors. David Kalt, president and CEO of the online brokerage firm OptionsXpress, expects SPDR options to be hugely popular and one of the most successful new products.

Of course, as discussed above, its "newness" is relative, given that its introduction has been unduly delayed for over three years now. But it's better late than never.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from 1989 to 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to