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 ( SPY), 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 McGraw-Hill ( MHP) 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 ( QQQQ) 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 all options exchanges as this conspicuously absent contract becomes available for trading.