Eliminating SPY Position Limits

On May 14, 2012 NYSE Amex Options’ rule filing to eliminate SPY option (options on the S&P 500 ETF) position limits was published by the SEC for comment. Historically, position limits have been used as a regulatory tool in the options markets to help prevent potentially manipulative schemes from adversely impacting the market. However, as SPY options have grown in volume to become the most actively traded options class in terms of average daily volume[1]; these position limits have become prohibitive to the optimal use of the product.

For many large market participants, such as mutual funds and other institutional investors, SPY options provide a means to deal with their substantial hedging needs. Currently, position limits are capped at 900,000 contracts on the same side of the market. By comparison, SPX options (options on the S&P 500 Index) which are 10 times the notional size of SPY options do not have these limits. A position of only 90,000 SPX options is equivalent to a position of 900,000 SPY options. The growth of SPX options trading volumes in recent years indicates that market participants are potentially forgoing SPY options in favor of utilizing SPX options for their hedging needs.

NYSE Amex Options believes that because SPX and SPY options are ultimately derivatives of the same benchmark- the S&P 500 Index- they should be treated equally from a position limit perspective. Therefore, SPY position limits should be eliminated.

For more information please read NYSE Amex Options’ rule filing here.

[1] Based off of OCC data

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