FR 2021-00199

General Summary

The document in question is a notice about a proposed rule change by the Cboe Exchange, Inc. It aims to allow the listing and trading of "micro-options," which are index options with a significantly smaller index multiplier of one. This proposal seeks to make these options more accessible to retail investors by offering lower-priced investment choices, representing only one-hundredth of the value of existing index options. The Securities and Exchange Commission (SEC) is asking for public comments to assess the proposal's alignment with the Securities Exchange Act of 1934.

Significant Issues or Concerns

The document is filled with highly technical and complex language, which can be daunting for someone without a background in finance or law. This complexity may hinder comprehensive public understanding and engagement. Moreover, the text is replete with references to specific rules and sections, which presumes that the reader has prior knowledge of regulatory provisions. The use of multiple acronyms and abbreviations, such as SPX, OCC, and ODD, without clear explanations further complicates the understanding of the proposal.

Additionally, the document references numerous reports, positions, and filings without clear summaries or explanations of what they aim to achieve. This lack of clarity can obscure the document's main objectives, particularly concerning the benefits and impacts of introducing micro-options to the market.

Impact on the Public

The introduction of micro-options is poised to potentially broaden access to the options market for retail investors. By lowering the cost barrier, smaller and individual investors might find it easier to engage in precise hedging strategies or investment practices that were previously out of reach due to high prices. This could lead to increased participation in the financial markets, promoting financial literacy and potentially diversifying investment portfolios.

However, the complexity of the proposal's documentation may limit its reach and comprehensibility to the broader public. For it to be truly beneficial, there should be more accessible information disseminated to educate potential new entrants about the risks and mechanics of options trading.

Impact on Stakeholders

Retail Investors: Retail investors stand to gain from expanded access to affordable options, enabling them to hedge their positions with greater precision than before. This could democratize part of the financial markets, allowing for a broader spectrum of participants.

Financial Professionals and Market Participants: The proposal may also drive increased activity and liquidity within the markets, as financial professionals could attract new business by targeting this broader audience. Market makers may be incentivized to adopt micro-options, potentially fostering enhanced competition and pricing within this niche market.

Regulatory Bodies: Regulatory bodies like the SEC will need to monitor this shift carefully, ensuring that the trading of these new financial products is fair and transparent, maintaining the integrity of the markets.

Challenges: Despite the potential benefits, the risk remains that less experienced investors could engage in complex financial products without fully understanding them, potentially leading to significant financial losses.

In conclusion, while the introduction of micro-options offers promising avenues for market expansion and participation, the implications of complex documentation highlight the necessity for clearer communication and education initiatives. This will help ensure that the new market opportunities are understood and accessible to a diverse audience.

The document discusses a proposed rule change by the Cboe Exchange, Inc. regarding the listing and trading of index options, referred to as "micro-options," which would have an index multiplier of one. This change seeks to lower the effective price of trading options by reducing the multiplier from the current standard of 100 to 1, thus affecting the notional value of these financial instruments.

The rule change aims to address the issue of high costs associated with standard options due to high index values. For instance, given the SPX was valued at 3629.65 on November 25, 2020, the notional value of an SPX option with a multiplier of 100 was $362,965. This high notional value can be a barrier for retail investors. By introducing options with a multiplier of one, the cost per option could be dramatically reduced. Therefore, proportionately equivalent SPX micro-options would allow trading at a much lower price of $32.05 per contract.

For a portfolio valued at $10,000,000, this proposal highlights how micro-options could allow for a more precise hedging strategy. Using standard options, an investor might need to trade 28 contracts to closely match the portfolio value, resulting in a notional value of $10,163,020. However, with micro-options, the investor would require 2,755 contracts, enabling them to hedge within just $315 of the portfolio value—offering better precision.

The document further explains that smaller strike price intervals are proposed for micro-options, set at $0.50 or greater. This is a deliberate attempt to make these options more accessible and useful, particularly for retail investors, by offering finer granularity in the pricing. The change from a standard option strike deliverable of $325,000 to a micro-option deliverable of $3,250 aligns with the goal of affordability and risk reduction.

Despite the technical nature of this proposed change, it subtly addresses several issues, including market accessibility and liquidity. By lowering costs and refining pricing, Cboe Exchange hopes to make their products more attractive, possibly drawing liquidity away from the less transparent over-the-counter (OTC) markets to a more regulated environment. This shift could bring about benefits of increased market transparency and enhanced efficiency in trading.

In conclusion, the document outlines a potentially significant financial strategy aimed at expanding market participation by reducing the entry barriers associated with high costs of traditional index options. By lowering the financial stakes through micro-options, Cboe Exchange is seeking to provide a competitive and attractive alternative for retail investors, enhancing flexibility and hedging precision.