90 FR 3 pgs. 704-710 - Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Proposed Rule Change To Increase the Position and Exercise Limits for iShares Bitcoin Trust ETF
Type: NOTICEVolume: 90Number: 3Pages: 704 - 710
Pages: 704, 705, 706, 707, 708, 709, 710Docket number: [Release No. 34-102065; File No. SR-ISE-2024-62]
FR document: [FR Doc. 2024-31771 Filed 1-3-25; 8:45 am]
Agency: Securities and Exchange Commission
Official PDF Version: PDF Version
[top]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102065; File No. SR-ISE-2024-62]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Proposed Rule Change To Increase the Position and Exercise Limits for iShares Bitcoin Trust ETF
December 31, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on December 20, 2024, Nasdaq ISE, LLC ("ISE" or "Exchange") filed with the Securities and Exchange Commission ("Commission") the proposed rule change as described in Items I and II below, which Items have been prepared by ISE. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
Footnotes:
1 ?15 U.S.C. 78s(b)(1).
2 ?17 CFR 240.19b-4.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend Options 9, Sections 13 and 15 to propose an increase to the position and exercise limits for iShares Bitcoin Trust ETF ("IBIT").
The text of the proposed rule change is available on the Exchange's website at https://listingcenter.nasdaq.com/rulebook/ise/rules, at the principal office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Options 9, Section 13, Position Limits, and Options 9, Section 15, Exercise Limits, to increase the position and exercise limits for options on IBIT from 25,000 to 250,000 contracts.
IBIT is an Exchange-Traded Fund ("ETF") that holds bitcoin and is listed on The Nasdaq Stock Market LLC. 3 On September 20, 2024, ISE received approval to list options on IBIT. 4 The position and exercise limits for IBIT options are 25,000 contracts as stated in Options 9, Sections 13 and 15, the lowest limit available in options. 5
Footnotes:
3 ?Nasdaq received approval to list and trade Bitcoin-Based Commodity-Based Trust Shares in IBIT pursuant to Rule 5711(d) of Nasdaq. See Securities Exchange Act Release No. 99306 (January 10, 2024), 89 FR 3008 (January 17, 2024) (SR-NASDAQ-2023-016) (Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, To List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units). IBIT started trading on January 11, 2024.
4 ? See Securities Exchange Act Release No. 101128 (September 20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03) (Notice of Filing of Amendment Nos. 4 and 5 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 4, and 5, To Permit the Listing and Trading of Options on the iShares Bitcoin Trust) ("IBIT Approval Order"). ISE began trading IBIT options on November 19, 2024.
5 ?Options on Fidelity Wise Origin Bitcoin Fund, ARK 21Shares Bitcoin ETF, Grayscale Bitcoin Trust (BTC), Grayscale Bitcoin Mini Trust BTC, and Bitwise Bitcoin ETF are also subject to a 25,000 contract position and exercise limit.
Per the Commission "rules regarding position and exercise limits are intended to prevent the establishment of options positions that can be used or might create incentives to manipulate or disrupt the underlying market so as to benefit the options positions."? 6 For this reason, the Commission requires that "position and exercise limits must be sufficient to prevent investors from disrupting the market for the underlying security by acquiring and exercising a number of options contracts disproportionate to the deliverable supply and average trading volume of the underlying security."? 7 Based on its review of the data and analysis provided by the Exchange, the Commission concluded that the 25,000 contract position limit for non-FLEX IBIT options satisfied these objectives. 8
Footnotes:
6 ? See supra note 4, IBIT Approval Order, 89 FR 78946.
7 ? See id.
8 ? See id.
[top]
While the Exchange proposed an aggregated 25,000 contract position limit for IBIT options in its IBIT Approval Order, it nonetheless believed that evidence existed to support a much higher position limit. Specifically, the Commission has considered and reviewed the Exchange's analysis in its IBIT Approval Order that the exercisable risk associated with a position limit of 25,000 contracts represented only 0.4% of the outstanding shares of IBIT. 9 The Commission also has considered and reviewed the Exchange's statement its IBIT Approval Order that with a position limit of 25,000 contracts on the same side of the market and 611,040,00 shares of IBIT outstanding, 244 market participants would have to simultaneously exercise their positions to place IBIT under stress. 10 Based on the Commission's review of this information and analysis, the Commission concluded that the proposed position and exercise limits of 25,000 contracts were designed to prevent investors from disrupting the market for the underlying security by acquiring and exercising a number of options contracts disproportionate to the deliverable supply and average trading volume of the underlying security, and to prevent the establishment of options positions that can be used or might create incentives to manipulate or disrupt the underlying market so as to benefit the options position. 11
Footnotes:
9 ? See id. Data represents figures from August 12, 2024.
10 ? See id. Data represents figures from August 12, 2024.
11 ? See id.
IBIT currently qualifies for a 250,000 contract position limit pursuant to the criteria in Options 9, Section 13(g), which requires that, for the most recent six-month period, trading volume for the underlying security be at least 100,000,000 shares. 12 As of November 25, 2024, the market capitalization for IBIT was $46,783,480,800? 13 with an average daily volume ("ADV"), for the preceding three months prior to November 25, 2024, of 39,421,877 shares. IBIT is well above the requisite minimum of 100,000,000 shares necessary to qualify for the 250,000 contract position limit. Also, as of November 25, 2024, there are 19,787,762 bitcoins in circulation. 14 At a price of $94,830, 15 that equates to a market capitalization of greater than $1.876 trillion US. If a position limit of 250,000 contracts were considered, the exercisable risk would represent 2.89%? 16 of the outstanding shares outstanding of IBIT. Given IBIT's liquidity, the current 25,000 position limit is extremely conservative.
Footnotes:
12 ?Options 9, Section 13(g), Equity Option Position Limits, provides at subparagraph (i) that the position limit shall be 250,000 contracts for options: (a) on an underlying stock or Exchange-Traded Fund Share which had trading volume of at least 100,000,000 shares during the most recent six-month trading period; or (b) on an underlying stock or Exchange-Traded Fund Share which had trading volume of at least 75,000,000 shares during the most recent six-month trading period and has at least 300,000,000 shares currently outstanding.
13 ?The market capitalization was determined by multiplying a settlement price of ($54.02) by the number of shares outstanding (866,040,000). This figure was acquired as of November 25, 2024. See https://www.ishares.com/us/products/333011/ishares-bitcoin-trust-etf.
14 ? See https://www.coingecko.com/en/coins/bitcoin.
15 ?This is the approximate price of bitcoin from 4:00pm ET on November 25, 2024.
16 ?This percentage is arrived at with this equation: (250,000 contract limit * 100 shares per option/866,040,000 shares outstanding).
Position limits, and exercise limits, are designed to limit the number of options contracts traded on the exchange in an underlying security that an investor, acting alone or in concert with others directly or indirectly, may control. These limits, which are described in ISE Options 9, Sections 13 and 15, are intended to address potential manipulative schemes and adverse market impacts surrounding the use of options, such as disrupting the market in the security underlying the options. Position and exercise limits must balance concerns regarding mitigating potential manipulation and the cost of inhibiting potential hedging activity that could be used for legitimate economic purposes. To achieve this balance, ISE proposes to increase IBIT's position and exercise limits from 25,000 to 250,000 contracts. ISE believes that 250,000 contracts is the appropriate position and exercise limit based on its analysis described below.
First, ISE considered IBIT's market capitalization and Average Daily Volume ("ADV"), and prospective position limit in relation to other securities. In measuring IBIT against other securities, ISE aggregated market capitalization and volume data for securities that have defined position limits utilizing data from The Options Clearing Corporations ("OCC"). 17 This pool of data took into consideration 3,897 options on single stock securities, excluding broad based ETFs. 18 Next, the data was aggregated based on market capitalization and ADV and grouped by option symbol and position limit utilizing statistical thresholds for ADV, based on ninety days, and market capitalization that were one standard deviation above the mean for each position limit category ( i.e., 25,000, 50,000 to 65,000, 75,000, 100,000 to less than 250,000, and 250,000). 19 This exercise was performed to demonstrate IBIT's position limit relative to other options symbols in terms of market capitalization and ADV. For reference, the market capitalization for IBIT was $46,783,480,800? 20 with an ADV, for the preceding three months prior to November 25, 2024, of 39,421,877 shares.
Footnotes:
17 ?The computations are based on OCC data from November 25, 2024. Data displaying zero values in market capitalization or ADV were removed.
18 ?IBIT has one asset and therefore is not comparable to a broad based ETF where there are typically multiple components.
19 ?ISE Options 9, Section 13(d) sets out position limits for various contracts. For example, a 25,000 contract limit applies to those options having an underlying security that does not meet the requirements for a higher options contract limit. The Exchange notes that position limits may also be higher due to corporate actions in the underlying equities, such as a stock split. See https://www.theocc.com/market-data/market-data-reports/series-and-trading-data/position-limits. As a result, the Exchange's pool of data considered higher position limits than 250,000 contracts, where applicable.
20 ?The market capitalization was determined by multiplying a settlement price of ($54.02) by the number of shares outstanding (866,040,000). This figure was acquired as of November 25, 2024. See https://www.ishares.com/us/products/333011/ishares-bitcoin-trust-etf.
| Market cap statistics | 25k | 50k | 75k | 100k-<250k | 250k-<500k | 500k-1mm | >1mm |
|---|---|---|---|---|---|---|---|
| # of observations | 562 | 473 | 651 | 240 | 1934 | 27 | 10 |
| average | 1,038,795,162 | 2,957,127,045 | 4,466,049,699 | 5,390,836,360 | 26,286,624,063 | 67,390,777,100 | 717,540,906,097 |
| median | 360,130,143 | 889,627,570 | 1,445,831,231 | 1,643,123,279 | 3,535,963,213 | 27,063,940,966 | 90,047,209,478 |
| min | 2,204,436 | 4,211,156 | 3,830,532 | 5,090,230 | 1,616,094 | 2,762,394,749 | 11,786,645,969 |
| max | 36,120,249,097 | 70,846,805,916 | 174,820,296,591 | 106,971,594,180 | 3,573,884,443,220 | 733,972,714,698 | 3,358,647,600,000 |
| IBIT % rank | 100.00% | 98.94% | 98.77% | 98.33% | 88.57% | 59.26% | 20.00% |
[top]
| 90-Day ADV statistics | 25k | 50k | 75k | 100k-<250k | 250k-<500k | 500k-1mm | >1mm |
|---|---|---|---|---|---|---|---|
| # of observations | 562 | 473 | 651 | 240 | 1934 | 27 | 10 |
| average | 76,586 | 213,419 | 425,542 | 623,888 | 3,510,784 | 5,930,607 | 44,610,385 |
| median | 67,231 | 206,402 | 409,177 | 625,882 | 1,620,931 | 4,724,248 | 18,017,607 |
| min | 4,791 | 10,084 | 18,191 | 105,713 | 16,276 | 1,207,242 | 1,771,544 |
| max | 244,499 | 564,451 | 989,341 | 1,339,553 | 88,351,060 | 22,397,311 | 271,230,790 |
| IBIT % rank | 100.00% | 100.00% | 100.00% | 100.00% | 99.43% | 100.00% | 80.00% |
Based on the above table, if IBIT were compared to the 1,934 stocks that have position limits of 250,000 contracts to less than 500,000 contracts it would rank in the 88th percentile for market capitalization and the 99th percentile for ADV.
The Exchange also analyzed the position limits for IBIT by regressing the market capitalization figures and 90-day ADV of all non-ETF equities, against their respective position limit figures. From this regression, the Exchange was able to determine the implied coefficients to create a formulaic method for determining an appropriate position limit. 21 In this case, the modeled position limit is 565,796 contracts. 22 The results of the study are below.
Footnotes:
21 ?The Exchange utilized Excel's Data Analysis Package to model the position limit.
22 ?The Exchange utilized this formula to arrive at the number of contracts: ((46,783,380,800 mkt cap * 0.0000002630 market cap coefficient) + (39,421,877 ADV * 0.0140402219 ADV coefficient)).
| Multiple R | 0.496800597 |
| R Square | 0.246810833 |
| Adjusted R Square | 0.246361643 |
| Standard Error | 202227.4271 |
| Observations | 3905 |
| df | SS | MS | F | |
|---|---|---|---|---|
| Regression | 2 | 5.2304E+13 | 2.6152E+13 | 639.482566 |
| Residual | 3903 | 1.5962E+14 | 4.0896E+10 | |
| Total | 3905 | 2.1192E+14 | ||
| Coefficients | Standard error | t Stat | P-value | |
| Intercept | 0 | #N/A | #N/A | #N/A |
| Market Cap | 0.0000002630 | 3.3371E-08 | 7.88130564 | 4.1699E-15 |
| 90-day ADV | 0.0140402219 | 0.00055818 | 25.1533643 | 1.613E-129 |
Based on the aforementioned analysis, the Exchange believes that the proposed 250,000 contracts for position and exercise limits is appropriate.
Second, ISE reviewed IBIT's data relative to the market capitalization of the entire bitcoin market in terms of exercise risk and availability of deliverables. As of November 25, 2024, there are 19,787,762 bitcoins in circulation. 23 At a price of $94,830, 24 that equates to a market capitalization of greater than $1.876 trillion US. If a position limit of 250,000 contracts were considered, the exercisable risk would represent 2.89%? 25 of the outstanding shares outstanding of IBIT. Since IBIT has a creation and redemption process managed through the issuer, the position limit can be compared to the total market capitalization of the entire bitcoin market and in that case, the exercisable risk for options on IBIT would represent less than .072% of all bitcoin outstanding. 26 Assuming a scenario where all options on IBIT shares were exercised given the proposed 250,000 contract position limit (and exercise limit), this would have a virtually unnoticed impact on the entire bitcoin market. This analysis demonstrates that the proposed 250,000 per same side position and exercise limit is appropriate for options on IBIT given its liquidity.
Footnotes:
23 ? See https://www.coingecko.com/en/coins/bitcoin.
24 ?This is the approximate price of bitcoin from 4:00 pm ET on November 25, 2024.
25 ?This percentage is arrived at with this equation: (250,000 contract limit * 100 shares per option/866,040,000 shares outstanding).
26 ?This number was arrived at with this calculation: ((250,000 limit * 100 shares per option * $54.02 settle) / (19,787,762 BTC outstanding * $94,830 BTC price)).
[top] Third, ISE reviewed the proposed position limit by comparing it to position limits for derivative products regulated by the Commodity Futures Trading Commission ("CFTC"). While the CFTC, through the relevant Designated Contract Markets, only regulates options positions based upon delta equivalents (creating a less stringent standard), ISE examined equivalent bitcoin futures position limits. In particular, ISE looked to the CME bitcoin futures contract? 27 that has a position limit of 8,000 futures. 28 On October 22, 2024, CME bitcoin futures settled at $94,945. 29 On October 22, 2024, IBIT settled at $54.02, which would equate to greater than 17,557,898 shares of IBIT if the CME notional position limit was utilized. Since substantial portions of any distributed options portfolio is likely to be out of the money on expiration, an options position limit equivalent to the CME position limit for bitcoin futures (considering that all options deltas are <=1.00) should be a bit higher than the CME implied 175,578 limit. Of note, unlike options contracts, CME position limits are calculated on a net futures-equivalent basis by contract and include contracts that aggregate into one or more base contracts according to an aggregation ratio(s). 30 Therefore, if a
Footnotes:
27 ?CME Bitcoin Futures are described in Chapter 350 of CME's Rulebook.
28 ? See the Position Accountability and Reportable Level Table in the Interpretations & Special Notices Section of Chapter 5 of CME's Rulebook.
29 ?2,000 futures at a 5 bitcoin multiplier (per the contract specifications) equates to $949,450,000 (2000 contracts * 5 BTC per contract * $94,945 price of November BTC future) of notional value.
30 ? See https://www.cmegroup.com/education/courses/market-regulation/position-limits/position-limits-aggregation-of-contracts-and-table.htm.
31 ? Id.
Fourth, ISE analyzed a position and exercise limit of 250,000 for IBIT against other options on ETFs with an underling commodity, namely SPDR Gold Shares ("GLD"), iShares Silver Trust ("SLV"), and ProShares Bitcoin ETF ("BITO"). 32 GLD has a float of 306.1 million shares? 33 and a position limit of 250,000 contract. SLV has a float of 520.7 million shares, 34 and a position limit of 250,000 contracts. Finally, BITO has 107.65 million shares outstanding? 35 and a position limit of 250,000 contracts. As previously noted, position and exercise limits are designed to limit the number of options contracts traded on the exchange in an underlying security that an investor, acting alone or in concert with others directly or indirectly, may control. A position limit exercise in GLD would represent 8.17% of the float of GLD; a position limit exercise in SLV would represent 4.8% of the float of SLV, and a position limit exercise of BITO would represent 23.22% of the float of BITO. In comparison, a 250,000 contract position limit in IBIT would represent 2.89% of the float of IBIT. Consequently, the 250,000 proposed IBIT options position and exercise limit is more conservative than the standard applied to GLD, SLV and BITO, and appropriate. Additionally, the Exchange notes that the Cboe Bitcoin U.S. ETF Index Options (CBTX) and the Cboe Mini Bitcoin U.S. ETF Index Options (MBTX), 36 which trade exclusively on Cboe, are comprised of multiple bitcoin ETFs of which IBIT is the highest weighted (at 20%) in the index composition. 37 These indices currently trade pursuant to a 24,000 contract position and exercise limit. 38
Footnotes:
32 ?GLD, SLV and BITO each hold one asset in trust similar to IBIT.
33 ? See https://www.ssga.com/us/en/intermediary/etfs/spdr-gold-shares-gld.
34 ? See https://www.ishares.com/us/products/239855/ishares-silver-trust-fund.
35 ? See https://www.marketwatch.com/investing/fund/bito.
36 ?MBTX is based on 1/10th the value of the Cboe Bitcoin U.S. ETF Index.
37 ? See https://www.cboe.com/tradable_products/bitcoin-etf-index-options?utm_source=mcae&utm_medium=email&utm_campaign=bitcoin_eft_options_launch. Cboe's website provides a product comparison chart indicating that CBTX and MBTX are permitted to trade FLEX as compared to spot bitcoin ETF options. See https://cdn.cboe.com/resources/membership/Cboe_Bitcoin_US_ETF_Options_Comparative_Overview.pdf?_gl=1*1xmm04c*_up*MQ..*_ga*MTc0MjU1NzU1Ni4xNzM0NTU2NTky*_ga_5Q99WB9X71*MTczNDU1NjU5MC4xLjAuMTczNDU1NjU5MC4wLjAuMA.
38 ? See Cboe Rule 8.32(a). The Exchange notes that given the multiplier and notional value of CBTX, the index has a position and exercise limit that equates to 1,000,000 contracts of in kind exposure to IBIT, which is more than 40 times greater than the exposure for options on IBIT at the current 25,000 contract position and exercise limit.
Fifth, ISE notes that IBIT is likely to trade in penny increments as of January 2, 2025, provided it is able to meet the applicable criteria. 39 The Commission noted that evidence contained in both the Exchanges' Report and the Cornerstone analysis demonstrates that the Penny Pilot has benefitted investors and other market participants in the form of narrower spreads. 40 The most actively traded options classes are included in the Penny Program based on certain objective criteria (trading volume thresholds and initial price tests). As noted in the Penny Approval Order, the Penny Program reflects a certain level of trading interest (either because the class is newly listed or a class that experience a significant growth in investor interest) to quote in finer trading increments, which in turn should benefit market participants by reducing the cost of trading such options. 41 If IBIT options were to enter the Penny Program, it will be among a select group of products that have achieved a certain level of liquidity that have garnered it the ability to trade in finer increments. The Exchange believes that if IBIT options were to trade in penny increments, failing to increase position and exercise limits once it started trading in finer increments, may artificially inhibit liquidity and create price inefficiency.
Footnotes:
39 ?The Exchange may add to the Penny Program a newly listed option class provided that (i) it is among the 300 most actively traded multiply listed option classes, as ranked by National Cleared Volume at OCC, in its first full calendar month of trading and (ii) the underlying security is priced below $200 or the underlying index is at an index level below $200. Any option class added under this provision will be added on the first trading day of the month after it qualifies and will remain in the Penny Program for one full calendar year, after which it will be subject to the Annual Review described in Supplementary Material .01(b) to Options 3, Section 3. The Exchange may add any option class to the Penny Program, provided that (i) it is among the 75 most actively traded multiply listed option classes, as ranked by National Cleared Volume at OCC, in the past six full calendar months of trading and (ii) the underlying security is priced below $200 or the underlying index is at an index level below $200. Any option class added under this provision will be added on the first trading day of the second full month after it qualifies and will remain in the Penny Program for the rest of the calendar year, after which it will be subject to the Annual Review as described in Supplementary Material .01(b) to Options 3, Section 3. See Supplementary Material .01 to ISE Options 3, Section 3.
40 ? See Securities Exchange Act Release No. 88532 (April 1, 2020), 67 FR 19545, 19548 (April 7, 2020) (File No. 4-443) (Joint Industry Plan; Order Approving Amendment No. 5 to the Plan for the Purpose of Developing and Implementing Procedures Designed To Facilitate the Listing and Trading of Standardized Options To Adopt a Penny Interval Program) ("Penny Approval Order").
41 ? Id. at 19548.
The Exchange believes that IBIT options has demonstrated that it has more than sufficient liquidity to garner an increased position and exercise limit of 250,000 contracts. The Exchange believes that any concerns related to manipulation and protection of investors are mollified by the significant liquidity provision in IBIT. The Exchange states that, as a general principle, increases in active trading volume and deep liquidity of the underlying securities do not lead to manipulation and/or disruption.
[top] The Exchange believes that increasing the position (and exercise) limits for IBIT options would lead to a more liquid and competitive market environment for IBIT options, which will benefit customers that trade these options. Further, the reporting requirement for such options would remain unchanged. Thus, the Exchange will still require that each member organization that maintains positions in impacted options on the same side of the market, for its own account or for the account of a customer, report certain information to the Exchange. This information includes, but would not be limited to, the options' positions, whether such positions are hedged and, if so, a description of the hedge(s). Market-Makers would continue to be exempt from this reporting requirement, however, the Exchange may access Market-Maker position information. 42
Footnotes:
42 ?The Options Clearing Corporation ("OCC") through the Large option Position Reporting ("LOPR") system acts as a centralized service provider for TPH compliance with position reporting requirements by collecting data from each TPH or TPH organization, consolidating the information, and ultimately providing detailed listings of each TPH's report to the Exchange, as well as Financial Industry Regulatory Authority, Inc. ("FINRA"), acting as its agent pursuant to a regulatory services agreement ("RSA").
43 ? See Options 9, Section 16.
The Exchange also has no reason to believe that the growth in trading volume in IBIT will not continue. Rather, the Exchange expects continued options volume growth in IBIT as opportunities for investors to participate in the options markets increase and evolve. The Exchange believes that the current position and exercise limits in IBIT options are restrictive and will hamper the listed options markets from being able to compete fairly and effectively with the over-the-counter ("OTC") markets. OTC transactions occur through bilateral agreements, the terms of which are not publicly disclosed to the marketplace. As such, OTC transactions do not contribute to the price discovery process on a public exchange or other lit markets. The Exchange believes that without the proposed changes to position and exercise limits for IBIT, market participants will find the 25,000 contract position limit an impediment to their business and investment objectives as well as an impediment to efficient pricing. As such, market participants may find the less transparent OTC markets a more attractive alternative to achieve their investment and hedging objectives, leading to a retreat from the listed options markets, where trades are subject to reporting requirements and daily surveillance.
The Exchange believes that the existing surveillance procedures and reporting requirements at the Exchange are capable of properly identifying disruptive and/or manipulative trading activity. The Exchange also represents that it has adequate surveillances in place to detect potential manipulation, as well as reviews in place to identify continued compliance with the Exchange's listing standards. These procedures monitor market activity via automated surveillance techniques to identify unusual activity in both options and the underlyings, as applicable. The Exchange also notes that large stock holdings must be disclosed to the Commission by way of Schedules 13D or 13G, 44 which are used to report ownership of stock which exceeds 5% of a company's total stock issue and may assist in providing information in monitoring for any potential manipulative schemes. Further, the Exchange believes that the current financial requirements imposed by the Exchange and by the Commission adequately address concerns regarding potentially large, unhedged positions in equity options. Current margin and risk-based haircut methodologies serve to limit the size of positions maintained by any one account by increasing the margin and/or capital that a member organization must maintain for a large position held by itself or by its customer. 45 In addition, Rule 15c3-1? 46 imposes a capital charge on member organizations to the extent of any margin deficiency resulting from the higher margin requirement.
Footnotes:
44 ?17 CFR 240.13d-1.
45 ? See Options 9, Section 3 regarding margin requirements.
46 ?17 CFR 240.15c3-1.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section 6(b) of the Act, 47 in general, and furthers the objectives of Section 6(b)(5) of the Act, 48 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the proposed rule change is consistent with the Section (6)(b)(5)? 49 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers.
Footnotes:
47 ?15 U.S.C. 78f(b).
48 ?15 U.S.C. 78f(b)(5).
49 ?15 U.S.C. 78(f)(b)(5).
The Exchange believes increasing the position (and exercise limits) for IBIT options from 25,000 to 250,000 contracts will remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, protect investors and the public interest, because it will provide market participants with the ability to more effectively execute their trading and hedging activities. Also, increasing the position (and exercise) limits for IBIT options may allow Market-Makers to maintain their liquidity in these options in amounts commensurate with the continued high consumer demand in IBIT options market. The proposed higher position and exercise limit may also encourage other liquidity providers to continue to trade on the Exchange rather than shift their volume to OTC markets, which will enhance the process of price discovery conducted on the Exchange through increased order flow. The Exchange notes that a higher position and exercise limit would further allow institutional investors to utilize IBIT options for prudent risk management purposes.
In addition, the Exchange believes that the current liquidity in shares of and options on IBIT will mitigate concerns regarding potential manipulation of IBIT and/or disruption of IBIT upon increasing the position limit. ISE's proposed position and exercise limit of 250,000 contracts on IBIT options is appropriate given the market capitalization and ADV of IBIT and designed to prevent fraudulent and manipulative acts and practices. If IBIT were compared to the 1,934 stocks that have position limits of 250,000 contracts to less than 500,000 contracts it would rank in the 88th percentile for market capitalization and the 99th percentile for ADV.
[top] Additionally, the regression model performed by ISE demonstrates that the proposed position limit is half of the modeled limit given the liquidity of IBIT. Comparing IBIT's data relative to the market capitalization of the entire bitcoin market in terms of exercise risk and availability of deliverables, the Exchange was able to conclude that if a position limit of 250,000 contracts were considered, the exercisable risk would represent 2.89%? 50 of the shares outstanding of IBIT. Since IBIT has a creation and redemption process managed through the issuer (whereby Bitcoin is used to create IBIT shares), the position limit can be compared to the total market capitalization of the entire bitcoin market and in that case, the exercisable risk for options on IBIT would represent less than .072% of all bitcoin outstanding. 51 Comparing the proposed position limit to position limits for equivalent bitcoin futures position limits, the analysis demonstrated that the proposed 250,000
Footnotes:
50 ?This percentage is arrived at with this equation: (250,000 contract limit * 100 shares per option/866,040,000 shares outstanding).
51 ?This number was arrived at with this calculation: ((250,000 limit * 100 shares per option * $54.02 settle) / (19,787,762 BTC outstanding * $94,830 BTC price)).
Comparing a position limit of 250,000 for IBIT against other options on ETFs with an underling commodity, namely GLD, SLV and BITO, a position limit exercise in GLD represents 8.17% of the float of GLD, a position limit exercise in SLV represents 4.8% of the float of SLV, and a position limit exercise of BITO represents 23.22% of the float of BITO. In comparison, a 250,000 contract position limit in IBIT would represent 2.89% of the float of IBIT. Consequently, the 250,000 proposed IBIT options position limit is more conservative than the standard applied to GLD, SLV and BITO, and appropriate. Also, the Exchange notes that Cboe's proprietary CBTX and MBTX indices weight IBIT the highest (at 20%) in its index composition among the other ETFs that comprise the index. 52 The Exchange notes that today, these indexes have a position of 24,000 contracts which is much higher than the current position limits for IBIT options when considering the notional value of the indices. 53 These indexes are already trading with position and exercise limits that are higher than the lowest position limit for an industry index option. 54
Footnotes:
52 ? See https://www.cboe.com/tradable_products/bitcoin-etf-index-options?utm_source=mcae&utm_medium=email&utm_campaign=bitcoin_eft_options_launch.
53 ? See Cboe Rule 8.32(a). The Exchange notes that given the multiplier and notional value of CBTX, the index has a position and exercise limit that equates to 1,000,000 contracts of in kind exposure to IBIT, which is more than 40 times greater than the exposure for options on IBIT at the current 25,000 contract position and exercise limit.
54 ?18,000 contracts is the lowest position limit for industry index options if the Exchange determines, at the time of a review conducted pursuant to subparagraph (2) of this paragraph (a), that any single underlying stock accounted, on average, for thirty percent (30%) or more of the index value during the thirty (30) -day period immediately preceding the review. See ISE Options 4A, Section 7. Further, Cboe Rule 8.32(a)(3) permits a limit of 31,500 contracts if the Exchange determines that the conditions specified in Rule 8.32(a)(1) and (2), which would require the establishment of a lower limit, have not occurred.
ISE notes that IBIT is likely to trade in penny increments in January 2025, provided it is able to meet the applicable criteria. 55 The Commission noted that evidence contained in both the Exchanges' Report and the Cornerstone analysis demonstrates that the Penny Pilot has benefitted investors and other market participants in the form of narrower spreads. 56 The most actively traded options classes are included in the Penny Program based on certain objective criteria (trading volume thresholds and initial price tests). As noted in the Penny Approval Order, the Penny Program reflects a certain level of trading interest (either because the class is newly listed or a class that experience a significant growth in investor interest) to quote in finer trading increments, which in turn should benefit market participants by reducing the cost of trading such options. 57 If IBIT options were to enter the Penny Program, it will be among a select group of products that have achieved a certain level of liquidity that have garnered it the ability to trade in finer increments. The Exchange believes that if IBIT options were to trade in penny increments, failing to increase position and exercise limits once it started trading in finer increments, may artificially inhibit liquidity and create price inefficiency.
Footnotes:
55 ?The Exchange may add to the Penny Program a newly listed option class provided that (i) it is among the 300 most actively traded multiply listed option classes, as ranked by National Cleared Volume at OCC, in its first full calendar month of trading and (ii) the underlying security is priced below $200 or the underlying index is at an index level below $200. Any option class added under this provision will be added on the first trading day of the month after it qualifies and will remain in the Penny Program for one full calendar year, after which it will be subject to the Annual Review described in Supplementary Material .01(b) to Options 3, Section 3. The Exchange may add any option class to the Penny Program, provided that (i) it is among the 75 most actively traded multiply listed option classes, as ranked by National Cleared Volume at OCC, in the past six full calendar months of trading and (ii) the underlying security is priced below $200 or the underlying index is at an index level below $200. Any option class added under this provision will be added on the first trading day of the second full month after it qualifies and will remain in the Penny Program for the rest of the calendar year, after which it will be subject to the Annual Review as described in Supplementary Material .01(b) to Options 3, Section 3. See Supplementary Material .01 to ISE Options 3, Section 3.
56 ? See Securities Exchange Act Release No. 88532 (April 1, 2020), 85 FR 19545, 19548 (April 7, 2020) (File No. 4-443) (Joint Industry Plan; Order Approving Amendment No. 5 to the Plan for the Purpose of Developing and Implementing Procedures Designed To Facilitate the Listing and Trading of Standardized Options To Adopt a Penny Interval Program) ("Penny Approval Order").
57 ? Id. at 19548.
Finally, as discussed above, the Exchange's surveillance and reporting safeguards continue to be designed to deter and detect possible manipulative behavior that might arise from increasing or eliminating position and exercise limits in certain classes. The Exchange believes that the current financial requirements imposed by the Exchange and by the Commission adequately address concerns regarding potentially large, unhedged positions in the options on the underlying securities, further promoting just and equitable principles of trading, the maintenance of a fair and orderly market, and the protection of investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
The Exchange's proposal does not burden intra-market competition because all Members would be permitted to trade IBIT options pursuant to the proposed position and exercise limit of 250,000 contracts. The Exchange believes that the proposed rule change will also provide additional opportunities for market participants to continue to efficiently achieve their investment and trading objectives for equity options on the Exchange.
The Exchange does not believe that the proposed rule change will impose any burden on inter-market competition as the proposal is not competitive in nature. The Exchange expects that all option exchanges will adopt substantively similar proposals for adopting the additional position limit tiers, such that the Exchange's proposal would benefit competition. For these reasons, the Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
[top] Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
• Use the Commission's internet comment form ( https://www.sec.gov/rules/sro.shtml ); or
• Send an email to rule-comments@sec.gov. Please include file number SR-ISE-2024-62 on the subject line.
Paper Comments
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-ISE-2024-62. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website ( https://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR-ISE-2024-62 and should be submitted on or before January 27, 2025.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. 58
Footnotes:
58 ?17 CFR 200.30-3(a)(12).
Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024-31771 Filed 1-3-25; 8:45 am]
BILLING CODE 8011-01-P