December 13, 2011
My view of the proposed rule change is three fold. First, the pilot program to permit PM settled EOW options and EOM options on broad based indexes has been an unqualified success. Markets are robust, spreads competitve, volume strong and competing products struggling to keep up. Therefore, I have no issue with the extension of the pilot program itself, the 3:00 pm close is a completely different matter. The idea that the SEC would endorse a rule that subjects customers to unlimited risk by locking them out trading a position is just ridiculous. This is all downside for the customer and a mere convenience for market making firms that don't feel like reprogramming their software programs. The issue is simply resolved by allowing market-making firms to go double, triple or quadruaple wide with their index quotes after 3:00 pm on expiration day. Then they massively reduce their risk of sending inaccurate quotes tied to futures movement (while the underlying options are expiring to cash) and, more importantly, customers can trade their positions while the underlying cash value of the options is still moving. Alternatively, customers are compeletly locked out of trading positions after 3:00 pm subjecting them to massive risk of loss. For what, protecting market making firms that don't want to perform a few keystokes. This shouldn't even be an issue...the SEC should have rejected this idea out of hand with no further discussion.
Finally, I strenously object to ridiculously weak disclosure of the myriad of rule changes proposed by the CBOE each month. The disclosure compliance is completely legal and wholly inadequate. This is the information era...its time for the SEC to provide customers adequate information regarding important rule changes. Publishing on the SEC website and the Federal register is just not enough. I suggest that important rule changes (like one that subjects customers to unlimited risk after 3:00 pm) be communicated directly to customers by email through their brokerage houses. An easy change that would actually inform customers of important proposed rules before they go into effect. Under the current system 99.9% of customers only find out after the fact. Good for the CBOE and bad for the customer.