November 26, 2011
I would object to a portion to of the CBOEs filling of rule change SR-CBOE-2011-100. I am strongly in favor to the extension of the pilot program continuing the weekly contracts that the CBOE has listed, but I would object specifically to Rule 24.9 (e) (4). This is not listed on the summary of the rule change on the SEC site, but can be found on the original rule filing listed on the CBOE web site. Specifically this rule requests that the time the weekly PM settled index options stop trading on the day they expire be 3:00 central time (currently they trade until 3:15.)
Similar objections were filed on this matter in SR-CBOE-2011-38.
A change from closing time on these options will create confusion and hardship for the public. Although the stocks that make up these indexes generally stop trading at 3:00, THE INDEXES VALUES CONTINUE TO CHANGE WELL PAST 3:00. It is common to see changes to these index values as late as 3:05 and sometimes much later. Customers will no longer be able to hedge their risks by trading these options, even as the underlying index is moving after 3:00. This is a huge detriment to the public as it limits their ability to manage their risk.
The public has been accustomed to trading this product until 3:15 on expiration day since its inception. A change to 3:00 will create confusion. A customer who has a position will no longer be able to exit this position after 3:00 even though it may be gaining or losing money.
An example of another potential problem with this change would be come from a customer who has a time spread. He is short an expiring option and long an option expiring the next week. His back month option is traded until 3:15, but under the CBOEs proposal, he would not be permitted to trade the expiring option after 3:00 on expiration day. This will prevent him from taking his position off. If he attempts to sell his back month option his brokerage house would then view him naked short the expiring weekly option, thus vastly increasing his margin. This weekly option would still appear in his account until it is expired from his account. He would have a spread that he couldnt trade out of after 3:00, but still exposes him to risk. He would be forced to come in with a position the following Monday if the doesnt exit the entire position before 3:00.
Overall this section of the proposed rule is indeed controversial (unlike as claimed by the CBOE under Section 19(b)(3)(A)(iii) of the Act and Rule 19b-4(f)(6) thereunder). It is detrimental to the average public customer and will create confusion.