Spider Options Caught in Legal Web

January 07, 2005

S&P serves lawsuit on ISE to prevent the launch of unlicensed options on SPDRs. Judge grants injunction against ISE.

Traders are going to have to wait a little bit longer to get their eager hands on options based on the popular S&P 500 SPDR exchange-traded fund (ETF).

Dow Jones Newswire broke the story earlier this week that the International Securities Exchange (ISE) planned to launch options on the popular SPDRs without first obtaining a licenses from Standard and Poor's.  The options were scheduled to debut as early as today, and other exchanges were expected to follow suit with their own listings.

But late last night, a U.S. District Court judge in New York granted a temporary injunction barring ISE from launching the product.

"Standard & Poor's has not licensed ISE -- and ISE has no other right -- to use Standard & Poor's proprietary index nor Standard & Poor's marks in connection with any such product," McGraw-Hill, the parent company of S&P, said in its legal filing.  ""McGraw-Hill will plainly suffer irreparable injury if ISE or another exchange is permitted to begin listing and trading SPDR Options without a license."

ISE clearly believes otherwise, although the firm did not return calls seeking comment. 

The SPDR is the only broad-based ETF without associated options, a fact that has created a great deal of controversy in the options world.  Last summer, the Justice Department launched an investigation into whether S&P and the Chicago Board Options Exchange (CBOE) - which holds exclusive rights to options based on many S&P indexes - had entered into an illegal agreement to block the launch of SPDR options.

Standard and Poor's disputes the claim, and says that it has been negotiating deals to license the product for options at multiple exchanges. In fact, the company says those talks are ongoing.

"We've had conversations with a lot of exchanges on issue with licensing the SPDR for options, and those talks continue," said David Guarino, spokesperson for S&P. 

ISE's belief that it doesn't need a license may stem from the recent decision in the Nasdaq/Archipelago lawsuit, in which a judge ruled that Archipelago did not need a license to trade shares in Nasdaq's popular Nasdaq 100 (QQQQ) ETF.

The two situations are not perfectly analogous, however, as the QQQQ ruling concerned the trading of existing shares, not the creation of an entirely new product.

Options do exist on the full S&P 500 index, and are traded in volume on the CBOE.  The chief attraction of the SPDRs product would be its lower price point.  S&P 500 Index options trade with a strike price of nearly 1200, out of range for the average individual investor. In contrast, a SPDR option would trade at approximately 1/10th the value, making it more appropriate for smaller portfolios.

The ISE has been challenging the exclusive nature of index options contracts since the exchange launched in 2000.  Its corporate literature is full of challenges against the status quo, including this from their most recent edition of the "Circuits newsletter":

"Index options trading is the last bastion of anticompetitive listing practices in the U.S. options markets. The absence of multiple listing and true inter-exchange competition has arguably contributed to the lack of growth of index options in the U.S."

In fact, ISE filed a petition with the SEC in November 2002 asking the regulatory agency to use its authority to eliminate the exclusive listing of index options.

The SEC has yet to rule.





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