Wall Street Wants Permission for Frankenstein Trading Orders
Published Date: 1/13/2025
Notice
Summary
Cboe Exchange wants to let traders place special orders that mix options and futures together, called future-option orders. The SEC is now deciding if this new rule should be approved or not, with no public comments so far. This change could affect traders using Cboe and might speed up how they trade these combos, but the final decision is expected soon.
Analyzed Economic Effects
7 provisions identified: 4 benefits, 2 costs, 1 mixed.
Cboe to Allow Combined Options–Futures Orders
Cboe proposes to let traders submit a single “future-option order” that combines options and related futures into one package. The Exchange intends to initially permit these orders overlying VIX and may expand availability to other underliers in the future.
Eligibility Limited by Risk‑Offset Rule
A future-option order is allowed only if the future leg provides between 10% and 125% risk offset to the option leg(s), which the System measures as a net delta value no greater than -0.10 and no less than -1.25. Users must supply delta values for option legs and the Exchange will use them to calculate eligibility.
Futures Leg Routing Requires DCM or FCM/IB
When a user submits a future-option order, the Exchange will either send the futures component directly to the designated contract market (DCM) if the user is also a DCM member and direct connectivity exists, or else the user must designate an FCM or introducing broker (FCM/IB) with an agreement so the Exchange can communicate the futures leg. Users and associated persons must have any required futures industry registrations and comply with DCM and CFTC rules.
Contingent Execution and Nullification Rules
The Exchange will only report a trade to the user if it receives an execution report for the futures component from the DCM or designated FCM/IB; if the futures component cannot execute, the Exchange will nullify the option component trade and notify the user. Future-option orders may not be designated as GTC or GTD.
Could Shift OTC Liquidity onto Exchange
The Exchange says future-option orders may move liquidity and swap/OTC combos onto listed exchanges and designated contract markets, increasing transparency and centralized clearing for these combined trades. The Exchange believes this could improve price discovery and contra‑party creditworthiness due to clearing requirements.
Pricing Increments Can Be Finer
The Exchange would allow bids and offers for future-option orders in any decimal price it determines; the minimum increment for the option leg(s) may be $0.01 or greater (set class-by-class), and the futures leg(s) may execute at decimal prices permitted by the DCM. Option legs must still trade at increments allowed by the Commission.
SEC/CFTC Jurisdiction and Surveillance Steps
The Exchange states that the options component of future-option orders will remain under SEC jurisdiction and the futures component under CFTC jurisdiction, and that the Exchange will enter into information‑sharing agreements with the applicable DCM and use surveillance (including ISG cooperation) to monitor these trades.
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