* BOX Options Exchange lists jumbo options on S&P 500 ETF
* ISE believes product could potentially harm liquidity
* BOX says marketplace to dictate if product is accepted
By Doris Frankel
May 10 (Reuters) - A new "jumbo" option contract on the popular S&P 500 tracking ETF debuted on the BOX Options Exchange on Friday, but at least one rival has opted not to list the product for now because of concerns it will hurt liquidity in existing options on the fund.
The new product, known as the Jumbo SPY Options, is ten times the size of a traditional options contract on the fund, and is designed for institutional investors who prefer larger-sized contracts when executing their strategies.
Its introduction comes at a time when competing exchanges are trying to innovate and meet the demand of their customers.
"There are 11 option exchanges competing for order flow and innovation is the lifeblood of their future growth," said Andy Nybo, head of derivatives at research firm TABB Group.
BOX received the go-ahead from the U.S. Securities and Exchange Commission this week to trade the Jumbo SPY contract. Other option venues can list the contract after submitting a rule filing to the Securities and Exchange Commission.
Jumbo SPY options are based on 1,000 shares of the SPDR S&P 500 exchange-traded fund, the largest U.S. ETF by assets, compared to the standard contract based on 100 shares. They are targeted for customers who are looking for a larger notional contract size, BOX said.
However, the International Securities Exchange said on Friday it chose not to join BOX in opening them for trading. ISE's primary concern was that this would divide trading between the standard SPY options and the jumbos, therefore weakening the liquidity in one of the most actively traded issues in options.
"We believe Jumbo SPY would not create incremental volume and, even worse, could harm liquidity in SPY," said Boris Ilyevsky, ISE managing director, in an email to members.
The SPY ETF, known as the Spiders, is one of the most actively traded securities in the cash market. It has been an options crowd favorite for years as well. For this year through Thursday, volume on the SPY stood at 216.9 million contracts, compared with 199.3 million contracts for the year-ago period, according to the OCC, which clears all U.S.-listed options.
BOX said on Friday that it has seen the ISE letter to their members and "respects their position."
"We have spoken to other customers that have asked us to list this product and while we are happy to offer this to the marketplace, the market will ultimately dictate if the product is accepted," said Ed Boyle, senior vice president of strategy at BOX.
BOX Options Exchange is an all-electronic equity options market that is jointly owned by Canada's TMX Group and seven broker dealers. It began trading in February 2004.
ISE, an all-electronic platform owned by Deutsche Boerse AG , plans to monitor Jumbo SPY's activity so it can start trading it if gains industry acceptance. ISE has taken all other steps to list the jumbo options, including submitting a rule filing to the SEC, now posted on ISE's website.
The options market saw trading volume grow for nine consecutive years before 2012, when volumes fell just over 12 percent. The exchanges view new product offerings as a way to boost activity.
Over the past several years, the industry has seen the expansion of trading in weekly options contracts, the introduction of mini-options, listed Treasury options and options with smaller price increments, Nybo said.
But ISE's Ilyevsky said those products - including mini-options targeted for retail investors - met specific needs of industry participants.
"Larger sized ETF contracts do not address any unmet need in the industry and in fact would serve primarily to further fragment one of the few healthy centers of liquidity," Ilyevsky said.