ations.Wewouldsuggestthattheruleestablishaminimumnumberoftransactionsforthe calculationtoberunatall,andwesuggest250astheminimum,whichequatestoapproximatelyone transactionperdayforseasonedproducts.Wesuggestthatanyproductwithfewerthan250 transactionshaveablockthresholdofzero,makingalltradesinthatinstrumentblocktrades. Theseconditemwastheexpressedconcernthatoptionsproductsinparticularcouldpassthrough liquiditycyclesasthepriceoftheunderlyingmovesinrelationtotheoptionstrikeprice.Wenotethat suchasequence,aswheretheoptionmovesfromdeepoutofthemoneytoatthemoneytodeepin themoney,canhavetwoimpacts:ontheoptionsvolatilityandonitsliquidity.Sinceweunderstand thattheblockruleisfocusedonliquidityandnotvolatility,wethinkthattheblockcalculationaswe haveproposeditwillserveitspurposequitewellinthisinstance.Ifdeepoutsordeepinshavelow averagetradesizes,theirblockthresholdswillbeappropriatelylow.Iftheybecomeatthemoneysand theiraveragetradesizerises,theirblockthresholdswillriseappropriately.Thuswethinkthe methodologywillworkasdesiredinthiscase. Thethirdquestionrelatedtothepossibilityoftradersmovingtransactionsbetweenproducttypesin ordertoavailthemselvesoflowerblockthresholds.Theexamplepresentedwasofatraderusingdeep inoptionsasasubstituteforatransactionintheunderlyingbecausetheoptionthresholdislowerthan theunderlyings.Wenotethatthetraderistakingontworisksindoingthat.Thefirstisthattheliquidity oftheoptionispresumablylower,whichiswhytheblockthresholdislower,soanylargeposition establishedwillbemoredifficulttohedgeorunwind.Thesecondisthetheoptionisnotaperfect substitutefortheunderlying,asitsdeltawouldfallifitsintrinsicvaluefell.Wealsonotethatthe
advantagegainedbydoingablocktradeisverytemporary,notpermanent.Thuswedontthinkthis instancewillbeeconomicallyattractivefordealers,and,ifused,wouldnotactuallydamagethe Commissionsoversightfunction. WealsonotedthestaffsconcernabouttheuseofUPIinourcommentletter,sincethat implementationmightbesometimeoff.Webelievethatthesuggestedmethodologycanworkonany classificationschemausedbytheindustryasawhole,andonlyusedtheUPIinourletterbecausewe understandittobethestatedobjectiveoftheindustry. Ifwemissedanyofyourconcerns,pleaseletusknow.Asalways,wewouldbepleasedtodiscussthis letterwiththeCFTCscommissionersorstaffatyourconvenience,andwouldespeciallyliketotalk abouthowthemethodologywouldactuallybeimplementedwhenthetimeisright.Weunderstandthat thisletterwillbecomepartofthepublicrecord. Verytrulyyours, GeorgeBollenbacher Head,RegulatoryReformPractice george.bollenbacher@kinetixtt.com