2024-28115. Self-Regulatory Organizations; MIAX Sapphire, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 402, Criteria for Underlying Securities, To List and Trade Options on the Grayscale Bitcoin ...

Bitcoin fund	Shares outstanding	Market value (8/30/2024)
GBTC	284,570,100	$13,443,091,524
BTC	366,950,100	1,930,157,526
BITB	68,690,000	2,221,640,670

As shown above, each Bitcoin Fund had significantly more than 7,000,000 shares outstanding (approximately 29 and 6.5 times that amount, respectively), which is the minimum number of shares of a corporate stock that the Exchange generally requires to list options on that stock pursuant to Exchange Rule 402(b)(1). The Exchange believes this demonstrates that each Bitcoin Fund is characterized by a substantial number of outstanding shares.

Further, according to the NYSE American filing,^[14] the below table ( print page 95330) contains information regarding the number of beneficial holders of the Bitcoin Funds as of August 14, 2024:

Bitcoin fund	Beneficial holders (8/14/24)
GBTC	464,364
BTC	13,403
BITB	75,437

As this table shows, each Bitcoin Fund has significantly more than 2,000 beneficial holders (approximately 232, 7, and 38 time more, respectively), which is the minimum number of holders the Exchange generally requires for corporate stock in order to list options on that stock pursuant to Exchange Rule 402(b)(2). Therefore, the Exchange believes the shares of each Bitcoin Fund are widely held.

In addition, the Exchange believes the shares of each Bitcoin Fund are actively traded. Further, according to the NYSE American filing,^[15] as of September 30, 2024, the total trading volume (by shares and notional) for these funds since they began trading ^[16] and the average daily volume (“ADV”) over the 30-day period of September 1 through September 30, 2024, was as follows: ^[17]

Bitcoin fund	Trading volume (shares)	Trading volume (notional $)	ADV (shares)
GBTC	1,803,567,700	93,472,544,497	3,266,138
BTC	335,492,930	1,792,866,521	6,838,546
BITB	434,815,840	14,433,361,384	1,949,835

As demonstrated above, even though these Bitcoin Funds have been trading for less than one year, the trading volume for each is substantially higher than 2,400,000 shares (between roughly 165 and 700 times that amount), which is the minimum 12-month volume the Exchange generally requires for a security in order to list options on that security as set forth in Exchange Rule 402(b). The Exchange believes this data demonstrates each Bitcoin Fund is characterized by a substantial number of outstanding shares that are actively traded.

In addition to satisfying the Exchange's initial listing standards, options on the Bitcoin Funds will be subject to the Exchange's continued listing standards as set forth in Exchange Rule 403(g).^[18] Pursuant to Exchange Rule 403(g), the Exchange will not open for trading any additional series of option contracts covering a fund traded on the Exchange if such fund ceases to be an “NMS stock” as provided for Exchange Rule 402(b) or the fund is halted from trading on its primary market.^[19] Additionally, options on funds traded on the Exchange may be subject to the suspension of opening transactions as follows: (1) the fund no longer meets the terms of Exchange Rule 403(b); (2) following the initial twelve-month period beginning upon the commencement of trading of the fund, there are fewer than 50 record and/or beneficial holders of the fund for 30 or more consecutive trading days; (3) the value of the underlying commodity is no longer calculated or available; or (4) such other event occurs or condition exists that in the opinion of the Exchange makes further dealing on the Exchange inadvisable.

Options on each Bitcoin Fund will be physically settled contracts with American-style exercise.^[20] Consistent with Exchange Rule 404, which governs the opening of options series on a specific underlying security (including ETFs and ETPs), the Exchange will open at least one expiration month for options on each Bitcoin Fund ^[21] at the commencement of trading on the Exchange and may also list series of options on Bitcoin Funds for trading on a weekly,^[22] monthly,^[23] or quarterly ^[24] basis. The Exchange may also list long-term equity option series (“LEAPS”) that expire from twelve to thirty-nine months from the time they are listed.^[25]

( print page 95331)

Pursuant to Exchange Rule 404(g), which governs strike prices of series of options on ETFs, the interval between strike prices of series of options on Bitcoin Funds will be $1 or greater when the strike price is $200 or less and $5 or greater where the strike price is over $200.^[26] Additionally, the Exchange may list series of options pursuant to the $1 Strike Price Interval Program,^[27] the $0.50 Strike Program,^[28] and the $2.50 Strike Price Program.^[29] Pursuant to Exchange Rule 510, where the price of a series of a Bitcoin Fund option is less than $3.00, the minimum increment will be $0.05, and where the price is $3.00 or higher, the minimum increment will be $0.10.^[30] Any and all new series of Bitcoin Fund options that the Exchange lists will be consistent and comply with the expirations, strike prices, and minimum increments set forth in Exchange Rules 404 and 510, as applicable. Further, the Exchange notes that MIAX Chapter XV Rules (Margin), which governs margin requirements applicable to the trading of all options on the Exchange as that chapter of rules is incorporated by reference into the MIAX Sapphire Rulebook, including options on ETFs and ETPs, will also apply to the trading of Bitcoin Fund options.

Position and Exercise Limits

As mentioned above, the rules for position and exercise limits for options, including options on Bitcoin Funds, are determined pursuant to MIAX Rules 307 and 309, respectively, as incorporated by reference into the MIAX Sapphire Rulebook. Position and exercise limits for options vary according to the number of outstanding shares and the trading volumes of the underlying security over the past six months, where the largest in capitalization and the most frequently traded funds have an option position and exercise limit of 250,000 contracts (with adjustments for splits, re-capitalizations, etc.) on the same side of the market; and smaller capitalization funds have position and exercise limits of 200,000, 75,000, 50,000 or 25,000 contracts (with adjustments for splits, re-capitalizations, etc.) on the same side of the market.^[31]

Position limits are designed to limit the number of options contracts traded on the Exchange in an underlying security that an investor, acting alone or in concert with others directly or indirectly, may control. The purpose of position limits, which are set forth in MIAX Rule 307, is to address potential manipulative schemes and adverse market impacts surrounding the use of options, such as disrupting the market in the security underlying the options. As such, position limits must balance concerns regarding mitigating potential manipulation and the cost of inhibiting potential hedging activity that investors may use for legitimate economic purposes. To achieve this balance, the Exchange proposes to set the position and exercise limits for the options on the Bitcoin Funds at 25,000 contracts, a limit which has already been approved for IBIT at a competing exchange, an ETP that (like the Bitcoin Funds) holds bitcoin.^[32] Capping the position limit at 25,000 contracts, the lowest limit available in options, would address concerns related to manipulation and protection of investors as this number is conservative for the Bitcoin Funds and therefore appropriate given their liquidity. While the Exchange believes that the proposed 25,000-contract position limit is conservative for options on the Bitcoin Funds, it nonetheless believes that, for the reasons set forth below, evidence exists to support a much higher position limit.^[33]

As shown in the table below, provided in the NYSE American filing,^[34] GBTC, BITB and BTC would easily qualify for the 250,000-contract position limit available to other ETFs and ETPs pursuant to the criterion in MIAX Rule 307, which requires that, for the most recent six-month period, trading volume for the underlying security be at least 100,000,000 shares.^[35] As noted in the NYSE American filing, BTC began trading on July 31, 2024, and therefore had only two months of trading data available at the time of the NYSE American filing, as shown below.^[36]

Bitcoin fund	Total volume (9/30/2024)
GBTC	723,758,100 (6-months).
BTC	335,492,930 (2-months).
BITB	263,965,870 (6-months).

Thus, based on the most-recent trading volume, each Bitcoin Fund exceeded the requisite minimum of 100,000,000 shares necessary to qualify for the 250,000-contract position and exercise limits. By comparison, other options symbols with six-month trading volume less than GBTC, BITB, and BTC are eligible for position and exercise limits of at least 250,000.^[37]

( print page 95332)

With respect to the outstanding shares of each Bitcoin Fund, if a market participant held the maximum number of contracts possible pursuant to the proposed position and exercise limits (25,000 contracts), the equivalent shares represented by the proposed position/exercise limit (2,500,000 shares) would represent the following approximate percentage of current outstanding shares, according to the data presented in the NYSE American filing: ^[38]

Bitcoin Fund	Proposed position/ exercise limits in equivalent shares	Outstanding shares (8/30/24)	Percentage of outstanding shares
GBTC	2,500,000	284,570,100	0.9
BTC	2,500,000	366,950,100	0.7
BITB	2,500,000	68,690,000	3.6

As this table demonstrates, if a market participant held the maximum permissible options positions in one of the Bitcoin Fund options and exercised all of them at the same time, that market participant would control a small percentage of the outstanding shares of the underlying Bitcoin Fund. For example, as noted above, a position limit of 25,000 same side contracts effectively restricts a market participant from holding positions that could result in the receipt of no more than 2,500,000 shares of the applicable Bitcoin Fund (if that market participant exercised all its options). Based on data presented in the NYSE American filing regarding the number of shares outstanding for each Bitcoin Fund as of August 30, 2024, the table below sets forth the approximate number of market participants that could hold the maximum of 25,000 same side positions in each Bitcoin Fund that would equate to the number of shares outstanding of that Bitcoin Fund: ^[39]

Bitcoin Fund	Shares outstanding	Number of market participants with 25,000 same side positions
GBTC	284,570,100	114
BTC	366,950,100	147
BITB	68,690,000	27

This means if 114 market participants had 25,000 same side positions in options on GBTC, each of them would have to simultaneously exercise all of those options to create a scenario that may put the underlying security under stress. Similarly, this means if 147 market participants had 25,000 same side positions in options on BTC, each of them would have to simultaneously exercise all of those options to create a scenario that may put the underlying security under stress. Finally, this means if 27 market participants had 25,000 same side positions in options on BITB, each of them would have to simultaneously exercise all of those options to create a scenario that may put the underlying security under stress. The Exchange believes it is highly unlikely for this to occur; however, even if such event did occur, the Exchange would not expect any of the Bitcoin Fund to be under stress because such an event would merely induce the creation of more shares through the trust's creation and redemption process.

Further, given that the issuer of each Bitcoin Fund may create and redeem shares that represent an interest in Bitcoin, the Exchange believes it is relevant to compare the size of a position limit to the market capitalization of the Bitcoin market. As of August 30, 2024, the global supply of Bitcoin was 19,747,066, and the price of one Bitcoin was approximately $59,108.23, which equates to a market capitalization of approximately $1.167 trillion.^[40] Consider the proposed position and exercise limit of 25,000 option contracts for each Bitcoin Fund option. A position and exercise limit of 25,000 same side contracts effectively restricts a market participant from holding positions that could result in the receipt of no more than 2,500,000 shares of GBTC, BTC, or BITB, as applicable (if that market participant exercised all its options). The following table from the NYSE American filing shows the share price of each Bitcoin Fund on August 30, 2024, the value of 2,500,000 shares of the Bitcoin Fund at that price, and the approximate percentage of that value of the size of the Bitcoin market: ^[41]

Bitcoin Fund	Aug. 30th share price ($)	Value of 2,500,000 shares of Bitcoin Funds ($)	Percentage of Bitcoin market
GBTC	46.75	116,875,000	0.010
BTC	5.20	13,000,000	0.001
BITB	31.95	79,875,000	0.007

Therefore, if a market participant with the maximum 25,000 same side contracts in options on GBTC, BTC, or BITB exercised all positions at one time, such an event would have no practical impact on the Bitcoin market. As ( print page 95333) described in the NYSE American filing, the below chart shows the market capitalization of each Bitcoin Fund relative to the market capitalization of the entire bitcoin market, as of August 30, 2024.^[42]

	Bitcoin/shares outstanding	Market value (8/30/2024)	Percentage of Total bitcoin market
Total Bitcoin Market	$19,747,066	$1,167,214,096,788	100.00
GBTC	284,570,100	13,443,091,524	1.15
BTC	366,950,100	1,930,157,526	0.17
BITB	68,690,000	2,221,640,670	0.19

As shown above, the Bitcoin Funds collectively represent approximately 1.51% of the global supply of Bitcoin (19,747,066). Based on the $46.75 price of a GBTC share on August 30, 2024, a market participant could have redeemed one Bitcoin for approximately 1,264 GBTC shares. Another 24,967,146,455 GBTC shares could be created before the supply of Bitcoin was exhausted. As a result, 9,987 market participants would have to simultaneously exercise 25,000 same side positions in GBTC options to receive shares of the GBTC holding the entire global supply of Bitcoin. Similarly, based on the $5.20 price of a BTC share on August 30, 2024, a market participant could have redeemed one Bitcoin for approximately 11,367 BTC shares. Another 224,464,249,382 BTC shares could be created before the supply of Bitcoin was exhausted. As a result, 89,786 market participants would have to simultaneously exercise 25,000 same side positions in BTC options to receive shares of BTC holding the entire global supply of Bitcoin. Similarly, based on the $31.95 price of a BITB share on August 30, 2024, a market participant could have redeemed one Bitcoin for approximately 1,850 BITB shares. Another 36,532,522,591 BITB shares could be created before the supply of Bitcoin was exhausted. As a result, 14,613 market participants would have to simultaneously exercise 25,000 same side positions in BITB options to receive shares of BITB holding the entire global supply of Bitcoin. Unlike the Bitcoin Funds, the number of shares that corporations may issue is limited. However, like corporations, which authorize additional shares, repurchase shares, or split their shares, the Bitcoin Funds may create, redeem, or split shares in response to demand. While the supply of Bitcoin is limited to 21,000,000, it is believed that it will take more than 100 years to fully mine the remaining Bitcoin.^[43] The supply of Bitcoin is larger than the available supply of most securities.^[44] Given the significant unlikelihood of any of these events ever occurring, the Exchange does not believe options on the Bitcoin Funds should be subject to position and exercise limits even lower than those proposed (which are already equal to the lowest available limit for equity options in the industry) to protect the supply of Bitcoin.

The Exchange also believes the proposed limits are appropriate given position limits for Bitcoin futures. For example, the Chicago Mercantile Exchange (“CME”) imposes a position limit of 2,000 futures (for the initial spot month) on its Bitcoin futures contract.^[45] On August 28, 2024, CME Aug 24 Bitcoin Futures settled at $58,950. A position of 2,000 CME Bitcoin futures, therefore, would have a notional value of $589,500,000. The following table shows the share price of each Bitcoin Fund on August 28, 2024, and the approximate number of option contracts that equates to that notional value: ^[46]

Bitcoin Fund	Aug. 28th share price	Number of option contracts
GBTC	46.94	125,585
BTC	5.23	1,127,151
BITB	32.08	183,759