Nasdaq Aims to Increase iShares Bitcoin Trust Options Limits for Greater Institutional Hedging

Nasdaq's International Securities Exchange (ISE) has submitted a request to the U.S. Securities and Exchange Commission (SEC) to significantly raise the maximum number of options contracts available for BlackRock’s iShares Bitcoin Trust, enhancing institutional hedging capabilities.

Key Takeaways

Nasdaq is seeking to raise the position limit for iShares Bitcoin Trust options from 250,000 to one million contracts.
This change could facilitate larger institutional hedging, allowing investment firms to better manage their risk.
The iShares Bitcoin Trust is currently the largest Bitcoin ETF by assets in the U.S. market.
Higher limits could lead to increased volatility but may also tighten bid-ask spreads, impacting trading dynamics.
The SEC has not specified a timeline for its decision regarding this proposal, which will undergo a public comment period before any ruling.

Nasdaq Bitcoin ETF options contract board showing rising position limits

On November 26, Nasdaq's ISE filed a proposal with the SEC to boost the position limits for iShares Bitcoin Trust options from 250,000 contracts to an impressive one million. This change is aimed at accommodating larger institutional flows from pension and hedge funds, though it may also introduce increased volatility within the Bitcoin market.

Nasdaq iShares Bitcoin ETF Options Limits Proposal

According to regulatory documents, the recent filing aims to reclassify the iShares Bitcoin Trust into the same category as significant equity indexes and large-cap stocks like Apple, NVIDIA, the S&P 500, and the Nasdaq-100. Nasdaq argues that the current limit hampers effective trading and hedging practices, despite the fund’s considerable market capitalization and trading volume, which positions it among the largest products available on U.S. exchanges.

As of now, the iShares Bitcoin Trust leads the Bitcoin ETFs in terms of assets. If the proposal is approved, a fully utilized position of one million contracts would account for approximately 7.5% of the fund’s floats, equating to 0.284% of the total Bitcoin supply in circulation.

This expansion in position limits would empower market makers to hedge larger investments that correspond with institutional trading activities, especially from significant players like pension funds and hedge funds. Currently, under the existing restrictions, dealers encounter challenges in managing their risk exposure related to delta, gamma, and vega during large trades.

Recent market data shows that the iShares Bitcoin Trust has overtaken Deribit to become the largest platform for Bitcoin options open interest this year, signaling a shift in price discovery towards regulated U.S. exchanges. Analysts suggest that allowing higher position limits could lead to the development of structured financial products, such as capital-protected baskets and yield-generating instruments that offer Bitcoin exposure without needing direct ownership of the cryptocurrency. However, some regulatory constraints, like Staff Accounting Bulletin 121, still pose challenges for how traditional entities can manage digital asset custody.

The filing also includes a request to remove limits on specialized, physically delivered FLEX options. By doing so, it could facilitate large block trades moving from over-the-counter swaps to exchange-listed frameworks.

Experts in market structures note that while higher position limits typically narrow bid-ask spreads, they could also heighten volatility during intense price movements if dealers need to rapidly hedge substantial gamma exposures.

Currently, the SEC has not set a timeline for when it will decide on this proposal, as it generally allows a public comment period before making any determinations on modifications to exchange rules.