DBS Partners, one of the biggest market makers in S&P 500 Index options, was shut after failing to meet a margin call from Goldman Sachs, according to people familiar with the situation.
Goldman, DBS's clearing firm at the Chicago Board Options Exchange, auctioned off part of DBS's position last Friday. The underlying value of the position was in the hundreds of millions of dollars, the sources said.
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Attempts to reach DBS were unsuccessful. Goldman Sachs and CBOE representatives declined to comment.
``DBS Partners was a force in the SPX pit,'' said online brokerage Trademonster.com co-founder Jon Najarian, using the acronym for the S&P 500 index options. ``It was not uncommon for them to be bidding for 25,000 options at a clip.''
Each options contract confers the right to buy or sell 100 of the underlying shares, so 25,000 contracts represents 2.5 million shares.
Market makers are the lifeblood of an exchange because they stand ready to buy or sell whenever needed.
The exit of a major market maker, voluntary or not, can sometimes make it harder for investors to get deals done if other firms cannot step up to fill the vacuum.
S&P 500 Index options are traded exclusively at the CBOE and are CBOE's highest-revenue business. A drop in liquidity would hurt parent CBOE Holdings Inc as well as the large banks and hedge funds that use the contracts to bet on or guard against swings in the benchmark index.
But the DBS blowup, despite its massive size, made barely a ripple in the wider market, traders in the S&P index options pit said. The position was sold at just about the mid-point of the market's bid and ask prices, one trader who witnessed the sale said.
On Friday, a week after DBS's departure, institutional brokerages including MEB Options had no difficulty completing big trades, according to Najarian.
``This is the deep end of the pool and the liquidity these groups provide is massive,'' he said.
CBOE's S&P 500 index options are one of the few remaining options contracts bought and sold in face-to-face trading.
The absence of the DBS traders this week was hardly noticeable in the S&P 500 index options pit, where as many as a hundred traders stand in close quarters vying for trades.
More than 1 million of the contracts changed hands at the CBOE on Thursday, data from options clearinghouse OCC showed. Last month an average of 800,000 contracts changed hands daily.
CBOE is petitioning the Securities and Exchange Commission for permission to list its exclusive options on CBOE's new all-electronic market, C2. The SEC is expected to act by September.
Once listed and easily accessible to high-speed traders, volume in the contracts is likely to jump, analysts say. Until then, floor traders play a vital role in providing liquidity.
The shuttering of DBS Partners was reported earlier on Friday by Bloomberg. (Reporting by Ann Saphir and Doris Frankel; Editing by Derek Caney and Matthew Lewis)