Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt a Risk Monitor Mechanism, 34281-34284 [2011-14518]

Download as PDF Federal Register / Vol. 76, No. 113 / Monday, June 13, 2011 / Notices 2011–050 and should be submitted on or before July 5, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–14519 Filed 6–10–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64616; File No. SR– NASDAQ–2011–077] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt a Risk Monitor Mechanism June 7, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 1, 2011, The NASDAQ Stock Market LLC (‘‘NASDAQ’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by NASDAQ. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASDAQ is filing with the Securities and Exchange Commission (‘‘Commission’’) a proposal for the NASDAQ Options Market (‘‘NOM’’) to amend Chapter VI, Trading Systems, to adopt new Section 19, Risk Monitor Mechanism, to provide a risk monitor mechanism for all NOM Participants.3 This change is scheduled to be implemented on NOM on or about August 1, 2011; the Exchange will announce the implementation schedule by Options Trader Alert, once the rollout schedule is finalized. The text of the proposed rule change is available at 9 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 The term ‘‘Options Participant’’ or ‘‘Participant’’ means a firm or organization that is registered with the Exchange pursuant to Chapter II of the NOM Rules for purposes of participating in options trading on NOM as a ‘‘Nasdaq Options Order Entry Firm’’ or ‘‘Nasdaq Options Market Maker.’’ emcdonald on DSK2BSOYB1PROD with NOTICES 1 15 VerDate Mar<15>2010 16:06 Jun 10, 2011 Jkt 223001 nasdaq.cchwallstreet.com, at NASDAQ’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASDAQ included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASDAQ has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to reflect in NOM’s rules that Participants will be able to establish new risk control parameters. Specifically, NASDAQ proposes to adopt new Chapter VI, Section 19, Risk Monitor Mechanism, which is very similar to NASDAQ OMX PHLX (‘‘PHLX’’) Rule 1093 (as explained in detail below) and is intended to bring this aspect of PHLX’s technological functionality to NOM. The Risk Monitor Mechanism provides protection from the risk of multiple executions across multiple series of an option. The risk to Participants is not limited to a single series in an option; Participants have exposure in all series of a particular option, requiring them to offset or hedge their overall position in an option. In particular, the Risk Monitor Mechanism will be useful for Market Makers,4 who are required to continuously quote in assigned options. Quoting across many series in an option creates the possibility of ‘‘rapid fire’’ executions that can create large, unintended principal positions that expose the Market Maker to unnecessary market risk. The Risk Monitor Mechanism is intended to assist such Participants in managing their market risk. Though the Risk Monitor Mechanism will be most useful to Market Makers, 4 Unlike the PHLX Risk Monitor Mechanism, the NOM Risk Monitor Mechanism will be available to all Participants, not just Market Makers. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 34281 the Exchange proposes to offer the functionality to all participant types. There are other firms that trade on a proprietary basis and provide liquidity to the Exchange; these firms could potentially benefit, similarly to Market Makers, from the Risk Monitor Mechanism. The Exchange believes that the Risk Monitor Mechanism should help liquidity providers generally, market makers and other participants alike, in managing risk and providing deep and liquid markets to investors. Pursuant to new Section 19(a), the Risk Monitor Mechanism operates by the System maintaining a counting program for each Participant, which counts the number of contracts traded in an option by each Participant within a specified time period, not to exceed 15 seconds, established by each Participant (the ‘‘specified time period’’). The specified time period will commence for an option when a transaction occurs in any series in such option. Furthermore, the System engages the Risk Monitor Mechanism in a particular option when the counting program has determined that a Participant has traded a Specified Engagement Size (as defined below) established by such Participant during the specified time period. When such Participant has traded the Specified Engagement Size during the specified time period, the Risk Monitor Mechanism automatically removes such Participant’s orders in all series of the particular option. As provided in proposed subparagraph (b)(ii), the Specified Engagement Size is determined by the following: (A) For each series in an option, the counting program will determine the percentage that the number of contracts executed in that series represents relative to the Participant’s total size at all price levels in that series (‘‘series percentage’’); (B) The counting program will determine the sum of the series percentages in the option issue (‘‘issue percentage’’); (C) Once the counting program determines that the issue percentage equals or exceeds a percentage established by the Participant (‘‘Specified Percentage’’), the number of executed contracts in the option issue equals the Specified Engagement Size. For example, if a Participant is quoting in four series of a particular option issue, and sets its Specified Percentage at 100%, the Specified Engagement Size would be determined as follows: E:\FR\FM\13JNN1.SGM 13JNN1 34282 Federal Register / Vol. 76, No. 113 / Monday, June 13, 2011 / Notices EXAMPLE I Series Series Series Series Series 1 2 3 4 Number of contracts executed Size Percentage ........................................................................................................................................ ........................................................................................................................................ ........................................................................................................................................ ........................................................................................................................................ 100 50 200 150 40 20 20 15 40 40 10 10 Total ...................................................................................................................................... 500 95 100 In this example, the Specified Engagement Size is 95 contracts, which is the aggregate number of contracts executed among all series during the specified time period that represents an issue percentage equal to the Specified Percentage of 100%. EXAMPLE II Series Series Series Series Series 1 2 3 4 Number of contracts executed Size Percentage ........................................................................................................................................ ........................................................................................................................................ ........................................................................................................................................ ........................................................................................................................................ 100 50 200 150 0 0 0 150 0 0 0 100 Total ...................................................................................................................................... 500 150 100 In this example, the Specified Engagement Size is 150 contracts, which is the aggregate number of contracts executed among all series during the specified time period that represents an issue percentage equal to the Specified Percentage of 100%. If a Participant is quoting in four series of a particular option, and sets its Specified Percentage at 200%, the Specified Engagement Size would be determined as follows: EXAMPLE III Series Series Series Series Series 1 2 3 4 Number of contracts executed Size Percentage ........................................................................................................................................ ........................................................................................................................................ ........................................................................................................................................ ........................................................................................................................................ 100 50 200 150 80 40 40 30 80 80 20 20 Total ...................................................................................................................................... 500 190 200 In this example, the Specified Engagement Size is 190 contracts, which is the aggregate number of contracts executed among all series during the specified time period that represents an issue percentage equal to the Specified Percentage of 200%. positions, and long put positions will only be offset by short put positions. For example, a Participant that buys calls and also sells calls in the same option during the specified time period would have a Net Offset Specified Engagement Size as follows: The Specified Engagement Size will be automatically offset by a number of contracts that are executed on the opposite side of the market in the same option issue during the specified time period (the ‘‘Net Offset Specified Engagement Size’’). Long call positions will only be offset by short call emcdonald on DSK2BSOYB1PROD with NOTICES EXAMPLE IV Series Series Series Series Series 1 2 3 4 Size Buy call Sell call Net offset size Percentage ................................................................................................ ................................................................................................ ................................................................................................ ................................................................................................ 100 100 200 150 60 100 150 75 20 60 130 60 40 40 20 15 40 40 10 10 Total .............................................................................................. 550 385 270 115 100 VerDate Mar<15>2010 16:06 Jun 10, 2011 Jkt 223001 PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 E:\FR\FM\13JNN1.SGM 13JNN1 34283 Federal Register / Vol. 76, No. 113 / Monday, June 13, 2011 / Notices Here, the Net Offset Specified Engagement Size for each series is determined by offsetting the number of contracts executed on the opposite side of the market for each series during the specified time period. The Risk Monitor Mechanism shall be engaged once the Net Offset Specified Engagement Size is for a net number of contracts executed among all series in an option issue during the specified time period that represents an issue percentage equal to or greater than the Specified Percentage. As explained above, the Specified Engagement Size would be based on all price levels. For example, if a Participant is quoting in two series of a particular option, at several price levels in each, and sets its Specified Percentage at 90%, the Specified Engagement Size would be determined as follows: EXAMPLE V Series 1 size Price level Level Level Level Level 1 2 3 4 Series 2 size Number of contracts executed series 1 Number of contracts executed series 2 Percentage ................................................................................................. ................................................................................................. ................................................................................................. ................................................................................................. 100 100 150 150 50 50 100 200 100 100 0 0 50 50 100 0 32.5 32.5 25 ........................ Total .............................................................................................. 500 400 200 200 ........................ Percentage ........................................................................................... .................... .................... 40 50 90 In this example, the Specified Engagement Size is 400 contracts, which is the aggregate number of contracts executed among all series, at all price levels, during the specified time period that represents an issue percentage equal to the Specified Percentage of 90%. Although the Participant executed 40% and 50% of the aggregate size displayed in series 1 and series 2, respectively, 100% of the Participant’s top price level was executed in both series. While the Risk Monitor Mechanism is a useful feature that serves an important risk management purpose, it operates consistent with the firm quote obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS. Specifically, proposed paragraph (c) provides that any marketable orders or quotes that are executable against a Participant’s quotation that are received prior to the time the Risk Monitor Mechanism is engaged will be automatically executed at the price up to the Participant’s size, regardless of whether such an execution results in executions in excess of the Participant’s Specified Engagement Size. Accordingly, the Risk Monitor Mechanism cannot be used to circumvent a Participant’s firm quote obligation. If a Participant is quoting in two series of a particular option, at several price levels in each, and sets its Specified Percentage at 90%, one contra side order can result in executions in excess of the Specified Engagement Size. Specifically, if a market order to sell 500 contracts is received in Series 1, the order will execute against all four levels that the Participant is quoting, as follows: EXAMPLE VI Series 1 size Price level 1 2 3 4 Number of contracts executed series 1 Number of contracts executed series 2 Percentage ................................................................................................. ................................................................................................. ................................................................................................. ................................................................................................. 100 100 150 150 50 50 100 200 100 100 150 150 0 0 0 0 20 20 25 25 Total .............................................................................................. 500 400 200 0 ........................ Percentage ........................................................................................... emcdonald on DSK2BSOYB1PROD with NOTICES Level Level Level Level Series 2 size .................... .................... 100 0 100 Although the Participant’s Specified Percentage is 90%, the contra side order executes in its entirety and the Risk Protection Mechanism is engaged after the resulting executions have surpassed the Specified Engagement Size. Proposed Section 19(d) further provides that the system will automatically reset the counting program and commence a new specified time period when: VerDate Mar<15>2010 16:06 Jun 10, 2011 Jkt 223001 (i) A previous counting period has expired and a transaction occurs in any series in such option; or (ii) the Participant refreshes his/her quotation, in a series for which an order has been executed (thus commencing the specified time period) prior to the expiration of the specified time period. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 of the Act 5 in general, and furthers the objectives of Section 6(b)(5) of the Act 6 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the 5 15 6 15 E:\FR\FM\13JNN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 13JNN1 34284 Federal Register / Vol. 76, No. 113 / Monday, June 13, 2011 / Notices mechanisms of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Exchange believes that the proposal is appropriate and reasonable, because it offers additional functionality for Participants to manage their risk. B. Self-Regulatory Organization’s Statement on Burden on Competition NASDAQ does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NASDAQ–2011–077 and should be submitted on or before July 5, 2011. Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) As the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Cathy H. Ahn, Deputy Secretary. IV. Solicitation of Comments [FR Doc. 2011–14518 Filed 6–10–11; 8:45 am] Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: BILLING CODE 8011–01–P Electronic Comments Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the Functionality of the Post-Only Order emcdonald on DSK2BSOYB1PROD with NOTICES • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–NASDAQ–2011–077 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2011–077. This VerDate Mar<15>2010 16:06 Jun 10, 2011 Jkt 223001 (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing this proposed rule change to modify the functionality of its Post-Only Order on the NASDAQ OMX BX Equities System (the ‘‘BX System’’ or the ‘‘System’’). BX proposes to implement the rule change thirty days after the date of filing or as soon thereafter as practicable. The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at BX’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64615; File No. SR–BX– 2011–033] June 7, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that, on June 1, 2011, NASDAQ OMX BX, Inc. (the ‘‘Exchange’’ or ‘‘BX’’) filed with the Securities and Exchange Commission 7 17 CFR 200.30–3(a)(12). U.S.C.78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 BX proposes to modify the functionality associated with its existing Post-Only Order. Currently, if a PostOnly Order would lock an order on the BX System at the time of entry, the order is re-priced and displayed by the System to one minimum price increment (i.e., $0.01 or $0.0001) below the current low offer (for bids) or above the current best bid (for offers). Thus, if the best bid and best offer on the BX book were $10.00 × $10.05, and a market participant entered a Post-Only Order to buy at $10.05, the order would be re-priced and displayed at $10.04. This aspect of the functionality of the order is not changing. In addition, if a Post-Only Order would cross an order on the System, the order will be repriced as described above unless the value of price improvement associated with executing against a resting order E:\FR\FM\13JNN1.SGM 13JNN1

Agencies

[Federal Register Volume 76, Number 113 (Monday, June 13, 2011)]
[Notices]
[Pages 34281-34284]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14518]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64616; File No. SR-NASDAQ-2011-077]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt a Risk Monitor 
Mechanism

 June 7, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 1, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by NASDAQ. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ is filing with the Securities and Exchange Commission 
(``Commission'') a proposal for the NASDAQ Options Market (``NOM'') to 
amend Chapter VI, Trading Systems, to adopt new Section 19, Risk 
Monitor Mechanism, to provide a risk monitor mechanism for all NOM 
Participants.\3\
---------------------------------------------------------------------------

    \3\ The term ``Options Participant'' or ``Participant'' means a 
firm or organization that is registered with the Exchange pursuant 
to Chapter II of the NOM Rules for purposes of participating in 
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or 
``Nasdaq Options Market Maker.''
---------------------------------------------------------------------------

    This change is scheduled to be implemented on NOM on or about 
August 1, 2011; the Exchange will announce the implementation schedule 
by Options Trader Alert, once the rollout schedule is finalized.
    The text of the proposed rule change is available at 
nasdaq.cchwallstreet.com, at NASDAQ's principal office, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASDAQ included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASDAQ has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to reflect in NOM's 
rules that Participants will be able to establish new risk control 
parameters. Specifically, NASDAQ proposes to adopt new Chapter VI, 
Section 19, Risk Monitor Mechanism, which is very similar to NASDAQ OMX 
PHLX (``PHLX'') Rule 1093 (as explained in detail below) and is 
intended to bring this aspect of PHLX's technological functionality to 
NOM. The Risk Monitor Mechanism provides protection from the risk of 
multiple executions across multiple series of an option. The risk to 
Participants is not limited to a single series in an option; 
Participants have exposure in all series of a particular option, 
requiring them to offset or hedge their overall position in an option.
    In particular, the Risk Monitor Mechanism will be useful for Market 
Makers,\4\ who are required to continuously quote in assigned options. 
Quoting across many series in an option creates the possibility of 
``rapid fire'' executions that can create large, unintended principal 
positions that expose the Market Maker to unnecessary market risk. The 
Risk Monitor Mechanism is intended to assist such Participants in 
managing their market risk.
---------------------------------------------------------------------------

    \4\ Unlike the PHLX Risk Monitor Mechanism, the NOM Risk Monitor 
Mechanism will be available to all Participants, not just Market 
Makers.
---------------------------------------------------------------------------

    Though the Risk Monitor Mechanism will be most useful to Market 
Makers, the Exchange proposes to offer the functionality to all 
participant types. There are other firms that trade on a proprietary 
basis and provide liquidity to the Exchange; these firms could 
potentially benefit, similarly to Market Makers, from the Risk Monitor 
Mechanism. The Exchange believes that the Risk Monitor Mechanism should 
help liquidity providers generally, market makers and other 
participants alike, in managing risk and providing deep and liquid 
markets to investors.
    Pursuant to new Section 19(a), the Risk Monitor Mechanism operates 
by the System maintaining a counting program for each Participant, 
which counts the number of contracts traded in an option by each 
Participant within a specified time period, not to exceed 15 seconds, 
established by each Participant (the ``specified time period''). The 
specified time period will commence for an option when a transaction 
occurs in any series in such option. Furthermore, the System engages 
the Risk Monitor Mechanism in a particular option when the counting 
program has determined that a Participant has traded a Specified 
Engagement Size (as defined below) established by such Participant 
during the specified time period. When such Participant has traded the 
Specified Engagement Size during the specified time period, the Risk 
Monitor Mechanism automatically removes such Participant's orders in 
all series of the particular option.
    As provided in proposed subparagraph (b)(ii), the Specified 
Engagement Size is determined by the following: (A) For each series in 
an option, the counting program will determine the percentage that the 
number of contracts executed in that series represents relative to the 
Participant's total size at all price levels in that series (``series 
percentage''); (B) The counting program will determine the sum of the 
series percentages in the option issue (``issue percentage''); (C) Once 
the counting program determines that the issue percentage equals or 
exceeds a percentage established by the Participant (``Specified 
Percentage''), the number of executed contracts in the option issue 
equals the Specified Engagement Size. For example, if a Participant is 
quoting in four series of a particular option issue, and sets its 
Specified Percentage at 100%, the Specified Engagement Size would be 
determined as follows:

[[Page 34282]]



                                                    Example I
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100              40              40
Series 2........................................................              50              20              40
Series 3........................................................             200              20              10
Series 4........................................................             150              15              10
                                                                 -----------------------------------------------
    Total.......................................................             500              95             100
----------------------------------------------------------------------------------------------------------------

    In this example, the Specified Engagement Size is 95 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 100%.

                                                   Example II
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100               0               0
Series 2........................................................              50               0               0
Series 3........................................................             200               0               0
Series 4........................................................             150             150             100
                                                                 -----------------------------------------------
    Total.......................................................             500             150             100
----------------------------------------------------------------------------------------------------------------

    In this example, the Specified Engagement Size is 150 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 100%.
    If a Participant is quoting in four series of a particular option, 
and sets its Specified Percentage at 200%, the Specified Engagement 
Size would be determined as follows:

                                                   Example III
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100              80              80
Series 2........................................................              50              40              80
Series 3........................................................             200              40              20
Series 4........................................................             150              30              20
                                                                 -----------------------------------------------
    Total.......................................................             500             190             200
----------------------------------------------------------------------------------------------------------------

    In this example, the Specified Engagement Size is 190 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 200%.
    The Specified Engagement Size will be automatically offset by a 
number of contracts that are executed on the opposite side of the 
market in the same option issue during the specified time period (the 
``Net Offset Specified Engagement Size''). Long call positions will 
only be offset by short call positions, and long put positions will 
only be offset by short put positions. For example, a Participant that 
buys calls and also sells calls in the same option during the specified 
time period would have a Net Offset Specified Engagement Size as 
follows:

                                                   Example IV
----------------------------------------------------------------------------------------------------------------
                                                                                      Net offset
                   Series                         Size       Buy call    Sell call       size       Percentage
----------------------------------------------------------------------------------------------------------------
Series 1....................................          100           60           20           40              40
Series 2....................................          100          100           60           40              40
Series 3....................................          200          150          130           20              10
Series 4....................................          150           75           60           15              10
                                             -------------------------------------------------------------------
    Total...................................          550          385          270          115             100
----------------------------------------------------------------------------------------------------------------


[[Page 34283]]

    Here, the Net Offset Specified Engagement Size for each series is 
determined by offsetting the number of contracts executed on the 
opposite side of the market for each series during the specified time 
period. The Risk Monitor Mechanism shall be engaged once the Net Offset 
Specified Engagement Size is for a net number of contracts executed 
among all series in an option issue during the specified time period 
that represents an issue percentage equal to or greater than the 
Specified Percentage.
    As explained above, the Specified Engagement Size would be based on 
all price levels. For example, if a Participant is quoting in two 
series of a particular option, at several price levels in each, and 
sets its Specified Percentage at 90%, the Specified Engagement Size 
would be determined as follows:

                                                    Example V
----------------------------------------------------------------------------------------------------------------
                                                                         Number of    Number of
                                                Series 1     Series 2    contracts    contracts
                 Price level                      size         size       executed     executed     Percentage
                                                                          series 1     series 2
----------------------------------------------------------------------------------------------------------------
Level 1.....................................          100           50          100           50            32.5
Level 2.....................................          100           50          100           50            32.5
Level 3.....................................          150          100            0          100              25
Level 4.....................................          150          200            0            0  ..............
                                             -------------------------------------------------------------------
    Total...................................          500          400          200          200  ..............
----------------------------------------------------------------------------------------------------------------
Percentage..................................  ...........  ...........           40           50              90
----------------------------------------------------------------------------------------------------------------

    In this example, the Specified Engagement Size is 400 contracts, 
which is the aggregate number of contracts executed among all series, 
at all price levels, during the specified time period that represents 
an issue percentage equal to the Specified Percentage of 90%. Although 
the Participant executed 40% and 50% of the aggregate size displayed in 
series 1 and series 2, respectively, 100% of the Participant's top 
price level was executed in both series.
    While the Risk Monitor Mechanism is a useful feature that serves an 
important risk management purpose, it operates consistent with the firm 
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation 
NMS. Specifically, proposed paragraph (c) provides that any marketable 
orders or quotes that are executable against a Participant's quotation 
that are received prior to the time the Risk Monitor Mechanism is 
engaged will be automatically executed at the price up to the 
Participant's size, regardless of whether such an execution results in 
executions in excess of the Participant's Specified Engagement Size. 
Accordingly, the Risk Monitor Mechanism cannot be used to circumvent a 
Participant's firm quote obligation.
    If a Participant is quoting in two series of a particular option, 
at several price levels in each, and sets its Specified Percentage at 
90%, one contra side order can result in executions in excess of the 
Specified Engagement Size. Specifically, if a market order to sell 500 
contracts is received in Series 1, the order will execute against all 
four levels that the Participant is quoting, as follows:

                                                   Example VI
----------------------------------------------------------------------------------------------------------------
                                                                         Number of    Number of
                                                Series 1     Series 2    contracts    contracts
                 Price level                      size         size       executed     executed     Percentage
                                                                          series 1     series 2
----------------------------------------------------------------------------------------------------------------
Level 1.....................................          100           50          100            0              20
Level 2.....................................          100           50          100            0              20
Level 3.....................................          150          100          150            0              25
Level 4.....................................          150          200          150            0              25
                                             -------------------------------------------------------------------
    Total...................................          500          400          200            0  ..............
----------------------------------------------------------------------------------------------------------------
Percentage..................................  ...........  ...........          100            0             100
----------------------------------------------------------------------------------------------------------------

    Although the Participant's Specified Percentage is 90%, the contra 
side order executes in its entirety and the Risk Protection Mechanism 
is engaged after the resulting executions have surpassed the Specified 
Engagement Size.
    Proposed Section 19(d) further provides that the system will 
automatically reset the counting program and commence a new specified 
time period when:
    (i) A previous counting period has expired and a transaction occurs 
in any series in such option; or
    (ii) the Participant refreshes his/her quotation, in a series for 
which an order has been executed (thus commencing the specified time 
period) prior to the expiration of the specified time period.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \5\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \6\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the

[[Page 34284]]

mechanisms of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. The Exchange 
believes that the proposal is appropriate and reasonable, because it 
offers additional functionality for Participants to manage their risk.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-NASDAQ-2011-077 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2011-077. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASDAQ-2011-077 and should be submitted on or before July 5, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-14518 Filed 6-10-11; 8:45 am]
BILLING CODE 8011-01-P