Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing of Proposed Rule Change Regarding the Short Term Option Series Program, 62809-62814 [2013-24673]
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
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credit. The change is consistent with an
equitable allocation of fees and not
unfairly discriminatory because it will
reduce the extent to which NASDAQ
pays an extra credit to encourage the use
of the QDRK and QCST strategies,
thereby making the credit paid to
NASDAQ members more consistent
with credits paid by BX. In addition, the
change is equitable and not unfairly
discriminatory because it affects only
those members that opt to use
NASDAQ’s optional routing services,
and will in any event have a minimal
impact because few orders using the
strategies execute at BX.
unattractive to market participants, it is
likely that NASDAQ will lose market
share as a result. As a result of these
considerations, NASDAQ does not
believe that the proposed changes will
impair the ability of members or
competing order execution venues to
maintain their competitive standing in
the financial markets.
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.11 NASDAQ notes that it
operates in a highly competitive market
in which market participants can
readily favor competing venues if they
deem fee levels at a particular venue to
be excessive, or rebate opportunities
available at other venues to be more
favorable. In such an environment,
NASDAQ must continually adjust its
fees to remain competitive with other
exchanges and with alternative trading
systems that have been exempted from
compliance with the statutory standards
applicable to exchanges. Because
competitors are free to modify their own
fees in response, and because market
participants may readily adjust their
order routing practices, NASDAQ
believes that the degree to which fee
changes in this market may impose any
burden on competition is extremely
limited. In this instance, although the
proposed change with respect to
midpoint orders has the effect of
eliminating a rebate tier, the tier had not
been successful at encouraging greater
use of midpoint orders, and so its
elimination is unlikely to have an
impact on the order routing decisions of
NASDAQ members. Moreover, other
incentive tiers with respect to midpoint
orders remain in place. Similarly, the
proposed changes with respect to
routing fees are expected to have a
minimal effect on members that opt to
use NASDAQ’s routing services,
because few routed orders execute at
PSX or BX; moreover, the amount of the
fee increase (for PSX) or credit
reduction (for BX) is small. In addition,
numerous alternatives exist to the
routing services offered by NASDAQ.
Thus, if any of the changes are [sic]
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 12 and paragraph (f) of Rule
19b–4 thereunder.13 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
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:
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–24570 Filed 10–21–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70682; File No. SR–Phlx–
2013–101]
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2013–129. This
file number should be included on the
subject line if email 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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
October 15, 2013.
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change
Regarding the Short Term Option
Series Program
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 October
3, 2013, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III, 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.
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
U.S.C. 78s(b)(3)(A).
13 17 CFR 240.19b–4(f).
U.S.C. 78f(b)(8).
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 on official business
days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing also
will be available for inspection and
copying at the principal offices 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–2013–129, and should be
submitted on or before November 12,
2013.
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2013–129 on the subject line.
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing with the
Commission a proposal to amend Rule
1012 (Series of Options Open for
Trading) to expand the Short Term
Option Program (‘‘STO Program’’ or
‘‘Program’’) 3 so that the Exchange may:
Change the current thirty option class
limitation to fifty option classes on
which STOs may be opened; list or add
STOs within fifty percent (50%) above
or below the closing price of the
underlying security from the preceding
day if the price of the underlying
security is greater than $20, or within
one hundred percent (100%) above or
below the closing price of the
underlying security from the preceding
day if the price of the underlying
security is less than or equal to $20;
open up to thirty STO series for each
expiration date in an STO class; add an
STO strike price interval of $2.50 or
greater where the strike price is above
$150; and in general harmonize the
different parts of the Program.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxphlx.cchwallstreet.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
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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.
3 STOs, also known as ‘‘weekly options’’ as well
as ‘‘Short Term Options’’, are series in an options
class that are approved for listing and trading on the
Exchange in which the series are opened for trading
on any Thursday or Friday that is a business day
and that expire on the Friday of the next business
week. If a Thursday or Friday is not a business day,
the series may be opened (or shall expire) on the
first business day immediately prior to that
Thursday or Friday, respectively. For STO Program
rules regarding non-index options, see Rule
1000(b)(44) and Commentary .11 to Rule 1012. For
STO Program rules regarding index options, which
are not implicated by this proposal, see Rule
1000A(b)(16) and Rule 1101A(b)(vi).
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this proposed rule
change is to amend Rule 1012 to expand
the STO Program for non-index options
so that the Exchange may: Change the
current thirty option class limitation to
fifty option classes on which STOs may
be opened; list or add STOs within fifty
percent (50%) above or below the
closing price of the underlying security
from the preceding day if the price of
the underlying security is greater than
$20, or within one hundred percent
(100%) above or below the closing price
of the underlying security from the
preceding day if the price of the
underlying security is less than or equal
to $20; open up to thirty STO series for
each expiration date in an STO class;
add an STO strike price interval of $2.50
or greater where the strike price is above
$150; and in general harmonize the
different parts of the Program.4
The STO Program, which was
initiated in 2010,5 is codified in
Commentary .11 to Rule 1012 for nonindex options including equity,
currency, and exchange traded fund
(‘‘ETF’’) options.6 These sections
currently state that after an option class
has been approved for listing and
trading on the Exchange, the Exchange
may open for trading on any Thursday
or Friday that is a business day series
of options on no more than thirty option
classes that expire on the Friday of the
following business week that is a
business day.7 In addition to the thirty
option class limitation, there is also a
limitation that no more than twenty
series for each expiration date in those
classes may be opened for trading.8
4 The price of the underlying security will be
calculated commensurate with Commentary .10(a)
to Rule 1012 as amended.
5 See Securities Exchange Act Release No. 62296
(June 15, 2010), 75 FR 35115 (June 21, 2010)
(SR–Phlx–2010–84) (notice of filing and immediate
effectiveness permanently establishing STO
Program on the Exchange).
6 The Exchange does not by this filing propose
any changes to Rule 1101A(b)(vi) related to the STO
Program for index options.
7 The increase in the number of option issues that
could be opened pursuant to the STO Program was
approved in 2011. See Securities Exchange Act
Release No. 65776 (November 17, 2011), 76 FR
72482 (November 23, 2011) (SR–Phlx–2011–131)
(approval order).
8 However, if the Exchange opens less than
twenty (20) Short Term Option Series for a Short
Term Option Expiration Date, additional series may
be opened for trading on the Exchange when the
Exchange deems it necessary to maintain an orderly
market, to meet customer demand or when the
market price of the underlying security moves
substantially from the exercise price or prices of the
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Furthermore, the strike price of each
STO has to be fixed with approximately
the same number of strike prices being
opened above and below the value of
the underlying security at about the
time that the STOs are initially opened
for trading on the Exchange, and with
strike prices being within thirty percent
(30%) above or below the closing price
of the underlying security from the
preceding day. The Exchange proposes
in part to increase the number of STO
classes that may be opened, match the
opening of initial and additional STO
strikes to what is permissible per the
OLPP,9 add new strike prices
increments that may be used in the STO
Program, and in general harmonize the
different parts of the Program (e.g.,
initial listings and additional series).
In terms of the strike price intervals,
the STO Program currently allows that
the interval between strike prices on
series already opened. Any additional strike prices
listed by the Exchange shall be within thirty
percent (30%) above or below the current price of
the underlying security. The Exchange may also
open additional strike prices of Short Term Option
Series that are more than 30% above or below the
current price of the underlying security provided
that demonstrated customer interest exists for such
series, as expressed by institutional, corporate or
individual customers or their brokers. Marketmakers trading for their own account shall not be
considered when determining customer interest
under this provision. The opening of the new Short
Term Option Series shall not affect the series of
options of the same class previously opened.
Commentary .11(d) to Rule 1012. The Exchange
proposes, as discussed below, to change twenty (20)
Short Term Option Series to thirty (30) Short Term
Option Series to achieve consistency with other
proposed rule changes.
9 The full name of the OLPP (which is applicable
to all option exchanges) is Plan For The Purpose of
Developing and Implementing Procedures Designed
to Facilitate the Listing and Trading of
Standardized Options Submitted Pursuant to
Section 11A(a)(3)(B) of the Securities Exchange Act
of 1934. With regard to the listing of new series on
equity, ETF, or trust issued receipt (‘‘TIRs’’) option
classes, subsection 3.(g)(i) of the OLPP states, in
relevant part, that the exercise price of each option
series listed by an exchange that chooses to list a
series of options (known as the Series Selecting
Exchange) shall be fixed at a price per share which
is reasonably close to the price of the underlying
equity security, ETF, or TIR at or about the time the
Series Selecting Exchange determines to list such
series. Except as provided in subparagraphs (ii)
through (iv) of the OLPP, if the price of the
underlying security is less than or equal to $20, the
Series Selecting Exchange shall not list new option
series with an exercise price more than 100% above
or below the price of the underlying security. If the
price of the underlying security is greater than $20,
the Series Selecting Exchange shall not list new
option series with an exercise price more than 50%
above or below the price of the underlying security.
Subsection 3.(g)(i) of the OLPP indicates that an
option series price has to be reasonably close to the
price of the underlying security and must not
exceed a maximum of 50% or 100%, depending on
the price, from the underlying. The Exchange’s
proposal related to non-index options, while
conforming to the current structure of the
Exchange’s STO rules, is similar in practical effect
to the noted OLPP subsection.
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
The Proposal
First, the Exchange proposes to
increase the number of STO classes that
may be opened after an option class has
been approved for listing and trading on
the Exchange. Specifically, the
Exchange proposes in Commentary
.11(a) of Rule 1012 that the Exchange
may select up to fifty currently listed
option classes on which Short Term
Option Series may be opened. The
Exchange proposes also that for each
option class eligible for participation in
the STO Program, the Exchange may
open up to thirty STO Series for each
expiration date in that class.12 The
Exchange believes that this proposed
moderate increase is needed and
advisable in light of the demonstrated
acceptance and popularity of the STO
Program among market participants, as
discussed below.
Second, the Exchange proposes to
indicate under what circumstances,
subsequent to opening initial STO
classes, additional STO strike prices
may be added. Specifically, the
Exchange proposes in Commentary
.11(c) of Rule 1012 that any initial series
listed by the Exchange shall be
reasonably close to the price of the
underlying equity security and within
the following parameters: (i) If the price
of the underlying security is less than or
equal to $20, additional strike prices
shall be not more than one hundred
percent (100%) above or below the price
of the underlying security; and (ii) if the
price of the underlying security is
greater than $20, additional strike prices
shall be not more than fifty percent
(50%) above or below the price of the
underlying security. This proposal is in
line with the process for adding new
series of options found in subsection
3.(g)(i) of the OLPP, and harmonizes the
Program internally. The Exchange
believes that this proposal is a
reasonable and desirable enhancement
to the STO Program.
Third, the Exchange proposes changes
to Commentary .11(d) of Rule 1012 to
indicate that any additional strike prices
listed by the Exchange shall be
reasonably close to the price of the
underlying equity security and within
the following parameters: (i) If the price
of the underlying security is less than or
equal to $20, additional strike prices
shall be not more than one hundred
percent (100%) above or below the price
of the underlying security; and (ii) if the
price of the underlying security is
greater than $20, additional strike prices
shall be not more than fifty percent
(50%) above or below the price of the
underlying security. This is done so that
the parameters for opening STOs and
adding strike prices are in conformity.
The Exchange proposes additional
changes to Commentary .11(d) to
indicate that if the Exchange has opened
less than thirty (30) Short Term Option
Series for a Short Term Option
Expiration Date, the Exchange may also
open additional strike prices of Short
Term Option Series that are more than
50% above or below the current price of
the underlying security (if the price is
greater than $20); provided that
demonstrated customer interest exists
for such series, as expressed by
institutional, corporate or individual
customers or their brokers. Market
Makers trading for their own account
are not considered when determining
customer interest.13 This is done to
conform the additional strike price
methodology with the proposed 50%
listing standard in the same subsections,
and to ensure that the opening 30 Short
Term Option Series language is
consistent with other proposed
changes,14 while retaining the
10 Related non-STOs are non-STOs that have
similar options with longer expiration cycles (e.g.,
monthly Apple (AAPL) options would be Related
non-STOs to weekly AAPL options). Unlike
monthly non-index options series such as AAPL,
which may not be listed within two business days
of expiration, because of the short STO expiration
cycle these options may be listed up to expiration.
11 Commentary .11(e) to Rule 1012.
12 The current limitation is up to thirty currently
listed option classes and up to twenty series for
each expiration date in an STO class. Commentary
.11(a) of Rule 1012.
13 Commentary .10(a) to Rule 1012 currently
states that if the price of the underlying security is
greater than $20, the Exchange shall not list new
option series with an exercise price more than 50%
above or below the price of the underlying security.
Immediately before this language, the Exchange
proposes to also add a carve-out that states: ‘‘Except
as provided in Commentary .11(d) to Rule 1012
. . .’’
14 The Exchange believes that the 100% standard
proposed for initial listings where the price of the
underlying is below $20 is adequate and does not
need to be repeated for additional series adds.
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STOs may be (i) $0.50 or greater where
the strike price is less than $75, and $1
or greater where the strike price is
between $75 and $150 for all classes
that participate in the STO Program; or
(ii) $0.50 for classes that trade in one
dollar increments in Related nonSTOs 10 and that participate in the STO
Program. Related non-STO series shall
be opened during the week prior to the
week that such Related non-STO series
expire in the same manner and in the
same strike price intervals as permitted
in Commentary .11 to Rule 1012.11 This
proposal retains many of the
fundamental limitations of the STO
Program while proposing specific
changes as described below.
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62811
demonstrated interest language that may
be useful in unforeseen circumstances.
Fourth, the Exchange also proposes to
simplify the Delisting Language in
Commentary .11(d) of Rule 1012, which
currently contains a range methodology
(at least 10% but not more than 30%
above or below the current price of the
underlying),15 to indicate that the
Exchange will delist any series with no
open interest in both the call and the
put series having a: (i) Strike higher
than the highest price with open interest
in the put and/or call series for a given
expiration week; and (ii) strike lower
than the lowest strike price with open
interest in the put and/or the call series
for a given expiration week. The
Exchange believes that like its other
proposals, the delisting proposal will
add clarity and certainty to the STO
process on the Exchange, as well as
across other markets that may choose to
implement similar changes (discussed
below).
Fifth, the Exchange proposes to add
$2.50 strike price intervals to the STO
Program. Specifically, the Exchange
proposes in Commentary .11(e) of Rule
1012 to indicate that the interval
between strike prices on STOs may be
$2.50 or greater where the strike price
is above $150. This proposed change
complements the current STO strike
price intervals, which are $0.50 or
greater where the strike price is less
than $75, and $1 or greater where the
strike price is between $75 and $150 for
all classes that participate in the STO
Program.16 The proposed $2.50 strike
price interval addresses the issue that
above a $150 strike price STO strike
15 Currently, the Delisting Language states: ‘‘In
the event that the underlying security has moved
such that there are no series that are at least 10%
above or below the current price of the underlying
security, the Exchange will delist any series with
no open interest in both the call and the put series
having a: (i) Strike higher than the highest price
with open interest in the put and/or call series for
a given expiration week; and (ii) strike lower than
the lowest strike price with open interest in the put
and/or the call series for a given expiration week,
so as to list series that are at least 10% but not more
than 30% above or below the current price of the
underlying security. In the event that the
underlying security has moved such that there are
no series that are at least 10% above or below the
current price of the underlying security and all
existing series have open interest, the Exchange
may list additional series, in excess of the 30
allowed under Commentary .11, that are between
10% and 30% above or below the price of the
underlying security.’’ Commentary .11(d) of Rule
1012. See Securities Exchange Act Release No.
70116 (August 5, 2013), 78 FR 48754 (August 9,
2013) (SR–Phlx–2013–79) (notice of filing and
immediate effectiveness regarding delisting series
and opening up to five consecutive weekly
expirations of STOs).
16 STO strike price intervals may also be in $1
increments in Related non-STOs that participate in
the STO Program. Commentary .11 of Rule 1012.
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
price intervals must currently be an
exceedingly wide $5.00 or greater.17
All options exchanges that have
weeklies programs have similar rules
regarding their own programs, and tend
to emulate STO changes that are
initiated by other options exchanges.
The Exchange recognizes that while this
may result in a potentially increased
combined capacity footprint of
exchanges with weeklies programs, the
specific beneficial changes proposed in
this filing greatly outweigh any such
potential impact.
The principal reason for the proposed
expansion is market demand for
additional STO classes and series and a
desire to make the STO Program more
effective. There is continuing strong
customer demand for having the ability
to execute hedging and trading
strategies via STOs, particularly in the
current fast and volatile multi-faceted
trading and investing environment that
extends across numerous markets and
platforms 18 and includes market
moving events such as significant
market volatility, corporate events, or
large market, sector, or individual issue
price swings. The Exchange has been
requested by traders and other market
participants to expand the STO Program
to allow additional STO offerings and
increased efficiency.
In order that the Exchange not exceed
the current thirty option class and
twenty option series restriction, the
Exchange has on occasion had to turn
away STO customers (traders and
investors) because it could not list, or
had to delist, STOs or could not open
adequate STO Series because of
restrictions in the STO Program. This
has negatively impacted investors and
traders, particularly retail public
customers, who have continued to
request the Exchange not to remove STO
classes or add STO classes, or have
requested the Exchange to expand the
STO Program so that additional STO
classes and series could be opened that
would allow the market participants to
execute trading and hedging
strategies.19 There are, as discussed,
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17 See,
e.g., Commentary .05 to Rule 1012.
18 These include, without limitation, options,
equities, futures, derivatives, indexes, ETFs,
exchange traded notes, currencies, and over the
counter instruments.
19 The Exchange noted, in its STO Program
expansion proposal in 2011, that it was requested
by a retail investor to reinstate an STO class that
the Exchange had to remove from trading because
of the class option limitation within the Program.
The investor told the Exchange that he had used the
removed class as a powerful tool for hedging a
market sector, and that various strategies that the
investor put into play were disrupted and
eliminated when the class was removed. See
Securities Exchange Act Release No. 65776
(November 17, 2011), 76 FR 72482 (November 23,
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substantial benefits to market
participants having the ability to trade
eligible option classes within the STO
Program. Furthermore, the Exchange
supports the objective of responding to
customer need to enhance successful
programs to make them more efficient
for hedging and trading purposes.
The Exchange notes that the STO
Program has been well-received by
market participants, in particular by
retail investors. The volume of STO
trading has increased by 132% since the
beginning of 2011 20 and continues to
grow, such that currently STOs
represent 20% of trading volume on the
Exchange and 31% of trading volume
across all option exchanges.21 The
Exchange believes that weekly
expiration options will continue to grow
in importance for all market
participants, including institutional and
retail investors.22
The proposed revisions to the STO
Program will permit the Exchange to
meet customer demand for better STO
Program use and efficiency,
harmonization of OLPP and STO
Program rules, internal harmonization
of the STO Program, and a reasonable
expansion of strike price intervals in the
Program.
By way of example, if an investor
wants to gain exposure to a relatively
higher priced security like AAPL, he
may invest in AAPL stock and/or AAPL
options. Currently, the investor must
choose a strike price that might lack the
precision he is looking for in order to
gain or reduce exposure to AAPL. If the
investor is looking to invest in a long
position in AAPL, for example, he may
choose to execute a covered call strategy
by selling calls on AAPL. Assume AAPL
is trading at $415. Under the current
rules the nearest out of the money STO
call would be the $420.00 strike, which
would, with one week until expiration,
trade at or about $2.15. If the $417.50
strike were available per this proposal,
however, the investor could sell calls at
approximately $3.15. This would allow
the investor to still execute an out of the
2011) (SR–Phlx–2011–131) (order approving
opening STO series on 30 option classes).
20 Since the STO Program was initiated in 2010
on the Exchange and other markets (some of which
were established after the STO Program was
initiated), STO Program volume has expanded by
more than 3000%.
21 During the same period of time, however, the
volume of standard monthly options across all
exchanges has, on the other hand, declined by 28%.
22 The current STO Program, which is similar
across all options markets that have weeklies
programs, is in its current formulation one of the
more challenging industry-wide listings program to
administer. Recognizing the importance of the
Program, the Exchange is seeking to improve the
Program for non-index STOs by making it more
uniform and logical.
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money covered call strategy, but would
increase the potential return by $1, or
approximately 46% ($1/$2.15), thus
offering approximately 46% additional
risk protection. To the investor writing
covered calls on his AAPL equity
position, this extra risk protection could
be very significant on an annual basis,
and costly if not available.
By way of a second example, if an
investor wants to gain exposure to a
lower priced security like Banc of
America (BAC), he may invest in BAC
stock and/or options. Assume BAC is
trading at $14.60. The investor may
have established a long position in a
non-STO BAC option like, for example,
the standard expiration BAC Aug 17th
1.00 calls. To offset some of the risk the
investor possesses in the BAC Aug 17th
1.00 calls, the investor may wish to
make a corresponding trade in the BAC
Aug 10th (STO) 1.00 call. Currently, the
investor does not have this risk
reduction strategy available to him, as
the current BAC STO does not have
available strikes. The proposal would
correct this shortcoming.
By way of further example, in a lower
priced stock such as BAC there may be
a need for tighter strike price intervals
in case of a precipitous drop in price.
Assume BAC is trading at $14.60.
Assume BAC announces a large loss,
and the stock price drops to $6. The
Exchange believes that investors should
have the ability to use calls or puts with
a more targeted strike price to attain
proper risk protection—one of the great
advantages of options. Because current
STO rules do not allow a strike price
below $9.50 in the BAC STO, however,
an investor looking to purchase out of
the money put protection for a short
period of time, and at a lower premium
than a longer term option, is not able to
do so. BAC $9.50 strike puts would
trade at a premium of about $3.50 or
more, and would require the investor to
sell or exercise his puts by expiration if
they remained in the money. An Aug
10th $5.00 out of the money STO option
in BAC, on the other hand, would trade
a much more affordable premium due to
being out of the money, and would only
require the investor to sell or exercise
his put if the BAC stock price continued
its precipitous drop. Clearly, the ability
to make more targeted and efficient
decisions regarding the protection of
investments is of great importance to
investments and market participants,
and should be encouraged.
Following are illustrations of the STO
listing process per the rules as
proposed. Assume that the Alcoa Inc.
(AA) STO closes at $7.92. Pursuant to
the proposed rule, STOs may be added
between $1 and $15.50 (half point strike
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intervals are currently permitted where
the strike price is below $75). On day
one, the maximum number of Short
Term Option Series that may be listed
are thirty. If the Exchange opens less
than thirty Short Term Option Series,
additional series may be added as the
underlying price moves. If the AA price
moves to $10, additional series can be
added as high as $20 (100% above the
underlying price). If the AA price moves
to $5, additional lower strikes would
not be added, since the initial strikes go
as low as possible ($1). Or, assume that
the McDonald’s Corporation (MCD) STO
closes at $96.26. Pursuant to the
proposed rule, Short Term Options
Series may be added between $49 and
$144 (in $0.50 and $1 intervals). On day
one, no more than thirty Short Term
Option Series may be listed. If the
Exchange opens less than thirty Short
Term Option Series, additional series
may be added as the underlying price
moves. If the MCD price moves to $105,
additional series can be added as high
as $155 (50% above the underlying
price). If the MCD price moves to $87,
additional lower strikes can be added as
low as $43.50. To list strikes above the
50% threshold, however, there must be
demonstrated customer interest for such
series, as expressed by institutional,
corporate or individual customers or
their brokers.
Following are illustrations of the STO
delisting process per the rules as
proposed. Series delisting would occur
under the proposed rule if the stock
price moves and there are no series at
least 10% above/below the current
price. Assume AA closed at $7.92 and
strikes were listed between $1 and $15.
If the AA price moved to $15, and there
were no strikes at $16.50 or above (at
least 10% above the current price), the
delisting process would begin. For the
delisting process, staff would simply
need to check what, if any, strikes are
higher than the highest strike with open
interest, and lower than the lowest
strike with open interest. Unlike the
current delisting process, there would
be no need to check whether strikes
were within a listing band (e.g., 10% to
30%). Or, assume that MCD closed at
$96.26 and strikes were listed between
$82 and $110. If the MCD price moved
to $104, and there were no strikes at
$115 or above (at least 10% above the
current price), the delisting process
would begin. For the delisting process,
staff would simply need to check what
strikes are higher than the highest strike
with open interest, and lower than the
lowest strike with open interest.
With regard to the impact of this
proposal on system capacity, the
Exchange has analyzed its capacity and
VerDate Mar<15>2010
21:08 Oct 21, 2013
Jkt 232001
represents that it and the Options Price
Reporting Authority (‘‘OPRA’’) have the
necessary systems capacity to handle
any potential additional traffic
associated with this current amendment
to the STO Program. The Exchange
believes that its members will not have
a capacity issue as a result of this
proposal. The Exchange represents that
it will monitor the trading volume
associated with the additional options
series listed as a result of this proposal
and the effect (if any) of these additional
series on market fragmentation and on
the capacity of the Exchange’s
automated systems.23
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 24 in general, and furthers the
objectives of Section 6(b)(5) of the Act 25
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest.
Expanding the classes and additional
series that can be opened in the STO
Program, simplifying the delisting
process, and allowing $2.50 strike price
intervals will result in a continuing
benefit to investors by giving them more
flexibility to closely tailor their
investment and hedging decisions in
greater number of securities.
The STO Program has been wellreceived by market participants, and in
particular by retail investors, and has
seen increasing trading volume. The
Exchange believes that the current
proposed revisions to the STO Program
will permit the Exchange to meet
customer demand for enhanced STO
Program use and efficiency,
harmonization of OLPP and STO
Program rules, and a reasonable
expansion of strike price intervals in the
Program to the benefit of investors,
market participants, and the
marketplace.
With regard to the impact of this
proposal on system capacity, the
Exchange believes that it and OPRA
have the necessary systems capacity to
handle any potential additional traffic
associated with this current amendment
23 As noted previously, because the STO Program
is an industry-wide program, exchanges tend to
emulate the rule filings of one another. The
Exchange recognizes that while this may result in
a potentially increased combined capacity footprint
of exchanges with weeklies programs, the Exchange
believes that the specific beneficial changes
proposed in this filing greatly outweigh any such
potential impact.
24 15 U.S.C. 78f(b).
25 15 U.S.C. 78f(b)(5).
PO 00000
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Sfmt 4703
62813
to the STO Program. The Exchange
believes that its members will not have
a capacity issue as a result of this
proposal. All exchanges that have STO
programs have largely similar STO rules
and tend to emulate STO rule changes
proposals initiated by other exchanges.
While the Exchange recognizes that this
proposal may be copied by other
exchanges and impact their capacity,
the Exchange believes that any such
potential capacity impact will not
outweigh (and does not outweigh for the
Exchange) the significant benefits that
this proposal will afford market
participants and the market in general
in terms of significantly greater
flexibility and increases in efficient
trading and hedging options.
The proposed revisions to the STO
Program will permit the Exchange to
meet customer demand for better STO
Program use and efficiency,
harmonization of OLPP and STO
Program rules, internal harmonization
of the STO Program, and a reasonable
expansion of strike price intervals in the
Program.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. To the
contrary, the Exchange believes that the
proposal is decidedly pro-competitive.
The Exchange believes that the
proposed rule change will result in
additional investment options and
opportunities to achieve the investment
objectives of market participants seeking
efficient trading and hedging vehicles,
to the benefit of investors, market
participants, and the marketplace in
general.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or 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 Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
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Federal Register / Vol. 78, No. 204 / Tuesday, October 22, 2013 / Notices
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:
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
Phlx–2013–101 on the subject line.
Paper Comments
sroberts on DSK5SPTVN1PROD with FRONT MATTER
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–Phlx–2013–101. This file
number should be included on the
subject line if email 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 (https://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 on official business
days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing also
will be available for inspection and
copying at the principal offices 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–Phlx–
2013–101, and should be submitted on
or before November 12, 2013.
CFR 200.30–3(a)(12).
VerDate Mar<15>2010
21:08 Oct 21, 2013
[FR Doc. 2013–24673 Filed 10–21–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70569; File No. SR–
NASDAQ–2013–102]
Electronic Comments
26 17
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Kevin M. O’Neill,
Deputy Secretary.
Jkt 232001
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Approving a Proposed Rule Change To
Assume Operational Responsibility for
Certain Surveillance Activity Currently
Performed by FINRA Under the
Exchange’s Authority and Supervision
September 30, 2013.
On July 31, 2013, The NASDAQ Stock
Market LLC (‘‘NASDAQ’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
assume operational responsibility for
certain surveillance activity currently
performed by the Financial Industry
Regulatory Authority (‘‘FINRA’’) under
the Exchange’s authority and
supervision. The proposed rule change
was published for comment in the
Federal Register on August 16, 2013.3
The Commission received no comments
on the proposal.
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange 4 and, in particular,
the requirements of Section 6(b)(5) of
the Act.5 Since it became a national
securities exchange, NASDAQ has
contracted with FINRA through various
regulatory services agreements to
perform certain surveillance and other
regulatory functions on its behalf.6
NASDAQ Rule 0150 requires that,
unless NASDAQ obtains prior
Commission approval, the regulatory
functions subject to the regulatory
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70159
(August 12, 2013), 78 FR 50123 (August 16,
2013)(‘‘Notice’’).
4 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
5 15 U.S.C. 78f(b)(5).
6 See Securities Exchange Act Release No. 53128
(January 13, 2006), 71 FR 3550 (January 23, 2006).
2 17
PO 00000
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Fmt 4703
Sfmt 4703
services agreement in effect at the time
when NASDAQ became a national
securities exchange must continue to be
performed by FINRA or an affiliate
thereof or by another independent selfregulatory organization. NASDAQ now
proposes to reallocate operational
responsibility from FINRA to NASDAQ
Regulation for a limited number of
equities surveillance patterns and
related review functions focused on: (1)
Manipulation patterns that monitor
solely NASDAQ activity, including
patterns that monitor the Exchange’s
opening and closing crosses and
compliance with minimum bid listing
requirements, and (2) monitoring of
compliance by member firms with
elements of the Commission’s
Regulation M 7 and NASDAQ Rule 4619
compliance.
In the Notice, the Exchange represents
that it has the ability to conduct the
surveillances and regulatory functions
that it will assume. The Commission
also notes that the Exchange represents
that its expertise in its own market
structure, along with its existing realtime monitoring of these activities, may
enable the Exchange to better detect
improper activities on its market.
Moreover, these patterns, underlying
rules, and analytical requirements are
similar to patterns that NASDAQ
regulatory personnel already operate for
affiliated options markets. The
Exchange represents that NASDAQ’s
MarketWatch group, which already
handles other real-time surveillance of
the NASDAQ market, should be able to
adequately and effectively handle the
surveillances related to the instant
proposed rule change.
In the Notice, the Exchange further
represents that it will continue to refer
potentially violative conduct to FINRA
for further review and that FINRA will
continue to perform most of the
surveillance activity for NASDAQ’s
equity markets. The Exchange also
represents that FINRA will continue to
perform examination and enforcement
work, subject to NASDAQ’s supervision
and ultimate responsibility.
For the foregoing reasons, the
Commission believes that the proposed
rule change is consistent with the Act.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,8 that the
proposed rule change (SR–NASDAQ–
2013–102) be, and it hereby is,
approved.
7 17
CFR 242.100 et seq.
U.S.C. 78s(b)(2).
9 17 CFR 200.30–3(a)(12).
8 15
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]]>Agencies
[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62809-62814]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24673]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70682; File No. SR-Phlx-2013-101]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change Regarding the Short Term Option Series
Program
October 15, 2013.
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 October 3, 2013, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
[[Page 62810]]
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange is filing with the Commission a proposal to amend Rule
1012 (Series of Options Open for Trading) to expand the Short Term
Option Program (``STO Program'' or ``Program'') \3\ so that the
Exchange may: Change the current thirty option class limitation to
fifty option classes on which STOs may be opened; list or add STOs
within fifty percent (50%) above or below the closing price of the
underlying security from the preceding day if the price of the
underlying security is greater than $20, or within one hundred percent
(100%) above or below the closing price of the underlying security from
the preceding day if the price of the underlying security is less than
or equal to $20; open up to thirty STO series for each expiration date
in an STO class; add an STO strike price interval of $2.50 or greater
where the strike price is above $150; and in general harmonize the
different parts of the Program.
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\3\ STOs, also known as ``weekly options'' as well as ``Short
Term Options'', are series in an options class that are approved for
listing and trading on the Exchange in which the series are opened
for trading on any Thursday or Friday that is a business day and
that expire on the Friday of the next business week. If a Thursday
or Friday is not a business day, the series may be opened (or shall
expire) on the first business day immediately prior to that Thursday
or Friday, respectively. For STO Program rules regarding non-index
options, see Rule 1000(b)(44) and Commentary .11 to Rule 1012. For
STO Program rules regarding index options, which are not implicated
by this proposal, see Rule 1000A(b)(16) and Rule 1101A(b)(vi).
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqomxphlx.cchwallstreet.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to amend Rule 1012 to
expand the STO Program for non-index options so that the Exchange may:
Change the current thirty option class limitation to fifty option
classes on which STOs may be opened; list or add STOs within fifty
percent (50%) above or below the closing price of the underlying
security from the preceding day if the price of the underlying security
is greater than $20, or within one hundred percent (100%) above or
below the closing price of the underlying security from the preceding
day if the price of the underlying security is less than or equal to
$20; open up to thirty STO series for each expiration date in an STO
class; add an STO strike price interval of $2.50 or greater where the
strike price is above $150; and in general harmonize the different
parts of the Program.\4\
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\4\ The price of the underlying security will be calculated
commensurate with Commentary .10(a) to Rule 1012 as amended.
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The STO Program, which was initiated in 2010,\5\ is codified in
Commentary .11 to Rule 1012 for non-index options including equity,
currency, and exchange traded fund (``ETF'') options.\6\ These sections
currently state that after an option class has been approved for
listing and trading on the Exchange, the Exchange may open for trading
on any Thursday or Friday that is a business day series of options on
no more than thirty option classes that expire on the Friday of the
following business week that is a business day.\7\ In addition to the
thirty option class limitation, there is also a limitation that no more
than twenty series for each expiration date in those classes may be
opened for trading.\8\ Furthermore, the strike price of each STO has to
be fixed with approximately the same number of strike prices being
opened above and below the value of the underlying security at about
the time that the STOs are initially opened for trading on the
Exchange, and with strike prices being within thirty percent (30%)
above or below the closing price of the underlying security from the
preceding day. The Exchange proposes in part to increase the number of
STO classes that may be opened, match the opening of initial and
additional STO strikes to what is permissible per the OLPP,\9\ add new
strike prices increments that may be used in the STO Program, and in
general harmonize the different parts of the Program (e.g., initial
listings and additional series).
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\5\ See Securities Exchange Act Release No. 62296 (June 15,
2010), 75 FR 35115 (June 21, 2010) (SR-Phlx-2010-84) (notice of
filing and immediate effectiveness permanently establishing STO
Program on the Exchange).
\6\ The Exchange does not by this filing propose any changes to
Rule 1101A(b)(vi) related to the STO Program for index options.
\7\ The increase in the number of option issues that could be
opened pursuant to the STO Program was approved in 2011. See
Securities Exchange Act Release No. 65776 (November 17, 2011), 76 FR
72482 (November 23, 2011) (SR-Phlx-2011-131) (approval order).
\8\ However, if the Exchange opens less than twenty (20) Short
Term Option Series for a Short Term Option Expiration Date,
additional series may be opened for trading on the Exchange when the
Exchange deems it necessary to maintain an orderly market, to meet
customer demand or when the market price of the underlying security
moves substantially from the exercise price or prices of the series
already opened. Any additional strike prices listed by the Exchange
shall be within thirty percent (30%) above or below the current
price of the underlying security. The Exchange may also open
additional strike prices of Short Term Option Series that are more
than 30% above or below the current price of the underlying security
provided that demonstrated customer interest exists for such series,
as expressed by institutional, corporate or individual customers or
their brokers. Market-makers trading for their own account shall not
be considered when determining customer interest under this
provision. The opening of the new Short Term Option Series shall not
affect the series of options of the same class previously opened.
Commentary .11(d) to Rule 1012. The Exchange proposes, as discussed
below, to change twenty (20) Short Term Option Series to thirty (30)
Short Term Option Series to achieve consistency with other proposed
rule changes.
\9\ The full name of the OLPP (which is applicable to all option
exchanges) is Plan For The Purpose of Developing and Implementing
Procedures Designed to Facilitate the Listing and Trading of
Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of
the Securities Exchange Act of 1934. With regard to the listing of
new series on equity, ETF, or trust issued receipt (``TIRs'') option
classes, subsection 3.(g)(i) of the OLPP states, in relevant part,
that the exercise price of each option series listed by an exchange
that chooses to list a series of options (known as the Series
Selecting Exchange) shall be fixed at a price per share which is
reasonably close to the price of the underlying equity security,
ETF, or TIR at or about the time the Series Selecting Exchange
determines to list such series. Except as provided in subparagraphs
(ii) through (iv) of the OLPP, if the price of the underlying
security is less than or equal to $20, the Series Selecting Exchange
shall not list new option series with an exercise price more than
100% above or below the price of the underlying security. If the
price of the underlying security is greater than $20, the Series
Selecting Exchange shall not list new option series with an exercise
price more than 50% above or below the price of the underlying
security.
Subsection 3.(g)(i) of the OLPP indicates that an option series
price has to be reasonably close to the price of the underlying
security and must not exceed a maximum of 50% or 100%, depending on
the price, from the underlying. The Exchange's proposal related to
non-index options, while conforming to the current structure of the
Exchange's STO rules, is similar in practical effect to the noted
OLPP subsection.
---------------------------------------------------------------------------
In terms of the strike price intervals, the STO Program currently
allows that the interval between strike prices on
[[Page 62811]]
STOs may be (i) $0.50 or greater where the strike price is less than
$75, and $1 or greater where the strike price is between $75 and $150
for all classes that participate in the STO Program; or (ii) $0.50 for
classes that trade in one dollar increments in Related non-STOs \10\
and that participate in the STO Program. Related non-STO series shall
be opened during the week prior to the week that such Related non-STO
series expire in the same manner and in the same strike price intervals
as permitted in Commentary .11 to Rule 1012.\11\ This proposal retains
many of the fundamental limitations of the STO Program while proposing
specific changes as described below.
---------------------------------------------------------------------------
\10\ Related non-STOs are non-STOs that have similar options
with longer expiration cycles (e.g., monthly Apple (AAPL) options
would be Related non-STOs to weekly AAPL options). Unlike monthly
non-index options series such as AAPL, which may not be listed
within two business days of expiration, because of the short STO
expiration cycle these options may be listed up to expiration.
\11\ Commentary .11(e) to Rule 1012.
---------------------------------------------------------------------------
The Proposal
First, the Exchange proposes to increase the number of STO classes
that may be opened after an option class has been approved for listing
and trading on the Exchange. Specifically, the Exchange proposes in
Commentary .11(a) of Rule 1012 that the Exchange may select up to fifty
currently listed option classes on which Short Term Option Series may
be opened. The Exchange proposes also that for each option class
eligible for participation in the STO Program, the Exchange may open up
to thirty STO Series for each expiration date in that class.\12\ The
Exchange believes that this proposed moderate increase is needed and
advisable in light of the demonstrated acceptance and popularity of the
STO Program among market participants, as discussed below.
---------------------------------------------------------------------------
\12\ The current limitation is up to thirty currently listed
option classes and up to twenty series for each expiration date in
an STO class. Commentary .11(a) of Rule 1012.
---------------------------------------------------------------------------
Second, the Exchange proposes to indicate under what circumstances,
subsequent to opening initial STO classes, additional STO strike prices
may be added. Specifically, the Exchange proposes in Commentary .11(c)
of Rule 1012 that any initial series listed by the Exchange shall be
reasonably close to the price of the underlying equity security and
within the following parameters: (i) If the price of the underlying
security is less than or equal to $20, additional strike prices shall
be not more than one hundred percent (100%) above or below the price of
the underlying security; and (ii) if the price of the underlying
security is greater than $20, additional strike prices shall be not
more than fifty percent (50%) above or below the price of the
underlying security. This proposal is in line with the process for
adding new series of options found in subsection 3.(g)(i) of the OLPP,
and harmonizes the Program internally. The Exchange believes that this
proposal is a reasonable and desirable enhancement to the STO Program.
Third, the Exchange proposes changes to Commentary .11(d) of Rule
1012 to indicate that any additional strike prices listed by the
Exchange shall be reasonably close to the price of the underlying
equity security and within the following parameters: (i) If the price
of the underlying security is less than or equal to $20, additional
strike prices shall be not more than one hundred percent (100%) above
or below the price of the underlying security; and (ii) if the price of
the underlying security is greater than $20, additional strike prices
shall be not more than fifty percent (50%) above or below the price of
the underlying security. This is done so that the parameters for
opening STOs and adding strike prices are in conformity. The Exchange
proposes additional changes to Commentary .11(d) to indicate that if
the Exchange has opened less than thirty (30) Short Term Option Series
for a Short Term Option Expiration Date, the Exchange may also open
additional strike prices of Short Term Option Series that are more than
50% above or below the current price of the underlying security (if the
price is greater than $20); provided that demonstrated customer
interest exists for such series, as expressed by institutional,
corporate or individual customers or their brokers. Market Makers
trading for their own account are not considered when determining
customer interest.\13\ This is done to conform the additional strike
price methodology with the proposed 50% listing standard in the same
subsections, and to ensure that the opening 30 Short Term Option Series
language is consistent with other proposed changes,\14\ while retaining
the demonstrated interest language that may be useful in unforeseen
circumstances.
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\13\ Commentary .10(a) to Rule 1012 currently states that if the
price of the underlying security is greater than $20, the Exchange
shall not list new option series with an exercise price more than
50% above or below the price of the underlying security. Immediately
before this language, the Exchange proposes to also add a carve-out
that states: ``Except as provided in Commentary .11(d) to Rule 1012
. . .''
\14\ The Exchange believes that the 100% standard proposed for
initial listings where the price of the underlying is below $20 is
adequate and does not need to be repeated for additional series
adds.
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Fourth, the Exchange also proposes to simplify the Delisting
Language in Commentary .11(d) of Rule 1012, which currently contains a
range methodology (at least 10% but not more than 30% above or below
the current price of the underlying),\15\ to indicate that the Exchange
will delist any series with no open interest in both the call and the
put series having a: (i) Strike higher than the highest price with open
interest in the put and/or call series for a given expiration week; and
(ii) strike lower than the lowest strike price with open interest in
the put and/or the call series for a given expiration week. The
Exchange believes that like its other proposals, the delisting proposal
will add clarity and certainty to the STO process on the Exchange, as
well as across other markets that may choose to implement similar
changes (discussed below).
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\15\ Currently, the Delisting Language states: ``In the event
that the underlying security has moved such that there are no series
that are at least 10% above or below the current price of the
underlying security, the Exchange will delist any series with no
open interest in both the call and the put series having a: (i)
Strike higher than the highest price with open interest in the put
and/or call series for a given expiration week; and (ii) strike
lower than the lowest strike price with open interest in the put
and/or the call series for a given expiration week, so as to list
series that are at least 10% but not more than 30% above or below
the current price of the underlying security. In the event that the
underlying security has moved such that there are no series that are
at least 10% above or below the current price of the underlying
security and all existing series have open interest, the Exchange
may list additional series, in excess of the 30 allowed under
Commentary .11, that are between 10% and 30% above or below the
price of the underlying security.'' Commentary .11(d) of Rule 1012.
See Securities Exchange Act Release No. 70116 (August 5, 2013), 78
FR 48754 (August 9, 2013) (SR-Phlx-2013-79) (notice of filing and
immediate effectiveness regarding delisting series and opening up to
five consecutive weekly expirations of STOs).
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Fifth, the Exchange proposes to add $2.50 strike price intervals to
the STO Program. Specifically, the Exchange proposes in Commentary
.11(e) of Rule 1012 to indicate that the interval between strike prices
on STOs may be $2.50 or greater where the strike price is above $150.
This proposed change complements the current STO strike price
intervals, which are $0.50 or greater where the strike price is less
than $75, and $1 or greater where the strike price is between $75 and
$150 for all classes that participate in the STO Program.\16\ The
proposed $2.50 strike price interval addresses the issue that above a
$150 strike price STO strike
[[Page 62812]]
price intervals must currently be an exceedingly wide $5.00 or
greater.\17\
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\16\ STO strike price intervals may also be in $1 increments in
Related non-STOs that participate in the STO Program. Commentary .11
of Rule 1012.
\17\ See, e.g., Commentary .05 to Rule 1012.
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All options exchanges that have weeklies programs have similar
rules regarding their own programs, and tend to emulate STO changes
that are initiated by other options exchanges. The Exchange recognizes
that while this may result in a potentially increased combined capacity
footprint of exchanges with weeklies programs, the specific beneficial
changes proposed in this filing greatly outweigh any such potential
impact.
The principal reason for the proposed expansion is market demand
for additional STO classes and series and a desire to make the STO
Program more effective. There is continuing strong customer demand for
having the ability to execute hedging and trading strategies via STOs,
particularly in the current fast and volatile multi-faceted trading and
investing environment that extends across numerous markets and
platforms \18\ and includes market moving events such as significant
market volatility, corporate events, or large market, sector, or
individual issue price swings. The Exchange has been requested by
traders and other market participants to expand the STO Program to
allow additional STO offerings and increased efficiency.
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\18\ These include, without limitation, options, equities,
futures, derivatives, indexes, ETFs, exchange traded notes,
currencies, and over the counter instruments.
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In order that the Exchange not exceed the current thirty option
class and twenty option series restriction, the Exchange has on
occasion had to turn away STO customers (traders and investors) because
it could not list, or had to delist, STOs or could not open adequate
STO Series because of restrictions in the STO Program. This has
negatively impacted investors and traders, particularly retail public
customers, who have continued to request the Exchange not to remove STO
classes or add STO classes, or have requested the Exchange to expand
the STO Program so that additional STO classes and series could be
opened that would allow the market participants to execute trading and
hedging strategies.\19\ There are, as discussed, substantial benefits
to market participants having the ability to trade eligible option
classes within the STO Program. Furthermore, the Exchange supports the
objective of responding to customer need to enhance successful programs
to make them more efficient for hedging and trading purposes.
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\19\ The Exchange noted, in its STO Program expansion proposal
in 2011, that it was requested by a retail investor to reinstate an
STO class that the Exchange had to remove from trading because of
the class option limitation within the Program. The investor told
the Exchange that he had used the removed class as a powerful tool
for hedging a market sector, and that various strategies that the
investor put into play were disrupted and eliminated when the class
was removed. See Securities Exchange Act Release No. 65776 (November
17, 2011), 76 FR 72482 (November 23, 2011) (SR-Phlx-2011-131) (order
approving opening STO series on 30 option classes).
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The Exchange notes that the STO Program has been well-received by
market participants, in particular by retail investors. The volume of
STO trading has increased by 132% since the beginning of 2011 \20\ and
continues to grow, such that currently STOs represent 20% of trading
volume on the Exchange and 31% of trading volume across all option
exchanges.\21\ The Exchange believes that weekly expiration options
will continue to grow in importance for all market participants,
including institutional and retail investors.\22\
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\20\ Since the STO Program was initiated in 2010 on the Exchange
and other markets (some of which were established after the STO
Program was initiated), STO Program volume has expanded by more than
3000%.
\21\ During the same period of time, however, the volume of
standard monthly options across all exchanges has, on the other
hand, declined by 28%.
\22\ The current STO Program, which is similar across all
options markets that have weeklies programs, is in its current
formulation one of the more challenging industry-wide listings
program to administer. Recognizing the importance of the Program,
the Exchange is seeking to improve the Program for non-index STOs by
making it more uniform and logical.
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The proposed revisions to the STO Program will permit the Exchange
to meet customer demand for better STO Program use and efficiency,
harmonization of OLPP and STO Program rules, internal harmonization of
the STO Program, and a reasonable expansion of strike price intervals
in the Program.
By way of example, if an investor wants to gain exposure to a
relatively higher priced security like AAPL, he may invest in AAPL
stock and/or AAPL options. Currently, the investor must choose a strike
price that might lack the precision he is looking for in order to gain
or reduce exposure to AAPL. If the investor is looking to invest in a
long position in AAPL, for example, he may choose to execute a covered
call strategy by selling calls on AAPL. Assume AAPL is trading at $415.
Under the current rules the nearest out of the money STO call would be
the $420.00 strike, which would, with one week until expiration, trade
at or about $2.15. If the $417.50 strike were available per this
proposal, however, the investor could sell calls at approximately
$3.15. This would allow the investor to still execute an out of the
money covered call strategy, but would increase the potential return by
$1, or approximately 46% ($1/$2.15), thus offering approximately 46%
additional risk protection. To the investor writing covered calls on
his AAPL equity position, this extra risk protection could be very
significant on an annual basis, and costly if not available.
By way of a second example, if an investor wants to gain exposure
to a lower priced security like Banc of America (BAC), he may invest in
BAC stock and/or options. Assume BAC is trading at $14.60. The investor
may have established a long position in a non-STO BAC option like, for
example, the standard expiration BAC Aug 17th 1.00 calls. To offset
some of the risk the investor possesses in the BAC Aug 17th 1.00 calls,
the investor may wish to make a corresponding trade in the BAC Aug 10th
(STO) 1.00 call. Currently, the investor does not have this risk
reduction strategy available to him, as the current BAC STO does not
have available strikes. The proposal would correct this shortcoming.
By way of further example, in a lower priced stock such as BAC
there may be a need for tighter strike price intervals in case of a
precipitous drop in price. Assume BAC is trading at $14.60. Assume BAC
announces a large loss, and the stock price drops to $6. The Exchange
believes that investors should have the ability to use calls or puts
with a more targeted strike price to attain proper risk protection--one
of the great advantages of options. Because current STO rules do not
allow a strike price below $9.50 in the BAC STO, however, an investor
looking to purchase out of the money put protection for a short period
of time, and at a lower premium than a longer term option, is not able
to do so. BAC $9.50 strike puts would trade at a premium of about $3.50
or more, and would require the investor to sell or exercise his puts by
expiration if they remained in the money. An Aug 10th $5.00 out of the
money STO option in BAC, on the other hand, would trade a much more
affordable premium due to being out of the money, and would only
require the investor to sell or exercise his put if the BAC stock price
continued its precipitous drop. Clearly, the ability to make more
targeted and efficient decisions regarding the protection of
investments is of great importance to investments and market
participants, and should be encouraged.
Following are illustrations of the STO listing process per the
rules as proposed. Assume that the Alcoa Inc. (AA) STO closes at $7.92.
Pursuant to the proposed rule, STOs may be added between $1 and $15.50
(half point strike
[[Page 62813]]
intervals are currently permitted where the strike price is below $75).
On day one, the maximum number of Short Term Option Series that may be
listed are thirty. If the Exchange opens less than thirty Short Term
Option Series, additional series may be added as the underlying price
moves. If the AA price moves to $10, additional series can be added as
high as $20 (100% above the underlying price). If the AA price moves to
$5, additional lower strikes would not be added, since the initial
strikes go as low as possible ($1). Or, assume that the McDonald's
Corporation (MCD) STO closes at $96.26. Pursuant to the proposed rule,
Short Term Options Series may be added between $49 and $144 (in $0.50
and $1 intervals). On day one, no more than thirty Short Term Option
Series may be listed. If the Exchange opens less than thirty Short Term
Option Series, additional series may be added as the underlying price
moves. If the MCD price moves to $105, additional series can be added
as high as $155 (50% above the underlying price). If the MCD price
moves to $87, additional lower strikes can be added as low as $43.50.
To list strikes above the 50% threshold, however, there must be
demonstrated customer interest for such series, as expressed by
institutional, corporate or individual customers or their brokers.
Following are illustrations of the STO delisting process per the
rules as proposed. Series delisting would occur under the proposed rule
if the stock price moves and there are no series at least 10% above/
below the current price. Assume AA closed at $7.92 and strikes were
listed between $1 and $15. If the AA price moved to $15, and there were
no strikes at $16.50 or above (at least 10% above the current price),
the delisting process would begin. For the delisting process, staff
would simply need to check what, if any, strikes are higher than the
highest strike with open interest, and lower than the lowest strike
with open interest. Unlike the current delisting process, there would
be no need to check whether strikes were within a listing band (e.g.,
10% to 30%). Or, assume that MCD closed at $96.26 and strikes were
listed between $82 and $110. If the MCD price moved to $104, and there
were no strikes at $115 or above (at least 10% above the current
price), the delisting process would begin. For the delisting process,
staff would simply need to check what strikes are higher than the
highest strike with open interest, and lower than the lowest strike
with open interest.
With regard to the impact of this proposal on system capacity, the
Exchange has analyzed its capacity and represents that it and the
Options Price Reporting Authority (``OPRA'') have the necessary systems
capacity to handle any potential additional traffic associated with
this current amendment to the STO Program. The Exchange believes that
its members will not have a capacity issue as a result of this
proposal. The Exchange represents that it will monitor the trading
volume associated with the additional options series listed as a result
of this proposal and the effect (if any) of these additional series on
market fragmentation and on the capacity of the Exchange's automated
systems.\23\
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\23\ As noted previously, because the STO Program is an
industry-wide program, exchanges tend to emulate the rule filings of
one another. The Exchange recognizes that while this may result in a
potentially increased combined capacity footprint of exchanges with
weeklies programs, the Exchange believes that the specific
beneficial changes proposed in this filing greatly outweigh any such
potential impact.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \24\ in general, and furthers the objectives of Section
6(b)(5) of the Act \25\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. Expanding the classes and additional series that can be
opened in the STO Program, simplifying the delisting process, and
allowing $2.50 strike price intervals will result in a continuing
benefit to investors by giving them more flexibility to closely tailor
their investment and hedging decisions in greater number of securities.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
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The STO Program has been well-received by market participants, and
in particular by retail investors, and has seen increasing trading
volume. The Exchange believes that the current proposed revisions to
the STO Program will permit the Exchange to meet customer demand for
enhanced STO Program use and efficiency, harmonization of OLPP and STO
Program rules, and a reasonable expansion of strike price intervals in
the Program to the benefit of investors, market participants, and the
marketplace.
With regard to the impact of this proposal on system capacity, the
Exchange believes that it and OPRA have the necessary systems capacity
to handle any potential additional traffic associated with this current
amendment to the STO Program. The Exchange believes that its members
will not have a capacity issue as a result of this proposal. All
exchanges that have STO programs have largely similar STO rules and
tend to emulate STO rule changes proposals initiated by other
exchanges. While the Exchange recognizes that this proposal may be
copied by other exchanges and impact their capacity, the Exchange
believes that any such potential capacity impact will not outweigh (and
does not outweigh for the Exchange) the significant benefits that this
proposal will afford market participants and the market in general in
terms of significantly greater flexibility and increases in efficient
trading and hedging options.
The proposed revisions to the STO Program will permit the Exchange
to meet customer demand for better STO Program use and efficiency,
harmonization of OLPP and STO Program rules, internal harmonization of
the STO Program, and a reasonable expansion of strike price intervals
in the Program.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. To the contrary, the
Exchange believes that the proposal is decidedly pro-competitive. The
Exchange believes that the proposed rule change will result in
additional investment options and opportunities to achieve the
investment objectives of market participants seeking efficient trading
and hedging vehicles, to the benefit of investors, market participants,
and the marketplace in general.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or 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 Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
[[Page 62814]]
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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2013-101 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2013-101. This file
number should be included on the subject line if email 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 (https://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 on official business
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for inspection and copying at the
principal offices 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-Phlx-2013-101, and should be submitted on or before
November 12, 2013.
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\26\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24673 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P
