Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Short Term Options Series, 45506-45511 [2014-18375]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 150 (Tuesday, August 5, 2014)]
[Notices]
[Pages 45506-45511]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18375]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72699; File No. SR-NASDAQ-2014-074]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Short Term Options Series

July 29, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that, on July 25, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') 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 the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to amend certain rules of The NASDAQ Options Market 
(``NOM''), NASDAQ's facility for executing and routing standardized 
equity and index options, pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \3\ and Rule 19b-4 
thereunder,\4\ to: (i) Expand the Short Term Option Program (``STO 
Program'' or ``Program'') \5\ so that the Exchange may change the 
current thirty option class limitation to fifty option classes on which 
STOs may be opened; (ii) 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; (iii) open up to 
thirty STO series for each expiration date in an STO class; (iv) add 
additional STO strike price intervals to give the Exchange the ability 
to initiate strike prices in more granular intervals; (v) provide for 
the ability to open up to five consecutive expirations under the STO 
Program; (vi) introduce finer strike price intervals for standard 
expiration contracts in option classes that also have STOs listed on 
them (``related non-STOs'' or ``related non-Short Term Options''); 
(vii) add delisting provisions; and (viii) in general harmonize the 
different parts of the Program.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ 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. Chapter IV at Section 6, Supplementary 
Material .07 governs rules for STO Program rules regarding non-index 
options. Chapter XIV, Section 11 governs rules for STO Program rules 
regarding index options, which are not implicated by this proposal.
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    The text of the proposed rule change is available on the Exchange's 
Web site at https://www.nasdaq.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 
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
    The purpose of the proposed rule change is to amend Chapter IV, 
Section 6 to expand the STO Program for non-index options so that the 
Exchange may change the current thirty option class limitation to fifty 
options classes on which STOs may be opened; list or add STOs within 
fifty percent (50%) above or below the price of the underlying security 
\6\ 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 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 
additional STO strike price intervals to give the Exchange the ability 
to initiate strike prices in more granular intervals; provide for the 
ability to open up to five consecutive expirations under the STO 
Program; introduce finer strike price intervals for standard expiration 
contracts in option classes that also have STOs listed on them 
(``related non-STOs'' or ``related non-Short Term Options''); add 
delisting provisions; and in general harmonize the different parts of 
the Program.
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    \6\ The price of the underlying security will be calculated 
commensurate with Supplementary Material .06(a) to Chapter IV, 
Section 6.
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    The STO Program, which was initiated in 2010,\7\ is codified in the 
Supplementary Material to Section 6 of Chapter IV at .07 for non-index 
options including equity, currency, and exchange traded fund (``ETF'') 
options.\8\ 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

[[Page 45507]]

that is a business day.\9\ 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.\10\ 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.\11\ 
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,\12\ 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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    \7\ See Securities Exchange Act Release No. 62297 (June 15, 
2010), 75 FR 35115 (June 21, 2010) (SR-NASDAQ-2010-073) (notice of 
filing and immediate effectiveness to establish a Short Term Options 
Program).
    \8\ The Exchange does not by this filing propose any changes to 
Chapter XIV, Section 11 related to the STO Program for index 
options.
    \9\ 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). See 
also Phlx Rule 1012 at Commentary .11(a).
    \10\ However, if the Exchange opens less than twenty (20) STOs 
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. Supplementary 
Material .07(d) to Chapter IV, Section 6. 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.
    \11\ See Supplementary Material .07(d) of Chapter IV, Section 6.
    \12\ 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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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 
Supplementary Material .07(a) of Chapter IV, Section 6 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.\13\ 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.
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    \13\ The current limitation is up to thirty currently listed 
option classes and up to twenty series for each expiration date in 
an STO class. See Supplementary Material .07(a) of Chapter IV, 
Section 6. The Exchange is proposing to include language in the rule 
that indicates that the addition of strike prices of STOs that are 
more than 50% above or below the current value of the underlying 
security (if the price is greater than $20) must comply with the 
OLPP. The Exchange notes that the number of classes that may 
participate in the STOS Program is aggregated between equity options 
and index options and is not apportioned between equity options and 
index options.
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    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 Supplementary 
Material .07(c) to Chapter IV, Section 6 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 Supplementary Material 
.07(d) to Chapter IV, Section 6 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 Supplementary Material 
.07(d) to Chapter IV, Section 6 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.\14\ 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,\15\ while retaining the

[[Page 45508]]

demonstrated interest language that may be useful in unforeseen 
circumstances.
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    \14\ Supplementary Material .06(a) to Chapter IV, Section 6 
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 Supplementary Material to Section 6 at .07(d). . .''
    \15\ 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 proposes to add language to provide for 
circumstances where 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 is proposing to add new language 
to Chapter IV, Section 6 at Supplementary Material .07(d) to provide 
that 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. The opening of the new Short Term 
Option Series shall not affect the series of options of the same class 
previously opened. This language will conform these rules to other 
exchange rules.\16\
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    \16\ See Securities Exchange Act Release Nos. 70116 (August 5, 
2013), 78 FR 48754 (August 9, 2013) (SR-Phlx-2013-79) and 71004 
(December 6, 2013), 78 FR 75437 (December 11, 2013) (SR-Phlx-2013-
101). See also Phlx Rule 1012, Commentary .11(d).
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    Fifth, the Exchange proposes to indicate that the interval between 
strike prices and STOs listed in accordance with the STO Program 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 Short Term Options Series Program \17\; (ii) 
$0.50 for classes that trade in one dollar increments in Related non-
Short Term Options and that participate in the Short Term Option Series 
Program; or (iii) $2.50 or greater where the strike price is above 
$150. Related non-Short Term Option series shall be opened during the 
month prior to the expiration of such Related non-Short Term Option 
series in the same manner as permitted in Supplementary Material to 
Section 6 at .07 and in the same strike price intervals that are 
permitted in Supplementary Material to Section 6 at .07.
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    \17\ STO strike price intervals may also be in $1 increments in 
Related non-STOs that participate in the STO Program.
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    The principal reason for the proposed expansion is in response to 
market and customer demand to list actively traded products in more 
granular strike price intervals and to provide Exchange members and 
their customers increased trading opportunities in the Short Term 
Option Program, which is one of the most popular and quickly-expanding 
options expiration programs.\18\ The Exchange has observed increased 
demand for STO classes and/or series, particularly when market moving 
events such as significant market volatility, corporate events, or 
large market, sector, or individual issue price swings have occurred. 
There are substantial benefits to market participants in the ability to 
trade eligible option classes at more granular strike price intervals. 
Furthermore, the Exchange supports the objective of responding to 
customer demand for harmonized listing between STO and Related non-
Short Term Options and the availability of more granular strike price 
intervals.
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    \18\ Since the inception of the Short Term Options Series 
Program, it has steadily expanded to the point that by the end of 
2012, STOs represented 7% of the total options volume on the 
Exchange and 13% of the total options volume in the United States.
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    For example, assume ABC is trading at $56.54 and the monthly 
expiration contract is three weeks to expiration. Assume also that the 
Exchange has listed all available STO expirations and thus has STOs 
listed on ABC for weeks one, two, four, five, and six. Each of the five 
weekly ABC expiration dates can be listed with strike prices in $0.50 
intervals, including, for example, the $56.50 at-the-money strike. 
Because the monthly expiration contract has three weeks to expiration, 
however, the near-the-money strikes must be listed in $5 intervals 
unless those options are eligible for one of the Exchange's other 
strike price programs. In this instance, that would mean that investors 
would be limited to choosing, for example, between the $55 and $60 
strike prices instead of the $56.50 at-the-money strike available for 
STOs. This is the case even though contracts on the same option class 
that expire both several weeks before and several weeks after the 
monthly expiration are eligible for finer strike price intervals. Under 
the proposed rule change, the Exchange would be permitted to list the 
related non-short term option on ABC, which is less than a month to 
expiration, in the same strike price intervals as allowed for STOs. 
Thus, the Exchange would be able to list, and investors would be able 
to trade, all expirations described above with the same uniform $0.50 
strike price interval.
    As proposed, the Exchange would be permitted to begin listing the 
monthly expiration contract in these narrower intervals at any time 
during the month prior to expiration, which begins on the first trading 
day after the prior month's expiration date, subject to the provisions 
of Exchange rules. For example, since the August 2014 monthly option 
will expire on Saturday, August 16, the proposed rule change will allow 
the Exchange to list the August 2014 monthly option in short term 
option intervals starting Monday, July 21. This language will conform 
these rules to other exchange rules.\19\ The Exchange proposes to amend 
Chapter IV, Section 6(d)(vi) to amend the strike price interval setting 
parameters for Related non-Short Term Option series. Specifically, the 
Exchange proposes to add rule text which states, ``notwithstanding any 
other provision regarding strike prices in Chapter IV, Section 6, non-
Short Term Options that are on a class that has been selected to 
participate in the Short Term Option Series Program (referred to as a 
``Related non-Short Term Option series'') shall be opened during the 
month prior to expiration in the same manner as permitted in 
Supplementary Material .07 to Chapter IV, Section 6 and in the same 
strike price intervals that are permitted in Supplementary Material .07 
to Chapter IV, Section 6.'' This language is similar to Phlx rule 
text.\20\
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    \19\ See Securities Exchange Act Release Nos. 67753 (August 29, 
2012), 77FR 54635 (September 5, 2012) (SR-Phlx-2012-78); 69633 (May 
23, 2013), 78 FR 32498 (May 30, 2013) (SR-Phlx-2013-55); 71004 
(December 6, 2013), 78 FR 75437 (December 11, 2013) (SR-Phlx-2013-
101); and 72504 (July 1, 2014), 79 FR 38628 (July 8, 2014) (SR-Phlx-
2014-41).
    \20\ See Rule 1012 at Commentary .11(e).
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    Sixth, the Exchange is proposing to amend Supplementary Material 
.07 of Chapter IV, Section 6 to open up to five consecutive expirations 
under the STO Program for trading on the Exchange to allow for the 
Exchange to delist any series in the STOs that do not have open 
interest, and to expand the number of series of STOs under limited 
circumstances. This proposal seeks to allow the Exchange to open STO 
series for up to five consecutive week expirations. However, a STO 
expiration will not be added in the same week that a monthly options 
series expires or, in the case of a Quarterly Options Series 
(``QOS''),\21\ on an expiration that coincides with an expiration of 
QOS on the same class. In other words, the total number of consecutive 
expirations will be five, including existing monthly or quarterly 
expirations.\22\ The Exchange

[[Page 45509]]

believes that the current proposed revision to the STO Program will 
permit the Exchange to meet increased customer demand. The proposed 
revision will also provide market participants with the ability to 
trade and hedge in a greater number of option classes and series.
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    \21\ See Supplementary Material .04 to Chapter IV, Section 6 for 
a discussion of Quarterly Options Series.
    \22\ For example, if QOS expire week 1 and monthly options 
expire week 3 from now, the proposal would allow the following 
expirations: Week 1 QOS, week 2 STOs, week 3 monthly, week 4 STOs, 
and week 5 STOs. If QOS expire week 3 and monthly options expire 
week 5, the following expirations would be allowed: Week 1 STOs, 
week 2 STOs, week 3 QOS, week 4 STOs, and week 5 monthly.
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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 \23\ 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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    \23\ 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.\24\ 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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    \24\ Phlx 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 \25\ 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.\26\ The Exchange believes that weekly expiration options 
will continue to grow in importance for all market participants, 
including institutional and retail investors.\27\
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    \25\ 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%.
    \26\ During the same period of time, however, the volume of 
standard monthly options across all exchanges has, on the other 
hand, declined by 28%.
    \27\ 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 GOOGL, he may invest in GOOGL 
stock and/or GOOGL 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 GOOGL. If the investor is looking to 
invest in a long position in GOOGL, for example, he may choose to 
execute a covered call strategy by selling calls on GOOGL. Assume GOOGL 
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 GOOGL 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

[[Page 45510]]

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 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.\28\
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    \28\ 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 \29\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \30\ 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, 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.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
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    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. Further, the amended 
rules will allow the Exchange to initiate strike prices in more 
granular intervals for STOs, which will benefit investors by providing 
them with the flexibility to more closely tailor their investment and 
hedging decisions. The Exchange also believes that it is reasonable to 
harmonize strike prices between STOs and Related non-Short Term Options 
during expiration month for Related non-Short Term Options, because 
doing so will ensure conformity between STOs and Related non-Short Term 
Options that are on the same class. While the proposed rule change may 
generate additional quote traffic, the Exchange does not believe that 
any increased traffic will become unmanageable since the proposal 
remains limited to a fixed number of classes. The Exchange also 
believes that the proposed rule change will ensure competition because 
it will allow the Exchange to initiate series in the same strike 
intervals as ISE, CBOE and other options exchanges.\31\
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    \31\ See ISE Rule 504, CBOE Rule 5.5 and Phlx Rule 1012.
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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,

[[Page 45511]]

harmonization of OLPP and STO Program rules, internal harmonization of 
the STO Program, and a reasonable expansion of strike price intervals 
in the Program.
    The Exchange believes that the ability to delist series with no 
open interest in both the call and the put series will benefit 
investors by devoting the STO cap to those series that are more closely 
tailored to the investment decisions and hedging decisions of 
investors.
    Finally, as noted herein, standard expiration options currently 
trade in wider intervals than their weekly counterparts, except during 
the week prior to expiration. This creates a situation where contracts 
on the same option class that expire both several weeks before and 
several weeks after the standard expiration are eligible to trade in 
strike price intervals that the standard expiration contract is not. 
There is continuing strong customer demand to have the ability to 
execute hedging and trading strategies in the finer strike price 
intervals available in STOs, and the Exchange believes that the 
proposed rule change will increase market efficiency by harmonizing 
strike price intervals for contracts that are close to expiration, 
whether those contracts happen to be listed pursuant to weekly or 
monthly expiration cycles.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act\32\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\33\
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    \32\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \33\ 17 CFR 240.19b-4(f)(6).
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved. The Exchange has 
provided the Commission written notice of its intent to file the 
proposed rule change, along with a brief description and text of the 
proposed rule change, at least five business days prior to the date of 
filing of the proposed rule change.

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-NASDAQ-2014-074 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2014-074. 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, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the 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-2014-074 and should 
be submitted on or before August 26, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18375 Filed 8-4-14; 8:45 am]
BILLING CODE 8011-01-P