Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Proposed Rule Change To Amend Rule 5050 Series of Options Contracts Open for Trading To Provide for the Listing and Trading on the Exchange of RealDayTM, 80125-80132 [2016-27363]
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Federal Register / Vol. 81, No. 220 / Tuesday, November 15, 2016 / Notices
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 not
necessary or appropriate in furtherance
of the purposes of the Act. The purpose
of this proposal is to provide the SEC
and market participants with notice of
BX’s efforts to remove its re-pricing
functionality in Test Group Three
securities for Price to Comply Orders,
Price to Display Orders, Non-Displayed
Orders, and Post-Only Orders that are
entered through the OUCH or FLITE
protocols, consistent with its statements
in SR–BX–2016–050 and SR–BX–2016–
054.
mstockstill on DSK3G9T082PROD with NOTICES
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)(iii) of the Act 12 and
subparagraph (f)(6) of Rule 19b–4
thereunder.13
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative prior to 30 days after
the date of filing. Rule 19b–4(f)(6)(iii),
however, permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Exchange requests that the Commission
waive the 30-day operative delay
contained in Rule 19b–4(f)(6)(iii) so that
this proposed change will be in
operative as of October 31, 2016, the
date that Test Group Three securities are
fully implemented and are subject to the
quoting and trading restrictions of the
Plan and, therefore, the relevant
language in Rule 4770.
The Commission believes that
waiving the 30-day operative delay is
consistent with the protection of
investors and the public interest
because it will allow the Exchange to
implement the proposed rules
immediately thereby preventing delays
12 15
U.S.C. 78s(b)(3)(A)(iii).
13 17 CFR 240.19b–4(f)(6).
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in the implementation of the Plan. The
Commission notes that the Pilot started
implementation on October 3, 2016,
Test Group Three securities were fully
phased into the Pilot on October 31,
2016, and waiving the 30-day operative
delay would ensure that the rules of the
Exchange would be in place during
implementation. Therefore, the
Commission hereby waives the 30-day
operative delay and designates the
proposed rule change to be operative
upon filing with the Commission.14
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.
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–
BX–2016–153 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–BX–2016–153. 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
14 For purposes only of waiving the operative
delay for this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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80125
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–BX–
2016–153, and should be submitted on
or before December 6, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Brent J. Fields,
Secretary.
[FR Doc. 2016–27367 Filed 11–14–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79258; File No. SR–BOX–
2016–50]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing of Proposed Rule Change To
Amend Rule 5050 Series of Options
Contracts Open for Trading To Provide
for the Listing and Trading on the
Exchange of RealDayTM Options
Pursuant to a Pilot Program
November 8, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
26, 2016, BOX Options Exchange LLC
(the ‘‘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 self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule from
interested persons.
15 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 81, No. 220 / Tuesday, November 15, 2016 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 5050 to provide for the listing and
trading on the Exchange of RealDayTM
Options pursuant to a pilot program.
The text of the proposed rule change is
available from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
Exchange’s Internet Web site at https://
boxexchange.com.
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
self-regulatory organization 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 self-regulatory organization 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
mstockstill on DSK3G9T082PROD with NOTICES
1. Purpose
The Exchange proposes to amend its
rules to provide for the listing and
trading on the Exchange of a new type
of standardized option product on the
SPDR® S&P 500® Exchange Traded
Fund (‘‘ETF’’) (this security is known by
its symbol ‘‘SPY’’) called RealDayTM
Options (‘‘RealDay Options’’) pursuant
to a pilot program ending 12 months
after approval of all necessary changes
to the applicable BOX Rules has been
received from the Securities and
Exchange Commission (the ‘‘SEC’’ or
‘‘Commission’’). RealDay Options will
possess many of the characteristics of
existing standardized options with some
important variations. Most notably, at
the commencement of trading of a
particular RealDay Option and until the
close of trading on the last trading day
before its expiration, the numerical
value of the strike price will not be
known. However, the formula used to
calculate the strike price will be fixed
and known from the time of listing.3
RealDay Options are a propriety
product that are designed and
exclusively licensed by the RealDay
3 The Exchange notes that this is not a new
concept. See Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’) Rule 24.1(aa).
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Jkt 241001
Options Corporation.4 RealDay Options
will be exclusively listed on BOX.
RealDay Options are designed to have
an active period, where the numerical
value of the strike prices is known, for
exactly one trading day but can be listed
far in advance of their expiration date.
Although the active period is only one
trading day, RealDay options can still be
traded during the anticipatory period
which is the period of time from listing
until the close of trading on the trading
day prior to expiration. The Exchange
believes that there is interest for options
designed to cover a single trading day
across all market participants, including
institutional investors and the public.
RealDay Options are true, or real, oneday options, because they are forwardstart (or delayed start 5) options whose
strike increments and strike price
setting formula are fixed from the time
they are listed, but whose numerical
strike prices are determined based on
the formula which uses the closing price
of SPY from the last trading day before
expiration. This unique structure of
having the strike intervals and strike
price setting formula fixed from the time
they are listed but not knowing the
numerical value of the strike price until
the exercise price setting date—which is
after the close of trading on the last
trading day before expiration—is what
makes these options one-day options.
Initially, RealDay Options will only
be listed on SPY but the Exchange may
seek to list RealDay Options on
additional securities in the future,6
provided that the Exchange receives the
necessary approval from the
Commission. The Exchange has selected
SPY as the initial security to list
RealDay Options on due to the vast
liquidity in the security. Specifically,
SPY is the largest and most actively
traded ETF in the United States.
According to State Street Global
Advisor, the Trustee of SPY, as of
October 5, 2016, the total net assets of
SPY were approximately $198 billion,
and the weighted average market
capitalization of the portfolio
components was approximately $146
4 The RealDay Options Corporation is a design
and product development company specializing in
innovative exchange-listed derivative instruments.
For more information visit https://
realdayoptions.com/.
5 Delayed start options are options that do not
have an exercise price when first introduced for
trading, but instead have an exercise price setting
formula pursuant to which the exercise price will
be fixed on a specified future date. The price setting
formula is fixed and known from the time of listing.
6 The Exchange would use the SEC’s form 19b–
4 approval process in order to list RealDay Options
on additional securities.
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billion.7 For the three months ending
October 5, 2016, the average daily
volume in SPY shares was
approximately 85 million.8
RealDay Options will be P.M. cashsettled and have European-style exercise
provisions.9 These options may expire
every trading day, including days on
which monthly options series, Short
Term Options Series, and Quarterly
Options Series on SPY expire. The
Exchange believes that cash settlement
is more appropriate than physical
settlement and therefore is best suited
for this product. Physical settlement
possesses certain risks with respect to
volatility and movement of the
underlying security at expiration that
the recipient may need to hedge against.
Cash settlement does not have any of
these risks associated with the
underlying security. If an issue with the
delivery of the underlying security
arises, it may become more expensive to
reverse due to a change in the price of
the underlying security; such risk does
not exist with reversing a cash payment.
Additionally, with physical settlement,
the recipient has to sell the underlying
security if they desire cash, which
would cause them to incur costs
associated with liquidating the position
and has risks related to movement of the
underlying price before it can be
liquidated. Further, if RealDay Options
were physically settled, an investor
would need to carry the security
overnight and liquidate the next trading
day; this would defeat the purpose of
having an option where the active
period is designed to cover only a single
trading day. If an investor had to liquate
the next trading day, there would be a
risk that the price of the security could
change overnight before the investor
would be able to liquidate their
position.10 The Exchange notes that
there are still certain risks with cash
settlement, however, these risks are
minimal and will continue to be
monitored. The Exchange notes that
cash settlement for options is not a
unique feature and other options
exchanges have cash settled options.11
Additionally, the Exchange has
discussed RealDay Options with market
participants and they have expressed
7 See https://www.spdrs.com/product/fund.seam
?ticker=SPY.
8 Calculated using data from Yahoo as of October
5, 2016.
9 See Proposed Rule 5050(f)(4).
10 If an investor was required to wait until the
next trading day to liquidate, RealDay Options
would essentially be A.M.-settled options instead of
P.M.-settled, as designed.
11 See e.g. NASDAQ’s FX Options and CBOE’s
SPX Options.
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Federal Register / Vol. 81, No. 220 / Tuesday, November 15, 2016 / Notices
their preference for the product to be
cash-settled.
RealDay Options are P.M.-settled due
to the nature of the product.
Specifically, RealDay Options are
designed to cover a single trading day
due to the fact they are only active for
one trading day. The only way to ensure
that the option covers one trading day
is to have it be P.M.-settled, as opposed
to A.M.-settlement where additional
factors may have an effect on the
settlement price. Specifically, A.M.settled options use the opening price for
settlement which means they will price
in after-hours news and events and
therefore do not cover only one trading
day. If RealDay Options were A.M.settled, they would not cover only a
single trading day because the
settlement price would include events
occurring after the close, which is not
the intended goal of RealDay Options.
Additionally, the Exchange notes that
standard options in SPY are already
P.M.-settled.
mstockstill on DSK3G9T082PROD with NOTICES
Listing
Although RealDay Options are
designed to cover one trading day, they
will be listed at least two weeks prior to
their expiration but no greater than nine
(9) months prior to their expiration.12
The options are in essence divided into
two periods: The anticipatory period
and the active period.13 The
anticipatory period is the period of time
from the day the option is listed up
until the close of trading on the last
trading day before expiration. The active
period is the expiration day of the
option. During the anticipatory period
the strike intervals and strike price
setting formula are known, but not the
numerical value of the strike prices,
because they depend on the closing
price of SPY from the last trading day
before expiration. RealDay Options may
still be traded in the anticipatory period
in the same manner as standard options
on SPY. The fact that the numerical
strike prices will only be known for the
active period, which is one trading day,
is how RealDay Options are designed to
be active for one trading day.
Strike Prices
The numerical value of the strike
prices for RealDay Options will not be
known until the close of trading on the
last trading day before expiration,
although the strike intervals and strike
price setting formula will be fixed from
inception.14 As described in greater
12 See
13 See
Proposed Rule 5050(f).
Exhibit 3–2 for a chart illustrating the two
periods.
14 See Proposed Rule 5050(f)(8).
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detail below, the formula will involve
multiplying the closing price of SPY
from the last trading day before
expiration (‘‘Strike Setting Price’’) by
the Strike Multiplier.15 The Exchange
notes that calculating strike prices based
on a previous close is not an entirely
new concept.16 In effect, the strike price
will stay at the same percentage
relationship to the price of SPY from the
time of listing. Further, the Exchange
may only list up to a maximum of seven
strike prices for each expiration date.
The seven strike prices will consist of
up to three (3) strike prices with a price
greater than the Strike Setting Price,
three (3) strike prices with a price less
than the Strike Setting Price, and one (1)
strike price equal to the Strike Setting
Price.17 The Exchange will have
discretion in determining the number of
strike prices it will list per expiration,
provided that the strike prices listed
satisfy the restrictions above.
Additionally, the Exchange must list the
strike price that is equal to the Strike
Setting Price for every RealDay Option
expiration. For example, the Exchange
could not list four (4) strike prices at a
price greater than the Strike Setting
Price, one (1) strike price equal to the
Strike Setting Price and two (2) options
that have a strike price less than the
Strike Setting Price. However, the
Exchange could list three (3) strike
prices at a price greater than the Strike
Setting Price, one (1) strike price equal
to the Strike Setting Price and two (2)
strike prices that are less than the Strike
Setting Price.
The Exchange may, in its sole
discretion, determine to not list in-themoney (‘‘ITM’’) put or call options for
any of the seven (7) strike prices.18 The
ITM puts that the Exchange may decide
to not list are those corresponding to the
three strike prices that are greater than
the Strike Setting Price and the ITM call
options are those corresponding to the
three strike prices that are less than the
Strike Setting Price. The Exchange notes
that nothing in its Rules prohibits the
Exchange from deciding to list only a
put or call option for a specific strike
price. The Exchange also notes that the
listing of only a put or call option for
a specific strike price will allow for
15 The ‘‘Strike Multiplier’’ is the decimal
equivalent of the percentage strike of the specific
option. The Strike Multiplier will be expressed with
three decimal places. For example, an option that
is equal to the Strike Setting price would be 100%,
making the Strike Multiplier 1.000.
16 See CBOE Rule 24.9(d). The exercise price of
CBOE Delayed Start Options Series is determined
in relation to the closing price of the underlying
index on the date on which the exercise price is
fixed.
17 See Proposed Rule 5050(f)(2).
18 See Proposed Rule 5050(f)(2)(ii).
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80127
quote mitigation. Additionally, the
Exchange believes it will be beneficial
to have this discretion because it will
allow the Exchange to limit the number
of instruments listed. Additionally, the
Exchange believes that the value of
RealDay Options is in the instruments
that are at-the-money (‘‘ATM’’) and outof-the-money (‘‘OTM’’).
As is the case with other options that
the Exchange lists, the Exchange may
add additional strike prices after the
initial listing of a RealDay Option,
provided that the Exchange does not list
more than the seven strike prices as
described above. For example, if the
Exchange lists a RealDay Option at the
beginning of March with only the strike
price equal to the Strike Setting Price
that expires on June 29, 2017, the
Exchange could list up to six additional
strike prices at the beginning of June for
the same expiration.19 When listing the
additional strike prices, the Exchange
must follow the guidelines above with
respect to only being allowed to list up
to three strike prices above and three
strike prices below the Strike Setting
Price.
The strike price formula will be used
after the close of trading on the last
trading day before expiration in order to
calculate the numerical values of the
strike prices. Specifically, the strike
prices will be determined by
multiplying the Strike Setting Price by
the Strike Multiplier. Additionally, the
strike prices will have fixed strike
intervals of 0.50%; therefore the
Exchange’s general strike price interval
rules shall not apply to RealDay
Options.20 This means there will be one
strike price equal to 100% of the Strike
Setting Price.21 The three strike prices
greater than then Strike Setting Price
will be determined by adding 0.5%,
1.0%, and 1.5%,22 respectively, to the
Strike Setting Price. The three strike
prices less than the Strike Setting Price
will be determined by subtracting 0.5%,
1.0%, and 1.5%,23 respectively, from
the Strike Setting Price. The strike
prices will be rounded to the nearest
19 For example, on June 1, 2017, the Exchange
could list three strike prices greater than the Strike
Setting Price and three strike prices lower than the
Strike Setting Price. The threes [sic] strike prices
greater than the Strike Setting Price will be the
strike prices calculated by adding 0.5%, 1.0%, and
1.5%, respectively, to the Strike Setting Price. The
three strike prices less than the strike Setting Price
will be the strike prices calculated by subtracting
0.5%, 1.0%, and 1.5%, respectively, from the Strike
Setting Price.
20 See Proposed Rule 5050(f)(3).
21 The Strike Multiplier would be 1.000.
22 The Strike Multipliers would be 1.005, 1.010
and 1.015, respectively.
23 The Strike Multiplies would be 0.995, 0.990
and 0.985 respectively.
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Federal Register / Vol. 81, No. 220 / Tuesday, November 15, 2016 / Notices
minimum trading increment, if
necessary.
Example #1
On Tuesday, SPY’s closing price is
180.15, which will be the Strike Setting
Price. RealDay Options on SPY expiring
on the next trading day, Wednesday,
may have the following strike prices
computed by multiplying the Strike
Setting Price by the Strike Multiplier.
Formula
(strike setting price *
strike multiplier)
Option
Strike
Strike
Strike
Strike
Strike
Strike
Strike
Setting
Setting
Setting
Setting
Setting
Setting
Setting
Price
Price
Price
Price
Price
Price
Price
+1.5% ......................................................................................................................
+1.0% ......................................................................................................................
+0.5% ......................................................................................................................
..................................................................................................................................
¥0.5% .....................................................................................................................
¥1.0% .....................................................................................................................
¥1.5% .....................................................................................................................
If SPY does not open for trading on
the trading day before the options
expiration date, then the last available
closing price for SPY will be the Strike
Setting Price. For Example, if a RealDay
Option is expiring on Friday but SPY
does not open for trading on Thursday,
which is the last trading day before the
expiration date, the Strike Setting Price
used for the RealDay Option expiring on
Friday will be the closing price of SPY
from Wednesday, provided that SPY is
open for trading on Wednesday.
The Exchange is proposing to list
RealDay Options on SPY with the
symbol ‘‘SPYZ.’’ During the anticipatory
period, the strike prices will be listed as
the Strike Multiplier, since the
numerical value of the strike price is not
yet known. The table below illustrates
how this will work.
*
*
*
*
*
*
*
1.015
1.010
1.005
1.000
0.995
0.990
0.985
182.85
181.95
181.05
180.15
179.25
178.35
177.45
represent a strike price of a typical
standard option. The Exchange notes
that it will also provide information and
Option
education to market participants via
circular prior to the launch of RealDay
Options to further minimize any
Strike Setting Price +1.5% ...
1.015 investor confusion. Additionally, since
Strike Setting Price +1.0% ...
1.010
the Exchange will never list RealDay
Strike Setting Price +0.5% ...
1.005
Options on an underlying security with
Strike Setting Price ...............
1.000
Strike Setting Price ¥0.5% ..
0.995 a price below $10.00, there will be no
Strike Setting Price ¥1.0% ..
0.990 confusion that the decimal equivalent is
Strike Setting Price ¥1.5% ..
0.985 actually a strike price around $1.00. For
example, if the underlying security was
trading around $2.00, a strike price of
The Exchange believes that using
1.005 during the anticipatory period
three decimal places will minimize the
may be confused as a strike price equal
potential for investor confusion.24
to $1.005 instead of .05% above the
Specifically, since three decimal places
Strike Setting Price. Below is an
is unique and not currently used for
example of how RealDay Options will
options, investors will be on notice and
aware that the Strike Multiplier does not be listed.
Strike price
during
anticipatory
period
(strike
multiplier)
Symbol
SPYZ 161021C1.000 ..............................................................................
SPYZ 161021C.995 ................................................................................
mstockstill on DSK3G9T082PROD with NOTICES
180.15
180.15
180.15
180.15
180.15
180.15
180.15
Strike prices
SPYZ
SPYZ
Strike
(%)
CALL/PUT
100
99.50
CALL ...........
CALL ...........
Expiration date
10/21/2016
10/21/2016
After the close of trading on the last
trading day before expiration, the
decimal will be converted into the
numerical strike price by multiplying
the Strike Setting Price by the Strike
Multiplier.25 For example, if SPY closes
at $190.00 on the last trading day before
expiration, the 1.005 strike price will be
converted to $190.95 ($190.00 * 1.005).
Although the Exchange will have
some discretion in determining the
exact number of strike prices that can be
listed, the Exchange will follow
additional procedures 26 based on the
price of the underlying security.
Specifically, if the underlying security
is at or above $25.00 per share, the
Exchange may list all seven strike
prices. If the underlying security is at or
below $10.00 per share, the Exchange
will not list any RealDay Option on the
underlying security. If the underlying
security is between $10.00 and $25.00
per share, the Exchange will only list
one strike price. In such a case, the one
strike price will be equal to the Strike
Setting Price.
These unique strike price features are
designed to minimize excessive quoting
traffic that would come from listing
standard options that expire every
trading day and are listed at least two
weeks prior to their expiration. If the
Exchange were to list standard options
on an underlying security that expire
every trading day, there would be an
enormous increase in quoting trading
traffic due to the sheer number of strike
prices that would have to be listed for
each series. This is in part due to the
fact that the price of the underlying
security will fluctuate between when a
standard option is listed and its
expiration date. For example, on March
1, 2016 there were 127 strike prices
listed for the weekly SPY option
expiring on March 4, 2016 and 232
strike prices listed for the standard SPY
option expiring on March 18, 2016. The
number of strike prices further increases
as the options expiration date
24 The Exchange notes that it has confirmed with
data vendors, the Options Clearing Corporation and
various market participants to confirm that they
will be able to handle three decimal places when
RealDay Options are launched. The Exchange also
explained what the three decimal places would
represent.
25 An adjustment to the Strike Setting Price may
be needed in order to remove the effects of
corporate actions, such as cash dividends. If a
dividend is declared, the Strike Setting Price would
be adjusted by subtracting the declared dividend
before multiplying it by the Strike multiplier.
26 See Proposed Rule 5050(f)(2).
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approaches, as well as in response to
any price swings. Listing a maximum of
seven strike prices, instead of over 100
strike prices for each expiration date, is
designed to mitigate issues associated
with RealDay Option quoting traffic
interfering with Exchange messaging by
minimizing the additional quoting
traffic. Additionally, having the strike
prices based on a percentage of the
underlying security up to the expiration
date will eliminate any issue around the
underlying security moving drastically
from the period of time between listing
and expiration, which would lead to the
need to list additional strike prices so
that there are strike prices near the price
of the underlying security.
Exercise and Settlement
The exercise and settlement price will
be calculated based on the closing price
of SPY on the trading day of expiration.
The exercise-settlement amount is equal
to the difference between the settlement
price and the exercise price of the
option multiplied by 100. Exercise will
result in the delivery of cash on the
business day following expiration.
Example #2
On Monday, a trader purchased a
1.005 (0.50%) call for expiration on
Thursday. The Strike Multiplier is
1.005. When he purchased the call he
did not know the numerical value of the
strike price, only that he will get a call
option whose strike price is fixed at
0.50% above the close of SPY on
Wednesday. On Wednesday, SPY closed
at 177.43 (the Strike Setting Price). All
RealDay strike prices for expiration on
Thursday are determined as follows:
Strike
multiplier
Option
mstockstill on DSK3G9T082PROD with NOTICES
Strike
Strike
Strike
Strike
Strike
Strike
Strike
Setting
Setting
Setting
Setting
Setting
Setting
Setting
Price
Price
Price
Price
Price
Price
Price
+1.5% ......................................................................................................................................
+1.0% ......................................................................................................................................
+0.5% ......................................................................................................................................
..................................................................................................................................................
¥0.5% .....................................................................................................................................
¥1.0% .....................................................................................................................................
¥1.5% .....................................................................................................................................
Since the trader purchased the
RealDay SPY 1.005 call, the strike price
is now set at 178.32. Upon the close on
Thursday, if SPY has risen above
178.32, the option expires in the money.
Assume that SPY closes at 178.75 on
Thursday, the call option purchased by
the trader will be $0.43 in the money
(178.75 ¥ 178.32 = 0.43), and the trader
will receive $43.00 (100 * 0.43).
If SPY does not open for trading on
the trading day of expiration, then the
last available closing price for SPY will
be used to determine the settlement
price of the expiring RealDay Options.
Specifically, if SPY does not open for
trading, at the close of trading on
expiration, RealDay Options will have
an exercise price that is equal to the
closing price from the last trading day
before expiration. This will result in all
RealDay Options expiring either ATM,
OTM, or ITM; depending on whether an
ATM, OTM, or ITM option was
purchased. This is due to the nature of
options that are designed to have an
active period of one trading day. For
example, if a trader purchases an ATM
RealDay call option, which is equal to
the closing price of SPY from the last
trading day before expiration (1.000
call), and SPY does not open for trading
on the expiration day of that RealDay
Options, then the call option purchased
by the trader would expire ATM. This
is because the exercise price would be
equal to the closing price which, in this
case, is equal to the closing price from
the last trading day before expiration,
since SPY did not open for trading on
the expiration day. This is the same
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procedure used for standard options.
Specifically, when an option does not
open for trading on an expiration date,
the last available closing price is used
for settlement purposes.
Contract Specifications
The contract specifications for
RealDay Options are set forth in Exhibit
3–1. RealDay Options will be Europeanstyle and P.M. cash-settled. As
mentioned above, the Exchange believes
that having a P.M. settlement is the best
way to adequately represent the goal of
RealDay Options, which are designed to
cover one trading day. The Exchange
does not believe that having a P.M.
settlement will raise any issues since
the market for SPY is so large that any
attempt to alter the closing price would
be extremely difficult and would subject
the manipulator to regulatory scrutiny.
As previously mentioned, BOX is only
proposing to list RealDay Options on
SPY, the most actively traded ETF in the
U.S. Due to the vast liquidity and
diversity in market participants trading
SPY, any attempt to manipulate the
closing price of SPY would be near
impossible to accomplish. Additionally,
the Exchange has surveillance measures
in place to monitor such behavior.
RealDay Options will overlie 100 shares
of SPY in the same manner as standard
options on SPY. The Exchange’s
standard trading hours for SPY options
will apply to trading in RealDay
Options.
PO 00000
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1.015
1.010
1.005
1.000
0.995
0.990
0.985
Strike price
180.09
179.20
178.32
177.43
176.54
175.66
174.77
With respect to margin
requirements 27 for RealDay Options, the
Exchange proposes to apply margin
requirements for the purchase and sale
of RealDay Options that are identical to
the margin requirements for standard
options on SPY.28 Margin requirements
for RealDay Options will be calculated
in the same manner as margins for
standard options on SPY. Margins
should be calculated in the same
manner during the anticipatory and
active periods. The Exchange notes that
even though the numerical value of the
strike price is not known until the close
of trading on the trading day before
expiration, the margins will still be
calculated the same way as standard
options. Specifically, the strike price
used for calculating the margin will just
be the numerical value of the strike
price using the current price of SPY for
the strike setting formula. For example,
if on Monday, a RealDay SPY Call
Option with a strike of 100% expiring
on Friday is purchased where the price
of SPY is $200, the strike price used for
calculating margins will be $200 (100%
* current SPY price).
The minimum trading increments for
RealDay Options will be the same as the
minimum trading increments applicable
to standard options on SPY.29
Specifically, RealDay Options on SPY
will have a minimum trading increment
27 Options Participants and associated persons are
bound by the initial and maintenance margin
requirements of either the CBOE or the New York
Stock Exchange. See Rule 10120, see also CBOE
Rule 12.3.
28 See Proposed Rule 5050(f)(6).
29 See Proposed Rule 5050(f)(5).
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of $0.01. The Exchange believes that,
since SPY options have a minimum
trading increment of $0.01, also having
a minimum trading increment of $0.01
for RealDay Options on SPY will avoid
investor confusion. The Exchange notes
that this is similar to the treatment of
Mini Options for which the minimum
trading increment is the same as the
minimum trading increment permitted
for standard options on the same
underlying security.30
Position Limits
The Exchange proposes that the
position limits for RealDay Options will
be the same as the position limits for
standard options on SPY.31 For
example, the Exchange proposes that
there shall be no position or exercise
limits for RealDay Options on SPY. As
noted above, RealDay Options will settle
using the published closing price from
SPY. Given that there are currently no
position limits for SPY options,32 the
Exchange believes it is appropriate for
there to be no position or exercise limits
for RealDay Options on SPY. Since the
removal of any position limits on SPY
is subject to a pilot program, if the pilot
is discontinued or cancelled and
therefore SPY becomes subject to
position limits, then RealDay Options
would become subject to the same
position limits as SPY options. Positions
in RealDay Options shall be aggregated
with positions in all other options on
SPY.
Customer Trading
Section 4000 of the Exchange’s rules
is designed to protect public customer
trading and shall apply to trading in
RealDay Options. Specifically, Rules
4020(a) and (b) prohibit Order Flow
Providers (‘‘OFP’’) 33 from accepting a
Public Customer order to purchase or
write an option, including RealDay
Options, unless such customer’s
account has been approved in writing
by a designated Options Principal of the
OFP. Additionally, Rule 4040 regarding
suitability is designed to ensure that
options, including RealDay Options, are
sold only to customers capable of
evaluating and bearing the risks
associated with trading in the
instrument. Further, Rule 4050 permits
OFPs to exercise discretionary power
mstockstill on DSK3G9T082PROD with NOTICES
30 See
IM–5050–10(d) to Rule 5050.
Proposed Rule 5050(f)(10).
32 See Securities Exchange Act Release No. 67936
(September 27, 2012), 77 FR 60491 (October 3,
2012) (Notice of Filing and Immediate Effectiveness
of SR–BOX–2012–013).
33 See Rule 100(a)(45). The terms ‘‘Order Flow
Provider’’ or ‘‘OFP’’ mean those Options
Participants representing as agent Customer Orders
on BOX and those non-Market Maker Participants
conducting proprietary trading.
31 See
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with respect to trading options,
including RealDay Options, in a Public
Customer’s account only if the OFP has
received prior written authorization
from the customer and the account has
been accepted in writing by a
designated Options Principal. Finally,
Rule 4030 Supervision of Accounts,
Rule 4060 Confirmation to Public
Customers, and Rule 4100 Delivery of
Current Options Disclosure Documents
and Prospectus, will also apply to
trading in RealDay Options.
Surveillance
The Exchange has an adequate
surveillance program in place for
RealDay Options and intends to apply
the same program procedures that it
applies to the Exchange’s other options
products. The Exchange does not
believe that it will have any issues with
the surveillance of RealDay Options.
Although there are certain differences
with RealDay Options as compared to
standard options, the Exchange believes
its current surveillance procedures will
adequately monitor RealDay Options.
Additionally, the Exchange is also a
member of the Intermarket Surveillance
Group (‘‘ISG’’) under the Intermarket
Surveillance Group Agreement dated
June 20, 1994. The ISG members work
together to coordinate surveillance and
investigative information sharing in the
stock and options markets.
Per the proposed rule change,
RealDay Options will be settled using a
calculation based on the daily closing
prices of SPY. The Exchange believes
that manipulating the settlement price
will be difficult based on the size of the
market for SPY. As discussed above, the
Exchange is only proposing to list
RealDay Options on SPY, which is the
most actively traded ETF in the United
States. The vast liquidity of the equities
markets ensures a multitude of market
participants at any given time. Due to
the high level of participation among
market makers that can enter quotes in
SPY, the Exchange believes it would be
very difficult for a single participant to
alter the closing price in any significant
way without exposing the would-be
manipulator to regulatory scrutiny and
financial costs. This is especially true
for SPY given the vast amount of
liquidity in the ETF.
The Exchange believes that there is no
additional risk of manipulation of
RealDay Options as compared to other
P.M.-settled options. RealDay Options
will be listed on the most actively
traded ETF and should dispel any
concerns of manipulation. Due to the
vast liquidity in SPY and the diverse
group of market participants that trade
PO 00000
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Fmt 4703
Sfmt 4703
SPY, any potential manipulator would
be subject to regulatory scrutiny.
The Exchange represents that it has
the necessary system capacity to
support additional quotations and
messages that will result from the listing
and trading of RealDay Options. The
Exchange believes that by limiting the
listing of RealDay Options to only seven
(7) strike prices per expiration, the
Exchange will minimize the system
capacity required to list them.
Additionally, the Exchange believes that
having the discretion to not list ITM call
or put options will further minimize the
required system capacity.
Standardized Options
Rule 9b–1 under the Act establishes a
disclosure framework for standardized
options that are traded on a national
securities exchange and cleared through
a registered clearing agency.34 The
exchange on which a standardized
option is listed and traded must prepare
an Options Disclosure Document
(‘‘ODD’’) that, among other things,
identifies the issuer and describes the
uses, mechanics, and risk of options
trading, in language that can be easily
understood by the investing public. The
ODD is treated as a substitute for the
traditional prospectus. Pursuant to Rule
9b–1 of the Act, use of the ODD is
limited to standardized options. The
Exchange believes that RealDay Options
are covered by the current language of
the ODD. Specifically, the June 2008
Supplement to the ODD added a
definition for delayed start options.35
The ODD describes delayed start
options as ‘‘an option that does not have
an exercise price when first introduced
for trading but instead has an exercise
price setting formula pursuant to which
the exercise price will be fixed on a
specified future date.’’ 36 Although the
Exchange believes that RealDay Options
are covered by the current language of
the ODD, BOX respectfully requests that
the Commission designate RealDay
Options as standardized options. The
Exchange notes that the Commission
has previously designated options
34 ‘‘Standardized options’’ are defined in Rule 9b–
1(a)(4) as ‘‘options contracts trading on a national
securities exchange, an automated quotation system
of a registered securities association, or a foreign
securities exchange which relate to options classes
the terms of which are limited to specific expiration
dates and exercise prices, or such other securities
as the Commission may, by order, designate.’’ See
17 CFR 240.9b–1(a)(4).
35 See pg. 129 of the Characteristics & Risks of
Standardized Options, located at https://
www.optionsclearing.com/about/publications/
character-risks.jsp.
36 Id.
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similar to RealDay Options as
standardized options.37
mstockstill on DSK3G9T082PROD with NOTICES
Market Participation
The Exchange believes that RealDay
Options will be a useful tool for all
market participants. The unique strike
price setting structure and the fact that
RealDay Options may expire every
trading day will allow investors to
hedge single day events, including the
release of an economic report or a
company’s earnings release (‘‘event
days’’). Although the Exchange believes
that these event days will be more active
as compared to the non-event days, the
Exchange still believes that investors
will see value, including obtaining
exposure to implied volatility, as
described in greater detail below, and
trade RealDay Options expiring on nonevent days. Additionally, market
participants can capture interday
realized volatility when they are
bundled as consecutive at-the-money
straddles.
Additionally, the Exchange believes
that market participants will find value
in trading RealDay Options during both
the anticipatory period and active
period. During the anticipatory period
investors can trade RealDay Options in
order to get exposure to implied
volatility and during the active period
RealDay Options will act and be traded
in the same manner as standard options.
Market participants can obtain exposure
to implied volatility by initiating a
position and then liquidating it prior to
the expiration day.
The Exchange believes that Market
Makers will be able to price and quote
RealDay Options effectively. Since
RealDay Options will not have their
strike prices set until the day before
expiration, the Exchange believes that
the models Market Makers use to price
and quote RealDay Options will be
simpler than the models they use for
standard options. Specifically, Market
Makers will not have to account for
price movements in SPY or time to
expiration; basically Market Makers will
just have to deal with implied volatility
when pricing RealDay Options.
Pilot Program
As proposed, the proposal would
become effective on a pilot program
basis for a period of twelve months.38 If
the Exchange were to propose an
extension of the program or should the
Exchange propose to make the program
37 See Securities Exchange Act Release No. 56855
(November 28, 2007), 72 FR 68613 (December 5,
2007)(Order Approving Proposed Rule Change as
Modified by Amendment No. 1 Thereto to List and
Trade Delayed Start Option Series).
38 See Proposed Rule 5050(f)(9).
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permanent, then the Exchange would
submit a filing to the Commission
proposing such amendments to the
program. The Exchange notes that any
positions established under the pilot
would not be impacted by the
expiration of the pilot. For example, a
position in a RealDay Option series that
expires beyond the conclusion of the
pilot period could be established during
the 12-month pilot. If the pilot program
were not extended, then the position
could continue to exist. However, the
Exchange notes that any further trading
in the series would be restricted to
transactions where at least one side of
the trade is a closing transaction.
The Exchange proposes to submit a
pilot program report to the Commission
two months prior to the expiration date
of the Pilot Program (the ‘‘pilot report’’).
The pilot report would contain an
analysis of volume, open interest, and
trading patterns. The analysis would
examine trading in RealDay Options. In
addition, for certain series, the pilot
report would provide analysis of price
volatility and trading activity in
additional option series. In addition to
the pilot report, the Exchange would
provide the Commission with periodic
interim reports while the pilot is in
effect that would contain some, but not
all, of the information contained in the
pilot report. The pilot report would be
provided to the Commission on a
confidential basis.
The pilot report would contain the
following volume and open interest data
for RealDay Options:
(1) Daily contract trading volume
aggregated for all trades, for all option
series with less than 31 days until
expiration;
(2) daily contract trading volume
aggregated by expiration date, for all
option series with less than 31 days
until expiration;
(3) daily contract trading volume for
each individual series;
(4) daily open interest aggregated for
all series, for all option series with less
than 31 days until expiration;
(5) daily open interest aggregated for
all series by expiration date, for all
option series with less than 31 days
until expiration;
(6) daily open interest for each
individual series;
(7) statistics on the distribution of
trade sizes;
(8) type of market participant trading
(e.g., contract trading volume for each
market participant type); and
(9) 5-minute returns, level changes,
and trading volume for the S&P 500
Index, VIX, SPY, IVV, and expiring
RealDay options between open and
close for the first and second
PO 00000
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Sfmt 4703
80131
Wednesday of the month that is a
trading day and trading days when
standard SPY options expire.
In addition to the pilot report, the
Exchange would periodically provide
the Commission with interim reports of
the information listed in items (1)
through (9) above as required by the
Commission while the pilot is in effect.
These interim reports would also be
provided on a confidential basis.
Additional Changes
The Exchange also proposes to amend
Rule 5050(a). Specifically, the Exchange
proposes to amend the rule to state that
the Exchange will fix a specific
expiration date and exercise price for
RealDay Options, as provided in
proposed Rule 5050(f).
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 39 in general, and furthers the
objectives of Section 6(b)(5) of the Act 40
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.
Specifically, the Exchange believes that
the introduction of RealDay Options
will attract order flow to the Exchange,
increase the variety of listed options to
investors, and provide a valuable hedge
tool to investors.
The Exchange believes the proposed
rule change will further the Exchange’s
goal of introducing new and innovative
products to the marketplace. The
Exchange believes that listing RealDay
Options will provide an opportunity for
investors to hedge, or speculate on, the
market risk associated with single day
events. The proposed rule change will
allow the Exchange to list options that
will allow traders to manage risk
associated with certain events, such as
a company’s earnings or the release of
an economic report. The Exchange
believes that RealDay Options will give
traders an unprecedented ability to
hedge against single day events. As the
Exchange previously noted, the concept
of a delayed start options is not a new
proposal. Specifically, CBOE has rules
covering delayed start options.41
Additionally, the ODD already has
language covering delayed start
options.42
39 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
41 See supra notes 3 and 16.
42 See supra note 35.
40 15
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Finally, the Exchange represents that
it has an adequate surveillance program
in place to detect manipulative trading
in RealDay Options. The Exchange
believes that by initially limiting
RealDay Options to only SPY, it will
reduce the chances of manipulation due
to the robust market and liquidity in
SPY. The Exchange also represents that
it has the necessary systems capacity to
support the new options series; and as
stated in the filing, the Exchange has
rules in place designed to protect public
customer trading.
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 not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange notes that the proposed rule
change will facilitate the listing and
trading of a novel option product that
will enhance competition among market
participants, to the benefit of investors
and the marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) by order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
mstockstill on DSK3G9T082PROD with NOTICES
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:
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BOX–2016–50 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–BOX-2016–50. 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–BOX–
2016–50 and should be submitted on or
before December 6, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Brent J. Fields,
Secretary.
[FR Doc. 2016–27363 Filed 11–14–16; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79267; File No. SR–C2–
2016–022]
Self-Regulatory Organizations; C2
Options Exchange, Incorporated;
Notice of Filing of a Proposed Rule
Change in Connection With a
Proposed Corporate Transaction
Involving CBOE Holdings, Inc. and
Bats Global Markets, Inc.
November 8, 2016.
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 November
4, 2016, C2 Options Exchange,
Incorporated (the ‘‘Exchange’’ or ‘‘C2’’)
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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange submits this rule filing
in connection with a proposed corporate
transaction (the ‘‘Transaction’’)
involving its ultimate parent company,
CBOE Holdings, Inc. (‘‘CBOE
Holdings’’), two wholly owned
subsidiaries of CBOE Holdings, CBOE
Corporation and CBOE V, LLC (‘‘CBOE
V’’), and Bats Global Markets, Inc.
(‘‘BGM’’). BGM is the ultimate parent
company of Bats BZX Exchange, Inc.
(‘‘Bats BZX’’), Bats BYX Exchange, Inc.
(‘‘Bats BYX’’), Bats EDGX Exchange, Inc.
(‘‘Bats EDGX’’), and Bats EDGA
Exchange, Inc. (‘‘Bats EDGA’’ and,
together with Bats BZX, Bats BYX, and
Bats EDGX, the ‘‘Bats Exchanges’’).
Upon completion of the Transaction
(the ‘‘Closing’’), CBOE Holdings will
become the ultimate parent of the Bats
Exchanges.
On September 25, 2016, CBOE
Holdings, CBOE Corporation, CBOE V,
and BGM entered into an Agreement
and Plan of Merger, as it may be
amended from time to time (the ‘‘Merger
Agreement’’). In connection with the
Transaction, the Exchange seeks the
Commission’s approval of a provision in
the Merger Agreement regarding the
composition of the CBOE Holdings
Board of Directors (‘‘CBOE Holdings
Board’’) upon the Closing. There are no
1 15
43 17
PO 00000
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Frm 00118
Fmt 4703
Sfmt 4703
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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]]>Agencies
[Federal Register Volume 81, Number 220 (Tuesday, November 15, 2016)]
[Notices]
[Pages 80125-80132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27363]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79258; File No. SR-BOX-2016-50]
Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing of Proposed Rule Change To Amend Rule 5050 Series of Options
Contracts Open for Trading To Provide for the Listing and Trading on
the Exchange of RealDayTM Options Pursuant to a Pilot Program
November 8, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 26, 2016, BOX Options Exchange LLC (the ``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 self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule 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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[[Page 80126]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 5050 to provide for the listing
and trading on the Exchange of RealDay\TM\ Options pursuant to a pilot
program. The text of the proposed rule change is available from the
principal office of the Exchange, at the Commission's Public Reference
Room and also on the Exchange's Internet Web site at https://boxexchange.com.
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 self-regulatory organization
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 self-regulatory organization
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 Exchange proposes to amend its rules to provide for the listing
and trading on the Exchange of a new type of standardized option
product on the SPDR[supreg] S&P 500[supreg] Exchange Traded Fund
(``ETF'') (this security is known by its symbol ``SPY'') called
RealDay\TM\ Options (``RealDay Options'') pursuant to a pilot program
ending 12 months after approval of all necessary changes to the
applicable BOX Rules has been received from the Securities and Exchange
Commission (the ``SEC'' or ``Commission''). RealDay Options will
possess many of the characteristics of existing standardized options
with some important variations. Most notably, at the commencement of
trading of a particular RealDay Option and until the close of trading
on the last trading day before its expiration, the numerical value of
the strike price will not be known. However, the formula used to
calculate the strike price will be fixed and known from the time of
listing.\3\
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\3\ The Exchange notes that this is not a new concept. See
Chicago Board Options Exchange, Incorporated (``CBOE'') Rule
24.1(aa).
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RealDay Options are a propriety product that are designed and
exclusively licensed by the RealDay Options Corporation.\4\ RealDay
Options will be exclusively listed on BOX. RealDay Options are designed
to have an active period, where the numerical value of the strike
prices is known, for exactly one trading day but can be listed far in
advance of their expiration date. Although the active period is only
one trading day, RealDay options can still be traded during the
anticipatory period which is the period of time from listing until the
close of trading on the trading day prior to expiration. The Exchange
believes that there is interest for options designed to cover a single
trading day across all market participants, including institutional
investors and the public. RealDay Options are true, or real, one-day
options, because they are forward-start (or delayed start \5\) options
whose strike increments and strike price setting formula are fixed from
the time they are listed, but whose numerical strike prices are
determined based on the formula which uses the closing price of SPY
from the last trading day before expiration. This unique structure of
having the strike intervals and strike price setting formula fixed from
the time they are listed but not knowing the numerical value of the
strike price until the exercise price setting date--which is after the
close of trading on the last trading day before expiration--is what
makes these options one-day options.
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\4\ The RealDay Options Corporation is a design and product
development company specializing in innovative exchange-listed
derivative instruments. For more information visit https://realdayoptions.com/.
\5\ Delayed start options are options that do not have an
exercise price when first introduced for trading, but instead have
an exercise price setting formula pursuant to which the exercise
price will be fixed on a specified future date. The price setting
formula is fixed and known from the time of listing.
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Initially, RealDay Options will only be listed on SPY but the
Exchange may seek to list RealDay Options on additional securities in
the future,\6\ provided that the Exchange receives the necessary
approval from the Commission. The Exchange has selected SPY as the
initial security to list RealDay Options on due to the vast liquidity
in the security. Specifically, SPY is the largest and most actively
traded ETF in the United States. According to State Street Global
Advisor, the Trustee of SPY, as of October 5, 2016, the total net
assets of SPY were approximately $198 billion, and the weighted average
market capitalization of the portfolio components was approximately
$146 billion.\7\ For the three months ending October 5, 2016, the
average daily volume in SPY shares was approximately 85 million.\8\
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\6\ The Exchange would use the SEC's form 19b-4 approval process
in order to list RealDay Options on additional securities.
\7\ See https://www.spdrs.com/product/fund.seam?ticker=SPY.
\8\ Calculated using data from Yahoo as of October 5, 2016.
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RealDay Options will be P.M. cash-settled and have European-style
exercise provisions.\9\ These options may expire every trading day,
including days on which monthly options series, Short Term Options
Series, and Quarterly Options Series on SPY expire. The Exchange
believes that cash settlement is more appropriate than physical
settlement and therefore is best suited for this product. Physical
settlement possesses certain risks with respect to volatility and
movement of the underlying security at expiration that the recipient
may need to hedge against. Cash settlement does not have any of these
risks associated with the underlying security. If an issue with the
delivery of the underlying security arises, it may become more
expensive to reverse due to a change in the price of the underlying
security; such risk does not exist with reversing a cash payment.
Additionally, with physical settlement, the recipient has to sell the
underlying security if they desire cash, which would cause them to
incur costs associated with liquidating the position and has risks
related to movement of the underlying price before it can be
liquidated. Further, if RealDay Options were physically settled, an
investor would need to carry the security overnight and liquidate the
next trading day; this would defeat the purpose of having an option
where the active period is designed to cover only a single trading day.
If an investor had to liquate the next trading day, there would be a
risk that the price of the security could change overnight before the
investor would be able to liquidate their position.\10\ The Exchange
notes that there are still certain risks with cash settlement, however,
these risks are minimal and will continue to be monitored. The Exchange
notes that cash settlement for options is not a unique feature and
other options exchanges have cash settled options.\11\ Additionally,
the Exchange has discussed RealDay Options with market participants and
they have expressed
[[Page 80127]]
their preference for the product to be cash-settled.
---------------------------------------------------------------------------
\9\ See Proposed Rule 5050(f)(4).
\10\ If an investor was required to wait until the next trading
day to liquidate, RealDay Options would essentially be A.M.-settled
options instead of P.M.-settled, as designed.
\11\ See e.g. NASDAQ's FX Options and CBOE's SPX Options.
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RealDay Options are P.M.-settled due to the nature of the product.
Specifically, RealDay Options are designed to cover a single trading
day due to the fact they are only active for one trading day. The only
way to ensure that the option covers one trading day is to have it be
P.M.-settled, as opposed to A.M.-settlement where additional factors
may have an effect on the settlement price. Specifically, A.M.-settled
options use the opening price for settlement which means they will
price in after-hours news and events and therefore do not cover only
one trading day. If RealDay Options were A.M.-settled, they would not
cover only a single trading day because the settlement price would
include events occurring after the close, which is not the intended
goal of RealDay Options. Additionally, the Exchange notes that standard
options in SPY are already P.M.-settled.
Listing
Although RealDay Options are designed to cover one trading day,
they will be listed at least two weeks prior to their expiration but no
greater than nine (9) months prior to their expiration.\12\ The options
are in essence divided into two periods: The anticipatory period and
the active period.\13\ The anticipatory period is the period of time
from the day the option is listed up until the close of trading on the
last trading day before expiration. The active period is the expiration
day of the option. During the anticipatory period the strike intervals
and strike price setting formula are known, but not the numerical value
of the strike prices, because they depend on the closing price of SPY
from the last trading day before expiration. RealDay Options may still
be traded in the anticipatory period in the same manner as standard
options on SPY. The fact that the numerical strike prices will only be
known for the active period, which is one trading day, is how RealDay
Options are designed to be active for one trading day.
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\12\ See Proposed Rule 5050(f).
\13\ See Exhibit 3-2 for a chart illustrating the two periods.
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Strike Prices
The numerical value of the strike prices for RealDay Options will
not be known until the close of trading on the last trading day before
expiration, although the strike intervals and strike price setting
formula will be fixed from inception.\14\ As described in greater
detail below, the formula will involve multiplying the closing price of
SPY from the last trading day before expiration (``Strike Setting
Price'') by the Strike Multiplier.\15\ The Exchange notes that
calculating strike prices based on a previous close is not an entirely
new concept.\16\ In effect, the strike price will stay at the same
percentage relationship to the price of SPY from the time of listing.
Further, the Exchange may only list up to a maximum of seven strike
prices for each expiration date. The seven strike prices will consist
of up to three (3) strike prices with a price greater than the Strike
Setting Price, three (3) strike prices with a price less than the
Strike Setting Price, and one (1) strike price equal to the Strike
Setting Price.\17\ The Exchange will have discretion in determining the
number of strike prices it will list per expiration, provided that the
strike prices listed satisfy the restrictions above. Additionally, the
Exchange must list the strike price that is equal to the Strike Setting
Price for every RealDay Option expiration. For example, the Exchange
could not list four (4) strike prices at a price greater than the
Strike Setting Price, one (1) strike price equal to the Strike Setting
Price and two (2) options that have a strike price less than the Strike
Setting Price. However, the Exchange could list three (3) strike prices
at a price greater than the Strike Setting Price, one (1) strike price
equal to the Strike Setting Price and two (2) strike prices that are
less than the Strike Setting Price.
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\14\ See Proposed Rule 5050(f)(8).
\15\ The ``Strike Multiplier'' is the decimal equivalent of the
percentage strike of the specific option. The Strike Multiplier will
be expressed with three decimal places. For example, an option that
is equal to the Strike Setting price would be 100%, making the
Strike Multiplier 1.000.
\16\ See CBOE Rule 24.9(d). The exercise price of CBOE Delayed
Start Options Series is determined in relation to the closing price
of the underlying index on the date on which the exercise price is
fixed.
\17\ See Proposed Rule 5050(f)(2).
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The Exchange may, in its sole discretion, determine to not list in-
the-money (``ITM'') put or call options for any of the seven (7) strike
prices.\18\ The ITM puts that the Exchange may decide to not list are
those corresponding to the three strike prices that are greater than
the Strike Setting Price and the ITM call options are those
corresponding to the three strike prices that are less than the Strike
Setting Price. The Exchange notes that nothing in its Rules prohibits
the Exchange from deciding to list only a put or call option for a
specific strike price. The Exchange also notes that the listing of only
a put or call option for a specific strike price will allow for quote
mitigation. Additionally, the Exchange believes it will be beneficial
to have this discretion because it will allow the Exchange to limit the
number of instruments listed. Additionally, the Exchange believes that
the value of RealDay Options is in the instruments that are at-the-
money (``ATM'') and out-of-the-money (``OTM'').
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\18\ See Proposed Rule 5050(f)(2)(ii).
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As is the case with other options that the Exchange lists, the
Exchange may add additional strike prices after the initial listing of
a RealDay Option, provided that the Exchange does not list more than
the seven strike prices as described above. For example, if the
Exchange lists a RealDay Option at the beginning of March with only the
strike price equal to the Strike Setting Price that expires on June 29,
2017, the Exchange could list up to six additional strike prices at the
beginning of June for the same expiration.\19\ When listing the
additional strike prices, the Exchange must follow the guidelines above
with respect to only being allowed to list up to three strike prices
above and three strike prices below the Strike Setting Price.
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\19\ For example, on June 1, 2017, the Exchange could list three
strike prices greater than the Strike Setting Price and three strike
prices lower than the Strike Setting Price. The threes [sic] strike
prices greater than the Strike Setting Price will be the strike
prices calculated by adding 0.5%, 1.0%, and 1.5%, respectively, to
the Strike Setting Price. The three strike prices less than the
strike Setting Price will be the strike prices calculated by
subtracting 0.5%, 1.0%, and 1.5%, respectively, from the Strike
Setting Price.
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The strike price formula will be used after the close of trading on
the last trading day before expiration in order to calculate the
numerical values of the strike prices. Specifically, the strike prices
will be determined by multiplying the Strike Setting Price by the
Strike Multiplier. Additionally, the strike prices will have fixed
strike intervals of 0.50%; therefore the Exchange's general strike
price interval rules shall not apply to RealDay Options.\20\ This means
there will be one strike price equal to 100% of the Strike Setting
Price.\21\ The three strike prices greater than then Strike Setting
Price will be determined by adding 0.5%, 1.0%, and 1.5%,\22\
respectively, to the Strike Setting Price. The three strike prices less
than the Strike Setting Price will be determined by subtracting 0.5%,
1.0%, and 1.5%,\23\ respectively, from the Strike Setting Price. The
strike prices will be rounded to the nearest
[[Page 80128]]
minimum trading increment, if necessary.
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\20\ See Proposed Rule 5050(f)(3).
\21\ The Strike Multiplier would be 1.000.
\22\ The Strike Multipliers would be 1.005, 1.010 and 1.015,
respectively.
\23\ The Strike Multiplies would be 0.995, 0.990 and 0.985
respectively.
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Example #1
On Tuesday, SPY's closing price is 180.15, which will be the Strike
Setting Price. RealDay Options on SPY expiring on the next trading day,
Wednesday, may have the following strike prices computed by multiplying
the Strike Setting Price by the Strike Multiplier.
------------------------------------------------------------------------
Formula (strike
Option setting price * strike Strike prices
multiplier)
------------------------------------------------------------------------
Strike Setting Price +1.5%..... 180.15 * 1.015 182.85
Strike Setting Price +1.0%..... 180.15 * 1.010 181.95
Strike Setting Price +0.5%..... 180.15 * 1.005 181.05
Strike Setting Price........... 180.15 * 1.000 180.15
Strike Setting Price -0.5%..... 180.15 * 0.995 179.25
Strike Setting Price -1.0%..... 180.15 * 0.990 178.35
Strike Setting Price -1.5%..... 180.15 * 0.985 177.45
------------------------------------------------------------------------
If SPY does not open for trading on the trading day before the
options expiration date, then the last available closing price for SPY
will be the Strike Setting Price. For Example, if a RealDay Option is
expiring on Friday but SPY does not open for trading on Thursday, which
is the last trading day before the expiration date, the Strike Setting
Price used for the RealDay Option expiring on Friday will be the
closing price of SPY from Wednesday, provided that SPY is open for
trading on Wednesday.
The Exchange is proposing to list RealDay Options on SPY with the
symbol ``SPYZ.'' During the anticipatory period, the strike prices will
be listed as the Strike Multiplier, since the numerical value of the
strike price is not yet known. The table below illustrates how this
will work.
------------------------------------------------------------------------
Strike price
during
Option anticipatory
period (strike
multiplier)
------------------------------------------------------------------------
Strike Setting Price +1.5%.............................. 1.015
Strike Setting Price +1.0%.............................. 1.010
Strike Setting Price +0.5%.............................. 1.005
Strike Setting Price.................................... 1.000
Strike Setting Price -0.5%.............................. 0.995
Strike Setting Price -1.0%.............................. 0.990
Strike Setting Price -1.5%.............................. 0.985
------------------------------------------------------------------------
The Exchange believes that using three decimal places will minimize
the potential for investor confusion.\24\ Specifically, since three
decimal places is unique and not currently used for options, investors
will be on notice and aware that the Strike Multiplier does not
represent a strike price of a typical standard option. The Exchange
notes that it will also provide information and education to market
participants via circular prior to the launch of RealDay Options to
further minimize any investor confusion. Additionally, since the
Exchange will never list RealDay Options on an underlying security with
a price below $10.00, there will be no confusion that the decimal
equivalent is actually a strike price around $1.00. For example, if the
underlying security was trading around $2.00, a strike price of 1.005
during the anticipatory period may be confused as a strike price equal
to $1.005 instead of .05% above the Strike Setting Price. Below is an
example of how RealDay Options will be listed.
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\24\ The Exchange notes that it has confirmed with data vendors,
the Options Clearing Corporation and various market participants to
confirm that they will be able to handle three decimal places when
RealDay Options are launched. The Exchange also explained what the
three decimal places would represent.
----------------------------------------------------------------------------------------------------------------
Symbol Strike (%) CALL/PUT Expiration date
----------------------------------------------------------------------------------------------------------------
SPYZ 161021C1.000............ SPYZ 100 CALL............. 10/21/2016
SPYZ 161021C.995............. SPYZ 99.50 CALL............. 10/21/2016
----------------------------------------------------------------------------------------------------------------
After the close of trading on the last trading day before
expiration, the decimal will be converted into the numerical strike
price by multiplying the Strike Setting Price by the Strike
Multiplier.\25\ For example, if SPY closes at $190.00 on the last
trading day before expiration, the 1.005 strike price will be converted
to $190.95 ($190.00 * 1.005).
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\25\ An adjustment to the Strike Setting Price may be needed in
order to remove the effects of corporate actions, such as cash
dividends. If a dividend is declared, the Strike Setting Price would
be adjusted by subtracting the declared dividend before multiplying
it by the Strike multiplier.
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Although the Exchange will have some discretion in determining the
exact number of strike prices that can be listed, the Exchange will
follow additional procedures \26\ based on the price of the underlying
security. Specifically, if the underlying security is at or above
$25.00 per share, the Exchange may list all seven strike prices. If the
underlying security is at or below $10.00 per share, the Exchange will
not list any RealDay Option on the underlying security. If the
underlying security is between $10.00 and $25.00 per share, the
Exchange will only list one strike price. In such a case, the one
strike price will be equal to the Strike Setting Price.
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\26\ See Proposed Rule 5050(f)(2).
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These unique strike price features are designed to minimize
excessive quoting traffic that would come from listing standard options
that expire every trading day and are listed at least two weeks prior
to their expiration. If the Exchange were to list standard options on
an underlying security that expire every trading day, there would be an
enormous increase in quoting trading traffic due to the sheer number of
strike prices that would have to be listed for each series. This is in
part due to the fact that the price of the underlying security will
fluctuate between when a standard option is listed and its expiration
date. For example, on March 1, 2016 there were 127 strike prices listed
for the weekly SPY option expiring on March 4, 2016 and 232 strike
prices listed for the standard SPY option expiring on March 18, 2016.
The number of strike prices further increases as the options expiration
date
[[Page 80129]]
approaches, as well as in response to any price swings. Listing a
maximum of seven strike prices, instead of over 100 strike prices for
each expiration date, is designed to mitigate issues associated with
RealDay Option quoting traffic interfering with Exchange messaging by
minimizing the additional quoting traffic. Additionally, having the
strike prices based on a percentage of the underlying security up to
the expiration date will eliminate any issue around the underlying
security moving drastically from the period of time between listing and
expiration, which would lead to the need to list additional strike
prices so that there are strike prices near the price of the underlying
security.
Exercise and Settlement
The exercise and settlement price will be calculated based on the
closing price of SPY on the trading day of expiration. The exercise-
settlement amount is equal to the difference between the settlement
price and the exercise price of the option multiplied by 100. Exercise
will result in the delivery of cash on the business day following
expiration.
Example #2
On Monday, a trader purchased a 1.005 (0.50%) call for expiration
on Thursday. The Strike Multiplier is 1.005. When he purchased the call
he did not know the numerical value of the strike price, only that he
will get a call option whose strike price is fixed at 0.50% above the
close of SPY on Wednesday. On Wednesday, SPY closed at 177.43 (the
Strike Setting Price). All RealDay strike prices for expiration on
Thursday are determined as follows:
------------------------------------------------------------------------
Strike
Option multiplier Strike price
------------------------------------------------------------------------
Strike Setting Price +1.5%.............. 1.015 180.09
Strike Setting Price +1.0%.............. 1.010 179.20
Strike Setting Price +0.5%.............. 1.005 178.32
Strike Setting Price.................... 1.000 177.43
Strike Setting Price -0.5%.............. 0.995 176.54
Strike Setting Price -1.0%.............. 0.990 175.66
Strike Setting Price -1.5%.............. 0.985 174.77
------------------------------------------------------------------------
Since the trader purchased the RealDay SPY 1.005 call, the strike
price is now set at 178.32. Upon the close on Thursday, if SPY has
risen above 178.32, the option expires in the money. Assume that SPY
closes at 178.75 on Thursday, the call option purchased by the trader
will be $0.43 in the money (178.75 - 178.32 = 0.43), and the trader
will receive $43.00 (100 * 0.43).
If SPY does not open for trading on the trading day of expiration,
then the last available closing price for SPY will be used to determine
the settlement price of the expiring RealDay Options. Specifically, if
SPY does not open for trading, at the close of trading on expiration,
RealDay Options will have an exercise price that is equal to the
closing price from the last trading day before expiration. This will
result in all RealDay Options expiring either ATM, OTM, or ITM;
depending on whether an ATM, OTM, or ITM option was purchased. This is
due to the nature of options that are designed to have an active period
of one trading day. For example, if a trader purchases an ATM RealDay
call option, which is equal to the closing price of SPY from the last
trading day before expiration (1.000 call), and SPY does not open for
trading on the expiration day of that RealDay Options, then the call
option purchased by the trader would expire ATM. This is because the
exercise price would be equal to the closing price which, in this case,
is equal to the closing price from the last trading day before
expiration, since SPY did not open for trading on the expiration day.
This is the same procedure used for standard options. Specifically,
when an option does not open for trading on an expiration date, the
last available closing price is used for settlement purposes.
Contract Specifications
The contract specifications for RealDay Options are set forth in
Exhibit 3-1. RealDay Options will be European-style and P.M. cash-
settled. As mentioned above, the Exchange believes that having a P.M.
settlement is the best way to adequately represent the goal of RealDay
Options, which are designed to cover one trading day. The Exchange does
not believe that having a P.M. settlement will raise any issues since
the market for SPY is so large that any attempt to alter the closing
price would be extremely difficult and would subject the manipulator to
regulatory scrutiny. As previously mentioned, BOX is only proposing to
list RealDay Options on SPY, the most actively traded ETF in the U.S.
Due to the vast liquidity and diversity in market participants trading
SPY, any attempt to manipulate the closing price of SPY would be near
impossible to accomplish. Additionally, the Exchange has surveillance
measures in place to monitor such behavior. RealDay Options will
overlie 100 shares of SPY in the same manner as standard options on
SPY. The Exchange's standard trading hours for SPY options will apply
to trading in RealDay Options.
With respect to margin requirements \27\ for RealDay Options, the
Exchange proposes to apply margin requirements for the purchase and
sale of RealDay Options that are identical to the margin requirements
for standard options on SPY.\28\ Margin requirements for RealDay
Options will be calculated in the same manner as margins for standard
options on SPY. Margins should be calculated in the same manner during
the anticipatory and active periods. The Exchange notes that even
though the numerical value of the strike price is not known until the
close of trading on the trading day before expiration, the margins will
still be calculated the same way as standard options. Specifically, the
strike price used for calculating the margin will just be the numerical
value of the strike price using the current price of SPY for the strike
setting formula. For example, if on Monday, a RealDay SPY Call Option
with a strike of 100% expiring on Friday is purchased where the price
of SPY is $200, the strike price used for calculating margins will be
$200 (100% * current SPY price).
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\27\ Options Participants and associated persons are bound by
the initial and maintenance margin requirements of either the CBOE
or the New York Stock Exchange. See Rule 10120, see also CBOE Rule
12.3.
\28\ See Proposed Rule 5050(f)(6).
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The minimum trading increments for RealDay Options will be the same
as the minimum trading increments applicable to standard options on
SPY.\29\ Specifically, RealDay Options on SPY will have a minimum
trading increment
[[Page 80130]]
of $0.01. The Exchange believes that, since SPY options have a minimum
trading increment of $0.01, also having a minimum trading increment of
$0.01 for RealDay Options on SPY will avoid investor confusion. The
Exchange notes that this is similar to the treatment of Mini Options
for which the minimum trading increment is the same as the minimum
trading increment permitted for standard options on the same underlying
security.\30\
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\29\ See Proposed Rule 5050(f)(5).
\30\ See IM-5050-10(d) to Rule 5050.
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Position Limits
The Exchange proposes that the position limits for RealDay Options
will be the same as the position limits for standard options on
SPY.\31\ For example, the Exchange proposes that there shall be no
position or exercise limits for RealDay Options on SPY. As noted above,
RealDay Options will settle using the published closing price from SPY.
Given that there are currently no position limits for SPY options,\32\
the Exchange believes it is appropriate for there to be no position or
exercise limits for RealDay Options on SPY. Since the removal of any
position limits on SPY is subject to a pilot program, if the pilot is
discontinued or cancelled and therefore SPY becomes subject to position
limits, then RealDay Options would become subject to the same position
limits as SPY options. Positions in RealDay Options shall be aggregated
with positions in all other options on SPY.
---------------------------------------------------------------------------
\31\ See Proposed Rule 5050(f)(10).
\32\ See Securities Exchange Act Release No. 67936 (September
27, 2012), 77 FR 60491 (October 3, 2012) (Notice of Filing and
Immediate Effectiveness of SR-BOX-2012-013).
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Customer Trading
Section 4000 of the Exchange's rules is designed to protect public
customer trading and shall apply to trading in RealDay Options.
Specifically, Rules 4020(a) and (b) prohibit Order Flow Providers
(``OFP'') \33\ from accepting a Public Customer order to purchase or
write an option, including RealDay Options, unless such customer's
account has been approved in writing by a designated Options Principal
of the OFP. Additionally, Rule 4040 regarding suitability is designed
to ensure that options, including RealDay Options, are sold only to
customers capable of evaluating and bearing the risks associated with
trading in the instrument. Further, Rule 4050 permits OFPs to exercise
discretionary power with respect to trading options, including RealDay
Options, in a Public Customer's account only if the OFP has received
prior written authorization from the customer and the account has been
accepted in writing by a designated Options Principal. Finally, Rule
4030 Supervision of Accounts, Rule 4060 Confirmation to Public
Customers, and Rule 4100 Delivery of Current Options Disclosure
Documents and Prospectus, will also apply to trading in RealDay
Options.
---------------------------------------------------------------------------
\33\ See Rule 100(a)(45). The terms ``Order Flow Provider'' or
``OFP'' mean those Options Participants representing as agent
Customer Orders on BOX and those non-Market Maker Participants
conducting proprietary trading.
---------------------------------------------------------------------------
Surveillance
The Exchange has an adequate surveillance program in place for
RealDay Options and intends to apply the same program procedures that
it applies to the Exchange's other options products. The Exchange does
not believe that it will have any issues with the surveillance of
RealDay Options. Although there are certain differences with RealDay
Options as compared to standard options, the Exchange believes its
current surveillance procedures will adequately monitor RealDay
Options. Additionally, the Exchange is also a member of the Intermarket
Surveillance Group (``ISG'') under the Intermarket Surveillance Group
Agreement dated June 20, 1994. The ISG members work together to
coordinate surveillance and investigative information sharing in the
stock and options markets.
Per the proposed rule change, RealDay Options will be settled using
a calculation based on the daily closing prices of SPY. The Exchange
believes that manipulating the settlement price will be difficult based
on the size of the market for SPY. As discussed above, the Exchange is
only proposing to list RealDay Options on SPY, which is the most
actively traded ETF in the United States. The vast liquidity of the
equities markets ensures a multitude of market participants at any
given time. Due to the high level of participation among market makers
that can enter quotes in SPY, the Exchange believes it would be very
difficult for a single participant to alter the closing price in any
significant way without exposing the would-be manipulator to regulatory
scrutiny and financial costs. This is especially true for SPY given the
vast amount of liquidity in the ETF.
The Exchange believes that there is no additional risk of
manipulation of RealDay Options as compared to other P.M.-settled
options. RealDay Options will be listed on the most actively traded ETF
and should dispel any concerns of manipulation. Due to the vast
liquidity in SPY and the diverse group of market participants that
trade SPY, any potential manipulator would be subject to regulatory
scrutiny.
The Exchange represents that it has the necessary system capacity
to support additional quotations and messages that will result from the
listing and trading of RealDay Options. The Exchange believes that by
limiting the listing of RealDay Options to only seven (7) strike prices
per expiration, the Exchange will minimize the system capacity required
to list them. Additionally, the Exchange believes that having the
discretion to not list ITM call or put options will further minimize
the required system capacity.
Standardized Options
Rule 9b-1 under the Act establishes a disclosure framework for
standardized options that are traded on a national securities exchange
and cleared through a registered clearing agency.\34\ The exchange on
which a standardized option is listed and traded must prepare an
Options Disclosure Document (``ODD'') that, among other things,
identifies the issuer and describes the uses, mechanics, and risk of
options trading, in language that can be easily understood by the
investing public. The ODD is treated as a substitute for the
traditional prospectus. Pursuant to Rule 9b-1 of the Act, use of the
ODD is limited to standardized options. The Exchange believes that
RealDay Options are covered by the current language of the ODD.
Specifically, the June 2008 Supplement to the ODD added a definition
for delayed start options.\35\ The ODD describes delayed start options
as ``an option that does not have an exercise price when first
introduced for trading but instead has an exercise price setting
formula pursuant to which the exercise price will be fixed on a
specified future date.'' \36\ Although the Exchange believes that
RealDay Options are covered by the current language of the ODD, BOX
respectfully requests that the Commission designate RealDay Options as
standardized options. The Exchange notes that the Commission has
previously designated options
[[Page 80131]]
similar to RealDay Options as standardized options.\37\
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\34\ ``Standardized options'' are defined in Rule 9b-1(a)(4) as
``options contracts trading on a national securities exchange, an
automated quotation system of a registered securities association,
or a foreign securities exchange which relate to options classes the
terms of which are limited to specific expiration dates and exercise
prices, or such other securities as the Commission may, by order,
designate.'' See 17 CFR 240.9b-1(a)(4).
\35\ See pg. 129 of the Characteristics & Risks of Standardized
Options, located at https://www.optionsclearing.com/about/publications/character-risks.jsp.
\36\ Id.
\37\ See Securities Exchange Act Release No. 56855 (November 28,
2007), 72 FR 68613 (December 5, 2007)(Order Approving Proposed Rule
Change as Modified by Amendment No. 1 Thereto to List and Trade
Delayed Start Option Series).
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Market Participation
The Exchange believes that RealDay Options will be a useful tool
for all market participants. The unique strike price setting structure
and the fact that RealDay Options may expire every trading day will
allow investors to hedge single day events, including the release of an
economic report or a company's earnings release (``event days'').
Although the Exchange believes that these event days will be more
active as compared to the non-event days, the Exchange still believes
that investors will see value, including obtaining exposure to implied
volatility, as described in greater detail below, and trade RealDay
Options expiring on non-event days. Additionally, market participants
can capture interday realized volatility when they are bundled as
consecutive at-the-money straddles.
Additionally, the Exchange believes that market participants will
find value in trading RealDay Options during both the anticipatory
period and active period. During the anticipatory period investors can
trade RealDay Options in order to get exposure to implied volatility
and during the active period RealDay Options will act and be traded in
the same manner as standard options. Market participants can obtain
exposure to implied volatility by initiating a position and then
liquidating it prior to the expiration day.
The Exchange believes that Market Makers will be able to price and
quote RealDay Options effectively. Since RealDay Options will not have
their strike prices set until the day before expiration, the Exchange
believes that the models Market Makers use to price and quote RealDay
Options will be simpler than the models they use for standard options.
Specifically, Market Makers will not have to account for price
movements in SPY or time to expiration; basically Market Makers will
just have to deal with implied volatility when pricing RealDay Options.
Pilot Program
As proposed, the proposal would become effective on a pilot program
basis for a period of twelve months.\38\ If the Exchange were to
propose an extension of the program or should the Exchange propose to
make the program permanent, then the Exchange would submit a filing to
the Commission proposing such amendments to the program. The Exchange
notes that any positions established under the pilot would not be
impacted by the expiration of the pilot. For example, a position in a
RealDay Option series that expires beyond the conclusion of the pilot
period could be established during the 12-month pilot. If the pilot
program were not extended, then the position could continue to exist.
However, the Exchange notes that any further trading in the series
would be restricted to transactions where at least one side of the
trade is a closing transaction.
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\38\ See Proposed Rule 5050(f)(9).
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The Exchange proposes to submit a pilot program report to the
Commission two months prior to the expiration date of the Pilot Program
(the ``pilot report''). The pilot report would contain an analysis of
volume, open interest, and trading patterns. The analysis would examine
trading in RealDay Options. In addition, for certain series, the pilot
report would provide analysis of price volatility and trading activity
in additional option series. In addition to the pilot report, the
Exchange would provide the Commission with periodic interim reports
while the pilot is in effect that would contain some, but not all, of
the information contained in the pilot report. The pilot report would
be provided to the Commission on a confidential basis.
The pilot report would contain the following volume and open
interest data for RealDay Options:
(1) Daily contract trading volume aggregated for all trades, for
all option series with less than 31 days until expiration;
(2) daily contract trading volume aggregated by expiration date,
for all option series with less than 31 days until expiration;
(3) daily contract trading volume for each individual series;
(4) daily open interest aggregated for all series, for all option
series with less than 31 days until expiration;
(5) daily open interest aggregated for all series by expiration
date, for all option series with less than 31 days until expiration;
(6) daily open interest for each individual series;
(7) statistics on the distribution of trade sizes;
(8) type of market participant trading (e.g., contract trading
volume for each market participant type); and
(9) 5-minute returns, level changes, and trading volume for the S&P
500 Index, VIX, SPY, IVV, and expiring RealDay options between open and
close for the first and second Wednesday of the month that is a trading
day and trading days when standard SPY options expire.
In addition to the pilot report, the Exchange would periodically
provide the Commission with interim reports of the information listed
in items (1) through (9) above as required by the Commission while the
pilot is in effect. These interim reports would also be provided on a
confidential basis.
Additional Changes
The Exchange also proposes to amend Rule 5050(a). Specifically, the
Exchange proposes to amend the rule to state that the Exchange will fix
a specific expiration date and exercise price for RealDay Options, as
provided in proposed Rule 5050(f).
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \39\ in general, and furthers the objectives of Section
6(b)(5) of the Act \40\ 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. Specifically, the Exchange believes that the introduction of
RealDay Options will attract order flow to the Exchange, increase the
variety of listed options to investors, and provide a valuable hedge
tool to investors.
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\39\ 15 U.S.C. 78f(b).
\40\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed rule change will further the
Exchange's goal of introducing new and innovative products to the
marketplace. The Exchange believes that listing RealDay Options will
provide an opportunity for investors to hedge, or speculate on, the
market risk associated with single day events. The proposed rule change
will allow the Exchange to list options that will allow traders to
manage risk associated with certain events, such as a company's
earnings or the release of an economic report. The Exchange believes
that RealDay Options will give traders an unprecedented ability to
hedge against single day events. As the Exchange previously noted, the
concept of a delayed start options is not a new proposal. Specifically,
CBOE has rules covering delayed start options.\41\ Additionally, the
ODD already has language covering delayed start options.\42\
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\41\ See supra notes 3 and 16.
\42\ See supra note 35.
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[[Page 80132]]
Finally, the Exchange represents that it has an adequate
surveillance program in place to detect manipulative trading in RealDay
Options. The Exchange believes that by initially limiting RealDay
Options to only SPY, it will reduce the chances of manipulation due to
the robust market and liquidity in SPY. The Exchange also represents
that it has the necessary systems capacity to support the new options
series; and as stated in the filing, the Exchange has rules in place
designed to protect public customer trading.
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 not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of a novel
option product that will enhance competition among market participants,
to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-BOX-2016-50 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-BOX-2016-50. 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-BOX-2016-50 and should be
submitted on or before December 6, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27363 Filed 11-14-16; 8:45 am]
BILLING CODE 8011-01-P
