Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Permit the Listing and Trading of Options Based on 1/100th the Value of the Nasdaq-100 Index, 19909-19912 [2021-07677]
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Federal Register / Vol. 86, No. 71 / Thursday, April 15, 2021 / Notices
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[FR Doc. 2021–07715 Filed 4–14–21; 8:45 am]
BILLING CODE 7515–01–P
NATIONAL ARCHIVES AND RECORDS
ADMINISTRATION
Office of Government Information
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[NARA–2021–023]
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Alina M. Semo,
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[FR Doc. 2021–07713 Filed 4–14–21; 8:45 am]
BILLING CODE 7515–01–P
Meetings; Chief Freedom of
Information Act (FOIA) Officers
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91524; File No. SR–Phlx–
2021–07]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Order Approving a
Proposed Rule Change, as Modified by
Amendment No. 1, To Permit the
Listing and Trading of Options Based
on 1/100th the Value of the Nasdaq-100
Index
April 9, 2021.
I. Introduction
On February 10, 2021, Nasdaq PHLX
LLC (‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
permit the listing and trading of index
options on based on 1/100th the value
of the Nasdaq-100 Index. The proposed
rule change was published for comment
in the Federal Register on February 26,
2021.3 On March 17, 2021, the Exchange
filed Amendment No. 1 to the proposed
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 91178
(February 22, 2021), 86 FR 11807.
2 17
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Federal Register / Vol. 86, No. 71 / Thursday, April 15, 2021 / Notices
rule change.4 The Commission is
approving the proposed rule change, as
modified by Amendment No. 1, subject
to a pilot period set to expire on
November 4, 2021.
II. Description of the Proposed Rule
Change, as Modified by Amendment
No. 1
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The Exchange is proposing to amend
its rules to permit the listing and trading
of index options on the Nasdaq 100
Micro Index (‘‘XND’’) on a pilot basis.
The Exchange states that the XND
options contract will be the same in all
respects as the current Nasdaq-100
Index (‘‘NDX’’) options contract listed
on the Exchange,5 except that it will be
based on 1/100th of the value of the
Nasdaq-100 Index, and will be P.M.settled with an exercise settlement value
based on the closing index value of the
Nasdaq-100 Index on the day of
expiration.6 In particular, XND options
will be subject to the same rules that
presently govern the trading of index
options based on the Nasdaq-100 Index,
including sales practice rules, margin
requirements, trading rules, and
position and exercise limits. Like NDX
options, XND options will be Europeanstyle and cash-settled, and will have a
contract multiplier of 100. XND options
will have a minimum trading increment
of $0.01 for all series.7 Strike price
intervals will be set at $2.50 or greater,
subject to conditions described in
Options 4A, Section 12(a)(2).8
4 In Amendment No. 1, the Exchange amended
the proposal to: (1) Extend the duration of the
proposed pilot period for XND options from May
4, 2021 to November 4, 2021; and (2) specify that
the Exchange intends to begin implementation of
the proposed rule change prior to May 1, 2021.
Because Amendment No. 1 to the proposed rule
change is technical in nature and does not
materially alter the substance of the proposed rule
change or raise any novel regulatory issues, it is not
subject to notice and comment. Amendment No. 1,
which amended and replaced the original proposal
in its entirety, is available on the Commission’s
website at: https://www.sec.gov/comments/sr-phlx2021-07/srphlx202107-8513064-230103.pdf.
5 See Options 4A, Section 12(e)(II).
6 The Exchange notes that similar features are
available with other index options contracts listed
or approved for trading on the Exchange and other
options exchanges, including the Exchange’s
affiliate, Nasdaq ISE, LLC (‘‘ISE’’), which lists
options contracts based on 1/5th the value of the
Nasdaq-100 (‘‘NQX’’). See Amendment No. 1, supra
note 4, at 5.
7 More specifically, the Exchange proposes that as
long as QQQ options participate in the Penny
Interval Program, XND options shall have a
minimum increment of $.01. See proposed
Supplementary Material .03 to Options 3, Section
3.
8 Generally, pursuant to Options 4A, Section
12(a)(2), except as provided in Supplementary
Material .04 to Options 4A, Section 12, index
options listed on the Exchange are subject to strike
price intervals of no less than $5, provided that
certain classes of index options (including Reduced
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Consistent with the Exchange’s existing
rules for index options, the Exchange
will allow up to six expiration months
at any one time that may expire at threemonth intervals or in consecutive
months, as well as LEAPS.9 The
Exchange states that, pursuant to Phlx
Options 4A, Section 12(b)(5), XND
options may be listed and traded in
accordance with the Nonstandard
Expirations Pilot Program, which
permits the Exchange to list Weekly
Expirations 10 and End of Month
(‘‘EOM’’) Expirations 11 on any broadbased index 12 eligible for standard
options trading. XND options will have
European-style exercise and will not be
subject to position limits, although the
Exchange proposes to amend Options
4A, Section 6 to describe how positions
in micro index value options would be
aggregated with full value and reduced
value options.13
As proposed, XND options would be
subject to a pilot for a period that would
end on November 4, 2021 (‘‘Pilot
Program’’). If the Exchange were to
propose an extension of the Pilot
Program or should the Exchange
propose to make the Pilot Program
permanent, then the Exchange would
submit a filing proposing such
amendments to the Pilot Program. The
Value NDX options) have strike price intervals of
no less than $2.50. The Exchange proposes to
amend Options 4A, Section 12(a)(2) to add XND
options to the list of classes where strike price
intervals of no less than $2.50 are generally
permitted, if the strike price is less than $200. The
Exchange will not list long term index options
series (‘‘LEAPS’’) on XND options at intervals less
than $5. If the Exchange determines to add XND
options to the Short Term Option Series (‘‘STOS’’)
or Quarterly Option Series programs, such options
will be listed with the expirations and strike prices
described in Supplementary Material .02 to Options
4A, Section 12. The Exchange notes that it expects
to add XND options to the STOS program. See
Amendment No. 1, supra note 4 at 11, n.18.
9 See id. at 11 & n.16.
10 Weekly Expirations may expire on any
Monday, Wednesday, or Friday (other than the
third Friday-of-the-month or days that coincide
with an EOM expiration). See Options 4A, Section
12(b)(5).
11 EOMs expire on last trading day of the month.
See Options 4A, Section 12(b)(5).
12 The Exchange states XND is a broad-based
index. See Amendment No. 1, supra note 4, at 4,
n.6. To the extent the Exchange lists XND options
pursuant to the Nonstandard Expirations Pilot
Program, the Exchange would be required to
provide the same information with respect to XND
that it does for others options listed pursuant to the
Nonstandard Expirations Pilot Program in the
reports and data it provides to the Commission.
13 For a more detailed description of the proposed
XND contract, see Amendment No. 1, supra note 4.
The Exchange also proposes to add new Options
4A, Section 12(a)(5) titled ‘‘European-Style
Exercise’’ to clarify in the Exchange’s rules which
Exchange-listed index options will trade EuropeanStyle Exercise, and to add rule text within Options
4A, Section 12(b)(2), which describes LEAPS, to
specifically allow for the listing of long term
options series on XND.
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Exchange notes that any positions
established under the pilot would not be
impacted by the expiration of the pilot.
For example, a position in an XND
options series that expires beyond the
conclusion of the pilot period could be
established during the 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 Commission at
least two months prior to the expiration
date of the Pilot Program (the ‘‘annual
report’’). The annual report would
contain an analysis of volume, open
interest, and trading patterns. The
analysis would examine trading in the
proposed option product as well as
trading in the securities that comprise
the Nasdaq-100 Index. In addition, for
series that exceed certain minimum
open interest parameters, the annual
report would provide analysis of index
price volatility and share trading
activity. In addition to the annual
report, the Exchange would provide the
Commission with periodic interim
reports while the Pilot Program is in
effect that would contain some, but not
all, of the information contained in the
annual report. The annual report would
be provided to the Commission on a
confidential basis. The annual report
would contain the following volume
and open interest data:
(1) Monthly volume aggregated for all
trades;
(2) monthly volume aggregated by
expiration date;
(3) monthly volume for each
individual series;
(4) month-end open interest
aggregated for all series;
(5) month-end open interest for all
series aggregated by expiration date; and
(6) month-end open interest for each
individual series.
In addition to the annual report, the
Exchange would provide the
Commission with interim reports of the
information listed in items (1) through
(6) above periodically as required by the
Commission while the Pilot Program is
in effect. These interim reports would
also be provided on a confidential basis.
Finally, the annual report would
contain the following analysis of trading
patterns in third Friday of the month
(‘‘Expiration Friday’’), P.M.-settled XND
option series in the Pilot Program: (1) A
time series analysis of open interest; and
(2) an analysis of the distribution of
trade sizes. Also, for series that exceed
certain minimum parameters, the
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Federal Register / Vol. 86, No. 71 / Thursday, April 15, 2021 / Notices
annual report would contain the
following analysis related to index price
changes and underlying share trading
volume at the close on Expiration
Fridays: A comparison of index price
changes at the close of trading on a
given Expiration Friday with
comparable price changes from a control
sample. The data would include a
calculation of percentage price changes
for various time intervals and compare
that information to the respective
control sample. Raw percentage price
change data as well as percentage price
change data normalized for prevailing
market volatility, as measured by an
appropriate index as agreed by the
Commission and the Exchange, would
be provided. The Exchange would
provide a calculation of share volume
for a sample set of the component
securities representing an upper limit
on share trading that could be
attributable to expiring in-the-money
series. The data would include a
comparison of the calculated share
volume for securities in the sample set
to the average daily trading volumes of
those securities over a sample period.
The minimum open interest parameters,
control sample, time intervals, method
for randomly selecting the component
securities, and sample periods would be
determined by the Exchange and the
Commission.14
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III. Discussion and Commission
Findings
After careful consideration of the
proposal, the Commission finds that the
proposed rule change, as modified by
Amendment No. 1, is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange,15 and, in particular, the
requirements of Section 6 of the Act.16
Specifically, the Commission finds that
the proposed rule change, as Modified
by Amendment No. 1, is consistent with
Section 6(b)(5) of the Act,17 which
requires that an exchange have rules
designed to remove impediments to and
perfect the mechanism of a free and
open market and to protect investors
14 See id. The proposed Pilot Program for XND
options is similar to the pilot program approved for
the listing and trading of P.M.-settled options on the
full value of the Nasdaq-100 (‘‘NDXPM’’) on the
Exchange and NQX options on ISE. See Securities
Exchange Act Release Nos. 81293 (August 2, 2017),
82 FR 37138 (August 8, 2017)(‘‘NDXPM Order’’)
and 82911 (March 20, 2018), 83 FR 12966 (March
26, 2018) (‘‘NQX Order’’).
15 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
16 15 U.S.C. 78f.
17 15 U.S.C. 78f(b)(5).
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and the public interest, to allow the
Exchange to conduct a limited, and
carefully monitored, pilot as proposed.
The Commission has previously
approved the listing and trading of
options based on a reduced value of the
Nasdaq-100 Index,18 including P.M.settled reduced value options,19 and, as
stated in the Commission’s order
approving the listing and trading of
NDXPM on the Exchange on a pilot
program basis, the Commission has had
concerns about the potential adverse
effects and impact of P.M. settlement
upon market volatility and the operation
of fair and orderly markets on the
underlying cash market at or near the
close of trading, including for cashsettled derivatives contracts based on a
broad-based index.20 The potential
impact today remains unclear, given the
significant changes in the closing
procedures of the primary markets in
recent decades. The Commission is
mindful of the historical experience
with the impact of P.M. settlement of
cash-settled index derivatives on the
underlying cash markets, but recognizes
that these risks may be mitigated today
by the enhanced closing procedures that
are now in use at the primary equity
markets.
For the reasons described below, the
Commission believes that the
Exchange’s proposed XND Pilot
Program is designed to mitigate
concerns regarding P.M. settlement and
will provide additional trading
opportunities for investors while
providing the Commission with data to
monitor the effects of XND options and
the impact of P.M. settlement on the
markets. To assist the Commission in
assessing any potential impact of a P.M.settled XND option on the options
markets as well as the underlying cash
equities markets, the Exchange will be
required to submit data to the
Commission in connection with the
Pilot Program. The Commission believes
that the Exchange’s proposed Pilot
Program, together with the data and
analysis that the Exchange will provide
18 See, e.g., Securities Exchange Act Release Nos.
57654 (April 11, 2008), 73 FR 21003 (April 17,
2008) and 51121 (February 1, 2005), 70 FR 6476
(February 7, 2005).
19 See NQX Order, supra note 14.
20 See NDXPM Order, supra note 14, at 37140.
See also Securities Exchange Act Release Nos.
64599 (June 3, 2011), 76 FR 33798, 33801–02 (June
9, 2011) (order instituting proceedings to determine
whether to approve or disapprove a proposed rule
change to allow the listing and trading of SPXPM
options); 65256 (September 2, 2011), 76 FR 55969,
55970–76 (September 9, 2011) (order approving
proposed rule change to establish a pilot program
to list and trade SPXPM options); and 68888
(February 8, 2013), 78 FR 10668, 10669 (February
14, 2013) (order approving the listing and trading
of SPXPM on CBOE).
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19911
to the Commission, will allow the
Exchange and the Commission to
monitor for and assess any potential for
adverse market effects of allowing P.M.
settlement for XND options, including
on the underlying component stocks. In
particular, the data collected from the
Exchange’s XND Pilot Program will help
inform the Commission’s consideration
of whether the Pilot Program should be
modified, discontinued, extended, or
permanently approved. Furthermore,
the Exchange’s ongoing analysis of the
Pilot Program should help it monitor
any potential risks from large P.M.settled positions and take appropriate
action on a timely basis if warranted.
The Exchange represents that it has
adequate surveillance procedures to
monitor trading in these options thereby
helping to ensure the maintenance of a
fair and orderly market, and has
represented that it has sufficient
capacity to handle additional traffic
associated with this new listing.21
For the reasons discussed above, the
Commission finds that the Exchange’s
proposal is consistent with the Act,
including Section 6(b)(5) thereof, in that
it is designed to remove impediments to
and perfect the mechanism of a free and
open market, and, in general, to protect
investors and the public interest. In
light of the enhanced closing procedures
at the underlying markets and the
potential benefits to investors discussed
by the Exchange in its filing,22 the
Commission finds that it is appropriate
and consistent with the Act to approve
the Exchange’s proposal on a pilot basis.
The collection of data during the Pilot
Program and the Exchange’s active
monitoring of any effects of XND
options on the markets will help the
Exchange and the Commission assess
any impact of P.M. settlement in today’s
market.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,23 that the
proposed rule change (SR–Phlx–2021–
07), as modified by Amendment No. 1,
be, and hereby is, approved, subject to
a pilot period set to expire on November
4, 2021.
21 See Amendment No. 1, supra note 4, at 17. In
addition, the Commission notes that the Exchange
would have access to information through its
membership in the Intermarket Surveillance Group
with respect to the trading of the securities
underlying the XND, as well as tools such as large
options positions reports to assist its surveillance of
XND options.
22 See Amendment No. 1, supra note 4.
23 15 U.S.C. 78s(b)(2).
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Federal Register / Vol. 86, No. 71 / Thursday, April 15, 2021 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–07677 Filed 4–14–21; 8:45 am]
BILLING CODE 8011–01–P
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91523; File No. SR–IEX–
2021–06]
Self-Regulatory Organizations;
Investors Exchange LLC; Notice of
Filing of Proposed Rule Change To
Enhance the IEX Retail Price
Improvement Program for the Benefit
of Retail Investors
April 9, 2021.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule
19b–4 thereunder,3 notice is hereby
given that, on April 1, 2021, the
Investors Exchange LLC (‘‘IEX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
jbell on DSKJLSW7X2PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Pursuant to the provisions of Section
19(b)(1) under the Act,4 and Rule
19b–4 thereunder,5 IEX is filing with the
Commission a proposed rule change to
enhance its Retail Price Improvement
Program for the benefit of retail
investors.
The text of the proposed rule change
is available at the Exchange’s website at
www.iextrading.com, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
24 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
4 15 U.S.C. 78s(b)(1).
5 17 CFR 240.19b–4.
1 15
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17:35 Apr 14, 2021
Jkt 253001
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.
1. Purpose
The purpose of the proposed rule
change is to enhance the Exchange’s
Retail Price Improvement Program for
the benefit of retail investors.
Specifically, the Exchange proposes to
make the following four changes: (i)
Revise the definition of Retail order 6 in
IEX Rule 11.190(b)(15) to apply only to
the trading interest of a natural person
that does not place more than 390
equity orders per day on average during
a calendar month for its own beneficial
account(s); 7 (ii) provide Order Book 8
priority to Retail Liquidity Provider
(‘‘RLP’’) orders 9 at the Midpoint Price 10
ahead of other non-displayed orders
priced to execute at the Midpoint Price;
(iii) disseminate a ‘‘Retail Liquidity
Identifier’’ through the Exchange’s
proprietary market data feeds and the
appropriate securities information
processor (‘‘SIP’’) when RLP order
interest aggregated to form at least one
round lot for a particular security is
available in the System,11 provided that
the RLP order interest is resting at the
Midpoint Price and is priced at least
$0.001 better than the NBB 12 or NBO; 13
and (iv) amend the definition of RLP
orders so such orders can only be
midpoint peg orders,14 cannot be
Discretionary Peg orders,15 and cannot
include a minimum quantity
restriction.16 The proposed changes are
designed to further support and enhance
6 See
IEX Rules 11.190(b)(15) and 11.232(a)(2).
existing restrictions applicable to a Retail
order, that it must reflect trading interest of a
natural person with no change made to the terms
of the underlying order of the natural person with
respect to price (except in the case of a market order
that is changed to a marketable limit order) or side
of market and that does not originate from a trading
algorithm or any other computerized methodology,
will continue to apply.
8 See IEX Rule 1.160(p).
9 See IEX Rules 11.190(b)(14) and 11.232(a)(3).
10 The term ‘‘Midpoint Price’’ means the midpoint
of the NBBO. See IEX Rule 1.160(t). The term
‘‘NBBO’’ means the national best bid or offer, as set
forth in Rule 600(b) of Regulation NMS under the
Act, determined as set forth in IEX Rule 11.410(b).
11 See IEX Rule 1.160(nn).
12 See IEX Rule 1.160(u).
13 See IEX Rule 1.160(u).
14 See IEX Rule 11.190(b)(9).
15 See IEX Rule 11.190(b)(10).
16 See IEX Rule 11.190(b)(11).
7 The
PO 00000
Frm 00044
Fmt 4703
Sfmt 4703
the ability of non-professional retail
investors to obtain meaningful price
improvement by incentivizing market
participants to compete to provide such
price improvement.
Background
In 2019 the Commission approved
IEX’s Retail Price Improvement Program
(‘‘Retail Program’’),17 which is designed
to provide retail investors with
meaningful price improvement
opportunities through trading at the
Midpoint Price or better.18 As currently
structured, Members 19 that qualify as
Retail Member Organizations
(‘‘RMOs’’) 20 are eligible to submit Retail
orders to the Exchange. Any Member is
able to provide price improvement to
Retail orders through orders priced to
execute at the Midpoint Price or better,
including RLP orders that are only
eligible to execute against a Retail order
at the Midpoint Price and execute in
price-time priority after other orders
resting on the Order Book priced to
trade at the Midpoint Price.
As IEX noted in its Retail Program
rule filing,21 the Commission has
consistently emphasized the importance
of continued broad, long-term retail
participation in our capital markets. In
its Strategic Plan for fiscal years 2018–
2022, the Commission highlighted its
vision to ‘‘promote capital markets that
inspire public confidence and provide a
diverse array of financial opportunities
to retail and institutional investors,
entrepreneurs, public companies, and
other market participants’’, with its first
goal to focus on the long-term interests
of Main Street (i.e., retail) investors.22
Against this backdrop, the Retail
Program is designed to provide retail
17 See Securities Exchange Act Release No. 86619
(August 9, 2019), 84 FR 41769 (August 15, 2019)
(SR–IEX–2019–05) (SEC order approving IEX’s
Retail Program).
18 On March 1, 2021, IEX filed an immediately
effective rule change proposal to provide that, in
addition to executing at the Midpoint Price, a Retail
order can execute against a displayed unprotected
odd lot order that is resting on the Order Book at
a price more aggressive than the Midpoint Price
(i.e., above the Midpoint Price in the case of an odd
lot buy order and below the Midpoint Price in the
case of an odd lot sell order). Executing against
such an odd lot order thus provides more price
improvement to the Retail order than executing at
the Midpoint Price. See Securities Exchange Act
Release No. 91324 (March 15, 2021), 86 FR 15015
(March 19, 2021) (SR–IEX–2021–03).
19 See IEX Rule 1.160(s).
20 See IEX Rule 11.232(a)(1).
21 See supra note 17. See also Securities Exchange
Act Release No. 86241 (June 28, 2019), 84 FR 32238
(July 5, 2019) (SR–IEX–2019–05) (IEX rule filing
proposing Retail Program).
22 See U.S. Securities and Exchange Commission,
Strategic Plan, Fiscal Years 2018–2022, available at
https://www.sec.gov/files/SEC_Strategic_Plan_
FY18-FY22_FINAL_0.pdf (‘‘Commission Strategic
Plan’’).
E:\FR\FM\15APN1.SGM
15APN1
]]>Agencies
[Federal Register Volume 86, Number 71 (Thursday, April 15, 2021)]
[Notices]
[Pages 19909-19912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07677]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91524; File No. SR-Phlx-2021-07]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a
Proposed Rule Change, as Modified by Amendment No. 1, To Permit the
Listing and Trading of Options Based on 1/100th the Value of the
Nasdaq-100 Index
April 9, 2021.
I. Introduction
On February 10, 2021, Nasdaq PHLX LLC (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to permit the
listing and trading of index options on based on 1/100th the value of
the Nasdaq-100 Index. The proposed rule change was published for
comment in the Federal Register on February 26, 2021.\3\ On March 17,
2021, the Exchange filed Amendment No. 1 to the proposed
[[Page 19910]]
rule change.\4\ The Commission is approving the proposed rule change,
as modified by Amendment No. 1, subject to a pilot period set to expire
on November 4, 2021.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 91178 (February 22,
2021), 86 FR 11807.
\4\ In Amendment No. 1, the Exchange amended the proposal to:
(1) Extend the duration of the proposed pilot period for XND options
from May 4, 2021 to November 4, 2021; and (2) specify that the
Exchange intends to begin implementation of the proposed rule change
prior to May 1, 2021. Because Amendment No. 1 to the proposed rule
change is technical in nature and does not materially alter the
substance of the proposed rule change or raise any novel regulatory
issues, it is not subject to notice and comment. Amendment No. 1,
which amended and replaced the original proposal in its entirety, is
available on the Commission's website at: https://www.sec.gov/comments/sr-phlx-2021-07/srphlx202107-8513064-230103.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
The Exchange is proposing to amend its rules to permit the listing
and trading of index options on the Nasdaq 100 Micro Index (``XND'') on
a pilot basis. The Exchange states that the XND options contract will
be the same in all respects as the current Nasdaq-100 Index (``NDX'')
options contract listed on the Exchange,\5\ except that it will be
based on 1/100th of the value of the Nasdaq-100 Index, and will be
P.M.-settled with an exercise settlement value based on the closing
index value of the Nasdaq-100 Index on the day of expiration.\6\ In
particular, XND options will be subject to the same rules that
presently govern the trading of index options based on the Nasdaq-100
Index, including sales practice rules, margin requirements, trading
rules, and position and exercise limits. Like NDX options, XND options
will be European-style and cash-settled, and will have a contract
multiplier of 100. XND options will have a minimum trading increment of
$0.01 for all series.\7\ Strike price intervals will be set at $2.50 or
greater, subject to conditions described in Options 4A, Section
12(a)(2).\8\ Consistent with the Exchange's existing rules for index
options, the Exchange will allow up to six expiration months at any one
time that may expire at three-month intervals or in consecutive months,
as well as LEAPS.\9\ The Exchange states that, pursuant to Phlx Options
4A, Section 12(b)(5), XND options may be listed and traded in
accordance with the Nonstandard Expirations Pilot Program, which
permits the Exchange to list Weekly Expirations \10\ and End of Month
(``EOM'') Expirations \11\ on any broad-based index \12\ eligible for
standard options trading. XND options will have European-style exercise
and will not be subject to position limits, although the Exchange
proposes to amend Options 4A, Section 6 to describe how positions in
micro index value options would be aggregated with full value and
reduced value options.\13\
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\5\ See Options 4A, Section 12(e)(II).
\6\ The Exchange notes that similar features are available with
other index options contracts listed or approved for trading on the
Exchange and other options exchanges, including the Exchange's
affiliate, Nasdaq ISE, LLC (``ISE''), which lists options contracts
based on 1/5th the value of the Nasdaq-100 (``NQX''). See Amendment
No. 1, supra note 4, at 5.
\7\ More specifically, the Exchange proposes that as long as QQQ
options participate in the Penny Interval Program, XND options shall
have a minimum increment of $.01. See proposed Supplementary
Material .03 to Options 3, Section 3.
\8\ Generally, pursuant to Options 4A, Section 12(a)(2), except
as provided in Supplementary Material .04 to Options 4A, Section 12,
index options listed on the Exchange are subject to strike price
intervals of no less than $5, provided that certain classes of index
options (including Reduced Value NDX options) have strike price
intervals of no less than $2.50. The Exchange proposes to amend
Options 4A, Section 12(a)(2) to add XND options to the list of
classes where strike price intervals of no less than $2.50 are
generally permitted, if the strike price is less than $200. The
Exchange will not list long term index options series (``LEAPS'') on
XND options at intervals less than $5. If the Exchange determines to
add XND options to the Short Term Option Series (``STOS'') or
Quarterly Option Series programs, such options will be listed with
the expirations and strike prices described in Supplementary
Material .02 to Options 4A, Section 12. The Exchange notes that it
expects to add XND options to the STOS program. See Amendment No. 1,
supra note 4 at 11, n.18.
\9\ See id. at 11 & n.16.
\10\ Weekly Expirations may expire on any Monday, Wednesday, or
Friday (other than the third Friday-of-the-month or days that
coincide with an EOM expiration). See Options 4A, Section 12(b)(5).
\11\ EOMs expire on last trading day of the month. See Options
4A, Section 12(b)(5).
\12\ The Exchange states XND is a broad-based index. See
Amendment No. 1, supra note 4, at 4, n.6. To the extent the Exchange
lists XND options pursuant to the Nonstandard Expirations Pilot
Program, the Exchange would be required to provide the same
information with respect to XND that it does for others options
listed pursuant to the Nonstandard Expirations Pilot Program in the
reports and data it provides to the Commission.
\13\ For a more detailed description of the proposed XND
contract, see Amendment No. 1, supra note 4. The Exchange also
proposes to add new Options 4A, Section 12(a)(5) titled ``European-
Style Exercise'' to clarify in the Exchange's rules which Exchange-
listed index options will trade European-Style Exercise, and to add
rule text within Options 4A, Section 12(b)(2), which describes
LEAPS, to specifically allow for the listing of long term options
series on XND.
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As proposed, XND options would be subject to a pilot for a period
that would end on November 4, 2021 (``Pilot Program''). If the Exchange
were to propose an extension of the Pilot Program or should the
Exchange propose to make the Pilot Program permanent, then the Exchange
would submit a filing proposing such amendments to the Pilot 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 an XND options series that expires beyond the conclusion of the
pilot period could be established during the 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
Commission at least two months prior to the expiration date of the
Pilot Program (the ``annual report''). The annual report would contain
an analysis of volume, open interest, and trading patterns. The
analysis would examine trading in the proposed option product as well
as trading in the securities that comprise the Nasdaq-100 Index. In
addition, for series that exceed certain minimum open interest
parameters, the annual report would provide analysis of index price
volatility and share trading activity. In addition to the annual
report, the Exchange would provide the Commission with periodic interim
reports while the Pilot Program is in effect that would contain some,
but not all, of the information contained in the annual report. The
annual report would be provided to the Commission on a confidential
basis. The annual report would contain the following volume and open
interest data:
(1) Monthly volume aggregated for all trades;
(2) monthly volume aggregated by expiration date;
(3) monthly volume for each individual series;
(4) month-end open interest aggregated for all series;
(5) month-end open interest for all series aggregated by expiration
date; and
(6) month-end open interest for each individual series.
In addition to the annual report, the Exchange would provide the
Commission with interim reports of the information listed in items (1)
through (6) above periodically as required by the Commission while the
Pilot Program is in effect. These interim reports would also be
provided on a confidential basis.
Finally, the annual report would contain the following analysis of
trading patterns in third Friday of the month (``Expiration Friday''),
P.M.-settled XND option series in the Pilot Program: (1) A time series
analysis of open interest; and (2) an analysis of the distribution of
trade sizes. Also, for series that exceed certain minimum parameters,
the
[[Page 19911]]
annual report would contain the following analysis related to index
price changes and underlying share trading volume at the close on
Expiration Fridays: A comparison of index price changes at the close of
trading on a given Expiration Friday with comparable price changes from
a control sample. The data would include a calculation of percentage
price changes for various time intervals and compare that information
to the respective control sample. Raw percentage price change data as
well as percentage price change data normalized for prevailing market
volatility, as measured by an appropriate index as agreed by the
Commission and the Exchange, would be provided. The Exchange would
provide a calculation of share volume for a sample set of the component
securities representing an upper limit on share trading that could be
attributable to expiring in-the-money series. The data would include a
comparison of the calculated share volume for securities in the sample
set to the average daily trading volumes of those securities over a
sample period. The minimum open interest parameters, control sample,
time intervals, method for randomly selecting the component securities,
and sample periods would be determined by the Exchange and the
Commission.\14\
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\14\ See id. The proposed Pilot Program for XND options is
similar to the pilot program approved for the listing and trading of
P.M.-settled options on the full value of the Nasdaq-100 (``NDXPM'')
on the Exchange and NQX options on ISE. See Securities Exchange Act
Release Nos. 81293 (August 2, 2017), 82 FR 37138 (August 8,
2017)(``NDXPM Order'') and 82911 (March 20, 2018), 83 FR 12966
(March 26, 2018) (``NQX Order'').
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III. Discussion and Commission Findings
After careful consideration of the proposal, the Commission finds
that the proposed rule change, as modified by Amendment No. 1, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange,\15\ and, in particular, the requirements of Section 6 of the
Act.\16\ Specifically, the Commission finds that the proposed rule
change, as Modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act,\17\ which requires that an exchange have rules
designed to remove impediments to and perfect the mechanism of a free
and open market and to protect investors and the public interest, to
allow the Exchange to conduct a limited, and carefully monitored, pilot
as proposed.
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\15\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78f.
\17\ 15 U.S.C. 78f(b)(5).
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The Commission has previously approved the listing and trading of
options based on a reduced value of the Nasdaq-100 Index,\18\ including
P.M.-settled reduced value options,\19\ and, as stated in the
Commission's order approving the listing and trading of NDXPM on the
Exchange on a pilot program basis, the Commission has had concerns
about the potential adverse effects and impact of P.M. settlement upon
market volatility and the operation of fair and orderly markets on the
underlying cash market at or near the close of trading, including for
cash-settled derivatives contracts based on a broad-based index.\20\
The potential impact today remains unclear, given the significant
changes in the closing procedures of the primary markets in recent
decades. The Commission is mindful of the historical experience with
the impact of P.M. settlement of cash-settled index derivatives on the
underlying cash markets, but recognizes that these risks may be
mitigated today by the enhanced closing procedures that are now in use
at the primary equity markets.
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\18\ See, e.g., Securities Exchange Act Release Nos. 57654
(April 11, 2008), 73 FR 21003 (April 17, 2008) and 51121 (February
1, 2005), 70 FR 6476 (February 7, 2005).
\19\ See NQX Order, supra note 14.
\20\ See NDXPM Order, supra note 14, at 37140. See also
Securities Exchange Act Release Nos. 64599 (June 3, 2011), 76 FR
33798, 33801-02 (June 9, 2011) (order instituting proceedings to
determine whether to approve or disapprove a proposed rule change to
allow the listing and trading of SPXPM options); 65256 (September 2,
2011), 76 FR 55969, 55970-76 (September 9, 2011) (order approving
proposed rule change to establish a pilot program to list and trade
SPXPM options); and 68888 (February 8, 2013), 78 FR 10668, 10669
(February 14, 2013) (order approving the listing and trading of
SPXPM on CBOE).
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For the reasons described below, the Commission believes that the
Exchange's proposed XND Pilot Program is designed to mitigate concerns
regarding P.M. settlement and will provide additional trading
opportunities for investors while providing the Commission with data to
monitor the effects of XND options and the impact of P.M. settlement on
the markets. To assist the Commission in assessing any potential impact
of a P.M.-settled XND option on the options markets as well as the
underlying cash equities markets, the Exchange will be required to
submit data to the Commission in connection with the Pilot Program. The
Commission believes that the Exchange's proposed Pilot Program,
together with the data and analysis that the Exchange will provide to
the Commission, will allow the Exchange and the Commission to monitor
for and assess any potential for adverse market effects of allowing
P.M. settlement for XND options, including on the underlying component
stocks. In particular, the data collected from the Exchange's XND Pilot
Program will help inform the Commission's consideration of whether the
Pilot Program should be modified, discontinued, extended, or
permanently approved. Furthermore, the Exchange's ongoing analysis of
the Pilot Program should help it monitor any potential risks from large
P.M.-settled positions and take appropriate action on a timely basis if
warranted.
The Exchange represents that it has adequate surveillance
procedures to monitor trading in these options thereby helping to
ensure the maintenance of a fair and orderly market, and has
represented that it has sufficient capacity to handle additional
traffic associated with this new listing.\21\
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\21\ See Amendment No. 1, supra note 4, at 17. In addition, the
Commission notes that the Exchange would have access to information
through its membership in the Intermarket Surveillance Group with
respect to the trading of the securities underlying the XND, as well
as tools such as large options positions reports to assist its
surveillance of XND options.
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For the reasons discussed above, the Commission finds that the
Exchange's proposal is consistent with the Act, including Section
6(b)(5) thereof, in that it is designed to remove impediments to and
perfect the mechanism of a free and open market, and, in general, to
protect investors and the public interest. In light of the enhanced
closing procedures at the underlying markets and the potential benefits
to investors discussed by the Exchange in its filing,\22\ the
Commission finds that it is appropriate and consistent with the Act to
approve the Exchange's proposal on a pilot basis. The collection of
data during the Pilot Program and the Exchange's active monitoring of
any effects of XND options on the markets will help the Exchange and
the Commission assess any impact of P.M. settlement in today's market.
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\22\ See Amendment No. 1, supra note 4.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-Phlx-2021-07), as modified
by Amendment No. 1, be, and hereby is, approved, subject to a pilot
period set to expire on November 4, 2021.
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\23\ 15 U.S.C. 78s(b)(2).
[[Page 19912]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-07677 Filed 4-14-21; 8:45 am]
BILLING CODE 8011-01-P
