Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To List and Trade Options on a Nasdaq-100 Volatility Index, 25918-25922 [2021-09889]
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Federal Register / Vol. 86, No. 89 / Tuesday, May 11, 2021 / Notices
investors with additional means of
managing their risk exposures and
carrying out their investment objectives.
Furthermore, the Exchange believes that
it has not experienced any adverse
market effects with respect to the pilot
program, including any adverse market
volatility effects that might occur as a
result of large FLEX exercises in FLEX
Option series that expire near Non-Flex
expirations and use a p.m. settlement.
Cboe Options believes that the
restriction actually places the Exchange
at a competitive disadvantage to its OTC
counterparts in the market for
customized options, and unnecessarily
limits market participants’ ability to
trade in an exchange environment that
offers the added benefits of
transparency, price discovery, liquidity,
and financial stability. Therefore, the
Exchange does not believe that the
proposed rule change will impose any
burden on competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
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) of the Act 21 and Rule 19b–
4(f)(6) thereunder.22
A proposed rule change filed under
Rule 19b–4(f)(6) 23 normally does not
become operative for 30 days after the
date of filing. However, pursuant to
Rule 19b–4(f)(6)(iii),24 the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
the proposal may become operative
21 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
23 17 CFR 240.19b–4(f)(6).
24 17 CFR 240.19b–4(f)(6)(iii).
22 17
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immediately upon filing. The Exchange
states that such waiver will allow the
Exchange to extend the pilot program
and maintain the status quo, thereby
reducing market disruption.
The Commission believes that
waiving the 30-day operative delay is
consistent with the protection of
investors and the public interest, as it
will allow the pilot program to continue
uninterrupted, thereby avoiding
investor confusion that could result
from a temporary interruption in the
pilot program. For this reason, the
Commission designates the proposed
rule change to be operative upon
filing.25
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2021–031, and
should be submitted on or before June
1, 2021.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
J. Matthew DeLesDernier,
Assistant Secretary.
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–
CBOE–2021–031 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
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–CBOE–2021–031. 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
25 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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[FR Doc. 2021–09890 Filed 5–10–21; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–91781; File No. SR–Phlx–
2020–41]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing of
Amendment Nos. 1 and 2 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, To List and
Trade Options on a Nasdaq-100
Volatility Index
May 5, 2021.
I. Introduction
On August 24, 2020, Nasdaq PHLX
LLC (‘‘Exchange’’ or ‘‘Phlx’’) 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 list and trade options on a
Nasdaq-100 Volatility Index (‘‘Volatility
26 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. 86, No. 89 / Tuesday, May 11, 2021 / Notices
Index’’ or ‘‘VOLQ’’). The proposed rule
change was published for comment in
the Federal Register on September 8,
2020.3 On October 20, 2020, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On December 4,
2020, the Commission instituted
proceedings under Section 19(b)(2)(B) of
the Act 6 to determine whether to
approve or disapprove the proposed
rule change.7 On March 4, 2021, the
Commission designated a longer period
for Commission action on the proposed
rule change.8 On March 11, 2021, the
Exchange filed Amendment No. 1 to the
proposed rule change, which replaced
and superseded the proposed rule
change.9 On April 19, 2021, the
Exchange filed partial Amendment No.
2 to the proposed rule change.10 The
3 See Securities Exchange Act Release No. 89725
(September 1, 2020), 85 FR 55544 (‘‘Notice’’).
Comments on the proposed rule change can be
found on the Commission’s website at: https://
www.sec.gov/comments/sr-phlx-2020-41/
srphlx202041.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 90226,
85 FR 67781 (October 26, 2020). The Commission
designated December 7, 2020 as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 90573,
85 FR 79552 (December 10, 2020).
8 See Securities Exchange Act Release No. 91254,
86 FR 13772 (March 10, 2021) (designating May 6,
2021 as the date by which the Commission shall
approve or disapprove the proposal).
9 In Amendment No. 1, the Exchange: (i) Sets the
end of the trading session for options on the
Volatility index at 4:00 p.m. ET instead of 4:15 p.m.
ET; (ii) expands the venues of the thirty-two
underlying Nasdaq-100 Index component options
used to calculate the Closing Volume Weighted
Average Price (i.e., settlement value for the
Volatility Index options), which will be determined
by reference to prices and sizes of executed orders
or quotes on Phlx to also include Nasdaq ISE, LLC
(‘‘ISE’’) and Nasdaq GEMX, LLC (‘‘GEMX’’); (iii)
clarifies that The Nasdaq Stock Market LLC shall be
the reporting authority for the VOLQ Index; (iv)
states that executed orders shall include simple
orders and complex orders, and that individual leg
executions of a complex order will only be included
if the executed price of the leg is at or within the
national best bid or offer (‘‘NBBO’’); (v) commits to
providing an annual report to the Commission for
five years containing certain settlement data; (vi)
states that Phlx will surveil for open interest in
VOLQ in addition to Nasdaq-100 trading volume
prior to settlement; and (vii) makes other clarifying
and conforming changes throughout the filing.
Amendment No. 1 is available at: https://
www.sec.gov/comments/sr-phlx-2020-41/
srphlx202041-8486517-229965.pdf.
10 In Amendment No. 2, the Exchange removes
the word ‘‘non-public’’ from the description of the
annual report it will provide to the Commission.
Amendment No. 2 is available at: https://
www.sec.gov/comments/sr-phlx-2020-41/
srphlx202041-8687377-235663.pdf.
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Commission is publishing this notice to
solicit comments on Amendment Nos. 1
and 2 from interested persons, and is
approving the proposed rule change, as
modified by Amendment Nos. 1 and 2,
on an accelerated basis.
II. Description of the Proposed Rule
Change, as Modified by Amendment
Nos. 1 and 2 11
The Exchange proposes to list and
trade options on VOLQ, a new index
that measures changes in 30-day
implied volatility of the Nasdaq-100
Index (‘‘Nasdaq-100 Index’’ or ‘‘NDX’’).
As proposed, options on VOLQ will be
cash-settled and will have Europeanstyle exercise provisions. The Exchange
states that the Volatility Index will
measure ‘‘at-the-money’’ volatility by
using published real-time bid/ask
quotes of NDX options and will be
disseminated in annualized percentage
points.
The Exchange proposes to list up to
six weekly expirations and up to 12
standard (monthly) expirations in
Volatility Index options. The six weekly
expirations will be for the nearest
weekly expirations from the actual
listing date, and the weekly expirations
will not expire in the same week in
which standard (monthly) Volatility
Index options expire. Standard
(monthly) expirations in the Volatility
Index options will not be counted as
part of the maximum six weekly
expirations permitted for Volatility
Index options. In addition, the Exchange
proposes that long term option series
having up to sixty months to expiration
may be listed and traded.
Volatility Index Design and
Composition
The Exchange states that the Volatility
Index reflects changes in 30-day implied
volatility, which measures the
magnitude of changes of the underlying
broad-based securities index, NDX.
According to the Exchange, the
Volatility Index measures the
expectation for market volatility over
the next thirty calendar days as
expressed by options on NDX. The
Exchange explains that the Volatility
Index uses the bid and offer prices of
certain listed options on NDX to obtain
the prices of synthetic precisely at-themoney options, which are then used to
calculate 30-day closed-form implied
volatility. Finally, the 30-day closedform implied volatility is multiplied by
100 to calculate the Volatility Index
level. The Volatility Index is quoted in
annualized percentage points.
11 Additional information regarding the proposal
can be found in Amendment No. 1, supra note 9.
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25919
The Exchange believes that the
proposed product does not have single
or aggregated component concentration
risk. The Exchange states that the
methodology caps each single
component as well as the top five
weighted components. The Exchange
further states that no component
security of the Volatility Index
comprises more than 12.50% of the
index’s weighting and that the five
highest weighted component securities
of the Volatility Index in the aggregate
do not comprise more than 43.75% of
the index’s weighting.
Index Calculation and Maintenance
The Exchange states that the level of
the Volatility Index will reflect the
current 30-day implied volatility of
NDX and will be updated on a real-time
basis on each trading day beginning at
9:30 a.m. and ending at 4:00 p.m. ET. If
the current published value of a
component is not available, the last
published value will be used in the
calculation. Values of the Volatility
Index will be disseminated via the
Nasdaq GIDS market data system every
fifteen seconds during the Exchange’s
regular trading hours to market
information vendors such as Bloomberg
and Thomson Reuters. In the event the
Volatility Index ceases to be maintained
or calculated the Exchange will not list
any additional series for trading and
will limit all transactions in such
options to closing transactions only for
the purpose of maintaining a fair and
orderly market and protecting investors.
Exercise and Settlement Value
The exercise settlement value
calculation used for Volatility Index
option settlement will be calculated on
the Volatility Index Options expiration
date, the specific date (usually a
Wednesday) identified in the option
symbol for the series. If that Wednesday
or the Friday that is thirty days
following that Wednesday is an
Exchange holiday, the exercise
settlement value will be calculated on
the business day immediately preceding
that Wednesday. The last trading day for
a Volatility Index option will be the
business day immediately preceding the
expiration date. When the last trading
day is moved because of an Exchange
holiday, the last trading day for an
expiring Volatility Index option contract
will be the day immediately preceding
the last regularly scheduled business
day.
Monthly options on the Volatility
Index will expire on the Wednesday
that is thirty days prior to the third
Friday of the following the expiring
month. Trading in expiring options on
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the Volatility Index will normally cease
at 4:00 p.m. ET on the Tuesday
preceding an expiration Wednesday.
Final Settlement
The Exchange states that the final
settlement price (Ticker Symbol: VOLS)
will be calculated as described below on
Wednesday commencing at 9:32:000
a.m. ET on the expiration day, and
continuing each second for the next 300
seconds (‘‘Closing Settlement Period’’).
The exercise settlement amount will be
equal to the difference between the final
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.
The Volatility Index’s component
NDX options are listed on Phlx as well
as on ISE and GEMX. The settlement
value for the Volatility Index options
will be the Closing Volume Weighted
Average Price, to be determined by
reference to the prices and sizes of
executed orders or quotes in the thirtytwo underlying NDX component
options on the Phlx, ISE, and GEMX
markets calculated near the opening of
trading on the expiration date. The
Exchange will observe the number of
contracts resulting from orders and
quotes of the then-current NDX
component options executed on Phlx,
ISE, and GEMX at each price during
individual one-second intervals of the
Closing Settlement Period on the
expiration day.12 If no transactions
occur on Phlx, ISE, or GEMX in an NDX
component option during any onesecond observation period, the NBBO
midpoint of each of the NDX component
options for which a transaction has not
occurred at the end of the one-second
observation period will be considered
the One Second VWAP for that
observation period for purposes of the
settlement methodology. The NBBO
midpoint will be the midpoint of the
best bid and best offer from Phlx, ISE,
and GEMX. Each One Second VWAP for
each component option is then used to
calculate the Volatility Index, resulting
in the calculation of 300 sequential
Volatility Index values. Finally, the
Exchange states that all 300 Volatility
Index values will be arithmetically
averaged (i.e., the sum of 300 Volatility
Index calculations is divided by 300)
and the resulting figure is rounded to
the nearest .01 to arrive at the settlement
value.
12 The Exchange calculates a volume weighted
average price for each one-second observation
period (a ‘‘One Second VWAP’’) for each
component option.
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Contract Specifications
The proposed options on the
Volatility Index are European-style and
cash-settled. The Exchange states that
the trading hours for Volatility Index
options will be 9:30 a.m. to 4:00 p.m.
ET. The Exchange proposes to apply
margin requirements for the purchase
and sale of options on the Volatility
Index that are identical to those applied
for its other broad-based index options.
The Exchange states that trading of
options on the Volatility Index will be
subject to the trading halt procedures
applicable to other index options traded
on the Exchange. Options on the
Volatility Index will be quoted and
traded in U.S. dollars. Accordingly, the
Exchange believes that all Exchange and
The Options Clearing Corporation
members will be able to accommodate
trading, clearance, and settlement of the
Volatility Index without alteration. All
options on the Volatility Index will have
a minimum increment of $0.05 for
options trading below $3.00 and $0.10
for all other series.
The Exchange proposes to set the
minimum strike price interval for
options on the Volatility Index at $0.50
or greater where the strike price is less
than $75, $1 or greater where the strike
price is $200 or less, and $5 or greater
where the strike price is more than
$200. The Exchange proposes that there
shall be no position or exercise limits
for options on the Volatility Index and
that trading of options on the Volatility
Index will be subject to the same rules
that presently govern the trading of
Exchange index options, including sales
practice rules, margin requirements, and
trading rules.
The Exchange believes that it is
unlikely that the Volatility Index
settlement value could be manipulated
because the likelihood of gaming the
components over a 300-second period is
extremely low. The Exchange states that
because the 32 component option inputs
are determined each second (meaning
that Volatility Index components could
change 300 times during the settlement
period), market participants would have
to predict market moves over the full
settlement period in order to manipulate
the settlement value. Additionally, the
Exchange believes that traders are
subject to highly competitive market
forces of deep and established market
liquidity. For example, the Exchange
notes that during each second of the
final settlement observation period on
January 16, 2019 and February 13, 2019,
the average notional value of each bid
of the thirty-two components was $21.1
million; the average notional value of
each offer was $13.5 million. Finally,
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the Exchange states that since the
Volatility Index assesses each second of
all listed NDX options, this is a
continuous assessment of competitive
price action and voluminous trading
activity for all Nasdaq-100 Index stock
components. In support, the Exchange
notes that during the final settlement
observation period (five-minute period)
on January 16, 2019 and February 13,
2019, the average summation of traded
volume for all Nasdaq-100 Index
component shares was 18.8 million
shares. The Exchange states that the
average total value of all Nasdaq-100
Index shares traded during the final
settlement observation period was $1.93
billion and the corresponding market
capitalization for all Nasdaq-100 Index
components during the final settlement
period was $7.8 trillion.
The Exchange represents that it has an
adequate surveillance program in place
for options traded on the Volatility
Index and intends to apply those same
program procedures that it applies to
the Exchange’s other options products.
Additionally, the Exchange states that it
is a member of the Intermarket
Surveillance Group, through which it
can coordinate surveillance and
investigative information sharing in the
stock and options markets with all of
the U.S. registered stock and options
markets. Phlx believes that its
surveillance procedures currently in
place, coupled with additional
surveillance measures, will allow it to
adequately surveil for any potential
manipulation in the trading of Volatility
Index options. The Exchange states it
will monitor the integrity of the
Volatility Index by analyzing trades,
quotations, and orders that affect any of
the 300 calculated reference prices for
any of the NDX option series used for
the final settlement calculation for
potential manipulation. In particular,
the Exchange states it will: (i) Monitor
all NDX NBBO quotes and trades
(including but not limited to NDX
quotes and trades on the Exchange)
during the opening for all options series
that are used as part of the final
settlement; (ii) surveil for open interest
manipulation by monitoring VOLQ and
NDX trading volume prior to settlement;
(iii) monitor trading on Phlx, ISE, and
GEMX after the Closing Settlement
Period for possible wash trading, prearranged, or related artificial activity;
and (iv) compare quotes for settlement
against quotes for non-settlement in the
32 NDX option series used for
settlement between the opening and a
period of time thereafter, with a focus
on identifying deviations of the
midpoint, the bid-ask spread, and other
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market elements compared to the
Nasdaq-100 Index value. The Exchange
also represents that it has the necessary
system capacity to support additional
quotations and messages that will result
from the listing and trading of options
on the Volatility Index.
The Exchange committed to providing
the Commission an annual report each
year for 5 years on the anniversary of
the first day of trading of VOLQ options.
The annual report shall consist of
twelve monthly data files, one for each
month, with settlement information
from the prior year which contains: (1)
One-second NBBO (bid price, bid size,
offer price, offer size, exchange code for
bid and offer, time stamp and timestamp
reference) and Options Price Reporting
Authority trade data (trade price,
volume, exchange code, trade indicator,
exchange code) for the VOLS NDX
component options from 9:30:00 a.m.
ET to 9:45:00 a.m. ET; (2) all VOLS onesecond index values (over the final
settlement window between 9:32:01
a.m. ET and 9:37:00 a.m. ET) used in
deriving the final settlement value for
Nasdaq-100 Volatility Index futures
contracts; and (3) expiring VOLQ
options open interest.
III. Discussion and Commission
Findings
After careful review of the proposed
rule change, as modified by Amendment
Nos. 1 and 2, as well as comment
received, the Commission finds that the
proposed rule change, as modified by
Amendment Nos. 1 and 2, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange.13 In
particular, the Commission finds that
the proposed rule change, as modified
by Amendment Nos. 1 and 2, is
consistent with Section 6(b)(5) of the
Act,14 which requires, among other
things, that the Exchange’s rules be
designed to prevent fraudulent and
manipulative acts and practices, 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.
In support of its proposal, the
Exchange states that the Volatility Index
final settlement has exceedingly high
hurdles for potential manipulation.
First, the Exchange believes that market
participants cannot predict which
components will be included in the
13 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).
14 15 U.S.C. 78f(b)(5).
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final settlement. Second, the Exchange
believes that traders are subject to
competitive market forces of deep and
established market liquidity. In
addition, the Exchange amended its
proposal to incorporate all trades in the
component options into the settlement
calculation, rather than only trades
occurring on the Exchange, and to
specify that legs of complex order
transactions would only be included in
the calculation if they were at or within
the NBBO. The Exchange also
committed to provide five years of
monthly settlement data on an annual
basis.15
The Exchange also states that the
proposal will facilitate the listing and
trading of an index option product with
a novel structure, which would enhance
competition among market participants.
A commenter, who states it is the
provider of the VOLQ methodology, also
expressed support for the proposal. The
commenter states that VOLQ is a
response to requests from market
participants and that competition and
innovation generated by VOLQ are in
the public interest and will benefit
investors.16
The Commission believes that the
Exchange’s proposal, including the
settlement methodology, as amended, in
conjunction with the Exchange’s
existing and additional proposed
surveillance procedures, will help to
ensure that the settlement value is not
readily susceptible to manipulation. The
amended settlement methodology
incorporates additional trade
information by including transactions
on all markets trading the component
NDX options while ensuring that
individual leg executions of complex
orders that may have traded through the
NBBO are not included in the
settlement calculation. The Commission
believes this will contribute to a more
robust settlement methodology. The
Volatility Index and the settlement
value are calculated based on quotes,
orders, or trades in the component NDX
options and the settlement value
calculation relies on 32 unique inputs
each second over 300 seconds. The 32
component NDX options that are the
15 In Amendment No. 2, the Exchange removed
the word ‘‘non-public’’ from its description of the
annual report it would provide to the Commission.
See Amendment No. 2, supra note 10. The
provision of annual settlement data for five years
will assist the Commission in monitoring settlement
inputs and values and assessing how the market for
VOLQ and the underlying NDX component options
may change over time.
16 See letter dated September 16, 2020 from Scott
Nations, President, Nations Indexes, to Vanessa
Countryman, Secretary, Commission, available at:
https://www.sec.gov/comments/sr-phlx-2020-41/
srphlx202041-7783670-223493.pdf.
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25921
basis of such inputs may change every
second over the settlement window
depending on the value of the Nasdaq100 Index. The Exchange states that it
will monitor for any potential
manipulation of the Volatility Index
settlement value in the normal course of
its surveillance. Additionally, the
Exchange has proposed enhanced
surveillance procedures to further
analyze trades, quotations, and orders
that affect any of the 300 calculated
reference prices for any NDX option
series used for the final settlement
calculation. The Commission believes
the Exchange’s existing and additional
surveillance procedures will allow the
Exchange to monitor for anomalous
trades, quotations, and orders that may
be indicative of manipulative trading or
quoting activity. The Commission finds
that the Exchange’s proposal regarding
surveillance of options on the Volatility
Index and the component option series
will allow it to adequately surveil for
any potential manipulation in the
trading of VOLQ. Therefore, the
Commission finds the settlement design,
as amended, when combined with the
Exchange’s existing and proposed
enhanced surveillance procedures, will
prevent fraudulent and manipulative
acts and practices and protect investors
and the public interest.
The Commission believes that the
Exchange’s proposal to impose no
position limits on the Volatility Index
options is appropriate and consistent
with the Act. As stated above, the
Volatility Index will settle using
published volume and/or quotes from
NDX options. Given that there are
currently no position limits for NDX
options,17 the Commission believes it is
appropriate for there to be no position
or exercise limits 18 for options on the
Volatility Index since the potential
manipulation and potential market
disruption concerns that position limits
are designed to address are mitigated in
the case of this product. According to
the Exchange, the market capitalization
of the NDX was approximately $11.42
trillion and contained approximately
74.7 billion component shares as of June
30, 2020. The Commission believes that
the enormous market capitalization of
NDX and the deep, liquid market for the
underlying component securities
significantly reduce concerns regarding
market manipulation or disruption in
the underlying market. Similar
17 See Phlx Options 4A, Section 6, ‘‘Position
Limits,’’ section (a)(ii).
18 Phlx Options 4A, Section 10, ‘‘Exercise
Limits,’’ provides ‘‘In determining compliance with
Options 9, Section 15, exercise limits for index
option contracts shall be equivalent to the position
limits described in Options 4A, Section 6.’’
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25922
Federal Register / Vol. 86, No. 89 / Tuesday, May 11, 2021 / Notices
reasoning would apply to options on the
Volatility Index since the value of
options on the Volatility Index is
derived from the volatility of NDX, as
implied by its options. Moreover, the
Commission believes that having no
position limits for the proposed
Volatility Index options may benefit
investors by bringing additional depth
and liquidity to these Volatility Index
options without raising significant
concerns about potential manipulation
or potential market disruption.
The Commission believes that the
proposed strike price intervals and
minimum trading increments for
options on the Volatility Index are
appropriate and consistent with the Act.
These aspects of the proposal will
provide investors with added flexibility
in the trading of these options and will
further the public interest by allowing
investors to establish positions that are
better tailored to meet their investment
objectives. In addition, the Exchange
states it has the necessary system
capacity to support additional
quotations and messages that will result
from the listing and trading of options
on the Volatility Index.
As a national securities exchange, the
Exchange is required, under Section
6(b)(1) of the Act,19 to enforce
compliance by its members and persons
associated with its members with the
provisions of the Act, Commission rules
and regulations thereunder, and its own
rules. In this regard, the Exchange states
that trading of options on the Volatility
Index will be subject to the same rules
that currently govern the trading of
other index options on the Exchange.
The Commission believes that it is
consistent with the Act to apply
Exchange rules governing, among other
things, margin requirements and trading
halt procedures to the proposed
Volatility Index options that are
otherwise applicable to options on
broad-based indexes.20 The Commission
believes that the Exchange’s rules
governing the trading of the Volatility
Index options on the Exchange help to
ensure the maintenance of fair and
orderly markets for the options on the
Volatility Index, which is consistent
with the protection of investors and the
public interest. Therefore, the
Commission finds that the Exchange’s
19 15
U.S.C. 78f(b)(1).
Commission’s approval of the listing and
trading of the Volatility Index, which the Exchange
proposes to treat as a broad-based index for
purposes of certain of its options rules, does not
address or relate to whether or not the index is
broad-based for any other purposes, including for
purposes of the definition of ‘‘narrow-based
security index’’ in Section 3(a)(55)(B) of the Act and
any related Commission orders.
20 The
VerDate Sep<11>2014
17:13 May 10, 2021
Jkt 253001
rules relating to trading of the options
on the Volatility Index on the Exchange
are designed to prevent fraudulent and
manipulative acts and practices, 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.
Accordingly, the Commission finds
that the proposed rule change, as
modified by Amendment Nos. 1 and 2,
is consistent with Section 6(b)(5) of the
Act 21 and the rules and regulations
thereunder applicable to a national
securities exchange.
IV. Solicitation of Comments on
Amendment Nos. 1 and 2 to the
Proposed Rule Change
Interested persons are invited to
submit written views, data, and
arguments concerning whether
Amendment Nos. 1 and 2 are consistent
with the Act. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
Phlx–2020–41 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–Phlx–2020–41. 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 website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
21 15
PO 00000
U.S.C. 78f(b)(5).
Frm 00086
Fmt 4703
Sfmt 9990
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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–Phlx–2020–41 and should
be submitted on or before June 1, 2021.
V. Accelerated Approval of the
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment Nos. 1 and 2,
prior to the thirtieth day after the date
of publication of notice of the filing of
Amendment Nos. 1 and 2 in the Federal
Register. In Amendment No. 1, among
other things,22 the Exchange modifies
certain aspects of the proposal,
including changes to the settlement
methodology that incorporate additional
pricing information, and commits to
provide the Commission with annual
settlement data for five years. In
Amendment No. 2, the Exchange
removes the word ‘‘non-public’’ from
the description of the annual settlement
data it will provide to the
Commission.23 The changes to the
proposal and additional information in
Amendment Nos. 1 and 2 assist the
Commission in evaluating the
Exchange’s proposal and in determining
that it is consistent with the Act.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,24 to approve the proposed
rule change, as modified by Amendment
Nos. 1 and 2, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,25 that the
proposed rule change (SR–Phlx–2020–
41), as modified by Amendment Nos. 1
and 2, be, and hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–09889 Filed 5–10–21; 8:45 am]
BILLING CODE 8011–01–P
22 See
supra note 9.
supra note 10.
24 15 U.S.C. 78s(b)(2).
25 Id.
26 17 CFR 200.30–3(a)(12).
23 See
E:\FR\FM\11MYN1.SGM
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]]>Agencies
[Federal Register Volume 86, Number 89 (Tuesday, May 11, 2021)]
[Notices]
[Pages 25918-25922]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09889]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91781; File No. SR-Phlx-2020-41]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To List
and Trade Options on a Nasdaq-100 Volatility Index
May 5, 2021.
I. Introduction
On August 24, 2020, Nasdaq PHLX LLC (``Exchange'' or ``Phlx'')
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
list and trade options on a Nasdaq-100 Volatility Index (``Volatility
[[Page 25919]]
Index'' or ``VOLQ''). The proposed rule change was published for
comment in the Federal Register on September 8, 2020.\3\ On October 20,
2020, pursuant to Section 19(b)(2) of the Act,\4\ the Commission
designated a longer period within which to approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to disapprove the proposed rule change.\5\ On
December 4, 2020, the Commission instituted proceedings under Section
19(b)(2)(B) of the Act \6\ to determine whether to approve or
disapprove the proposed rule change.\7\ On March 4, 2021, the
Commission designated a longer period for Commission action on the
proposed rule change.\8\ On March 11, 2021, the Exchange filed
Amendment No. 1 to the proposed rule change, which replaced and
superseded the proposed rule change.\9\ On April 19, 2021, the Exchange
filed partial Amendment No. 2 to the proposed rule change.\10\ The
Commission is publishing this notice to solicit comments on Amendment
Nos. 1 and 2 from interested persons, and is approving the proposed
rule change, as modified by Amendment Nos. 1 and 2, on an accelerated
basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 89725 (September 1,
2020), 85 FR 55544 (``Notice''). Comments on the proposed rule
change can be found on the Commission's website at: https://www.sec.gov/comments/sr-phlx-2020-41/srphlx202041.htm.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 90226, 85 FR 67781
(October 26, 2020). The Commission designated December 7, 2020 as
the date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 90573, 85 FR 79552
(December 10, 2020).
\8\ See Securities Exchange Act Release No. 91254, 86 FR 13772
(March 10, 2021) (designating May 6, 2021 as the date by which the
Commission shall approve or disapprove the proposal).
\9\ In Amendment No. 1, the Exchange: (i) Sets the end of the
trading session for options on the Volatility index at 4:00 p.m. ET
instead of 4:15 p.m. ET; (ii) expands the venues of the thirty-two
underlying Nasdaq-100 Index component options used to calculate the
Closing Volume Weighted Average Price (i.e., settlement value for
the Volatility Index options), which will be determined by reference
to prices and sizes of executed orders or quotes on Phlx to also
include Nasdaq ISE, LLC (``ISE'') and Nasdaq GEMX, LLC (``GEMX'');
(iii) clarifies that The Nasdaq Stock Market LLC shall be the
reporting authority for the VOLQ Index; (iv) states that executed
orders shall include simple orders and complex orders, and that
individual leg executions of a complex order will only be included
if the executed price of the leg is at or within the national best
bid or offer (``NBBO''); (v) commits to providing an annual report
to the Commission for five years containing certain settlement data;
(vi) states that Phlx will surveil for open interest in VOLQ in
addition to Nasdaq-100 trading volume prior to settlement; and (vii)
makes other clarifying and conforming changes throughout the filing.
Amendment No. 1 is available at: https://www.sec.gov/comments/sr-phlx-2020-41/srphlx202041-8486517-229965.pdf.
\10\ In Amendment No. 2, the Exchange removes the word ``non-
public'' from the description of the annual report it will provide
to the Commission. Amendment No. 2 is available at: https://www.sec.gov/comments/sr-phlx-2020-41/srphlx202041-8687377-235663.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2 \11\
---------------------------------------------------------------------------
\11\ Additional information regarding the proposal can be found
in Amendment No. 1, supra note 9.
---------------------------------------------------------------------------
The Exchange proposes to list and trade options on VOLQ, a new
index that measures changes in 30-day implied volatility of the Nasdaq-
100 Index (``Nasdaq-100 Index'' or ``NDX''). As proposed, options on
VOLQ will be cash-settled and will have European-style exercise
provisions. The Exchange states that the Volatility Index will measure
``at-the-money'' volatility by using published real-time bid/ask quotes
of NDX options and will be disseminated in annualized percentage
points.
The Exchange proposes to list up to six weekly expirations and up
to 12 standard (monthly) expirations in Volatility Index options. The
six weekly expirations will be for the nearest weekly expirations from
the actual listing date, and the weekly expirations will not expire in
the same week in which standard (monthly) Volatility Index options
expire. Standard (monthly) expirations in the Volatility Index options
will not be counted as part of the maximum six weekly expirations
permitted for Volatility Index options. In addition, the Exchange
proposes that long term option series having up to sixty months to
expiration may be listed and traded.
Volatility Index Design and Composition
The Exchange states that the Volatility Index reflects changes in
30-day implied volatility, which measures the magnitude of changes of
the underlying broad-based securities index, NDX. According to the
Exchange, the Volatility Index measures the expectation for market
volatility over the next thirty calendar days as expressed by options
on NDX. The Exchange explains that the Volatility Index uses the bid
and offer prices of certain listed options on NDX to obtain the prices
of synthetic precisely at-the-money options, which are then used to
calculate 30-day closed-form implied volatility. Finally, the 30-day
closed-form implied volatility is multiplied by 100 to calculate the
Volatility Index level. The Volatility Index is quoted in annualized
percentage points.
The Exchange believes that the proposed product does not have
single or aggregated component concentration risk. The Exchange states
that the methodology caps each single component as well as the top five
weighted components. The Exchange further states that no component
security of the Volatility Index comprises more than 12.50% of the
index's weighting and that the five highest weighted component
securities of the Volatility Index in the aggregate do not comprise
more than 43.75% of the index's weighting.
Index Calculation and Maintenance
The Exchange states that the level of the Volatility Index will
reflect the current 30-day implied volatility of NDX and will be
updated on a real-time basis on each trading day beginning at 9:30 a.m.
and ending at 4:00 p.m. ET. If the current published value of a
component is not available, the last published value will be used in
the calculation. Values of the Volatility Index will be disseminated
via the Nasdaq GIDS market data system every fifteen seconds during the
Exchange's regular trading hours to market information vendors such as
Bloomberg and Thomson Reuters. In the event the Volatility Index ceases
to be maintained or calculated the Exchange will not list any
additional series for trading and will limit all transactions in such
options to closing transactions only for the purpose of maintaining a
fair and orderly market and protecting investors.
Exercise and Settlement Value
The exercise settlement value calculation used for Volatility Index
option settlement will be calculated on the Volatility Index Options
expiration date, the specific date (usually a Wednesday) identified in
the option symbol for the series. If that Wednesday or the Friday that
is thirty days following that Wednesday is an Exchange holiday, the
exercise settlement value will be calculated on the business day
immediately preceding that Wednesday. The last trading day for a
Volatility Index option will be the business day immediately preceding
the expiration date. When the last trading day is moved because of an
Exchange holiday, the last trading day for an expiring Volatility Index
option contract will be the day immediately preceding the last
regularly scheduled business day.
Monthly options on the Volatility Index will expire on the
Wednesday that is thirty days prior to the third Friday of the
following the expiring month. Trading in expiring options on
[[Page 25920]]
the Volatility Index will normally cease at 4:00 p.m. ET on the Tuesday
preceding an expiration Wednesday.
Final Settlement
The Exchange states that the final settlement price (Ticker Symbol:
VOLS) will be calculated as described below on Wednesday commencing at
9:32:000 a.m. ET on the expiration day, and continuing each second for
the next 300 seconds (``Closing Settlement Period''). The exercise
settlement amount will be equal to the difference between the final
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.
The Volatility Index's component NDX options are listed on Phlx as
well as on ISE and GEMX. The settlement value for the Volatility Index
options will be the Closing Volume Weighted Average Price, to be
determined by reference to the prices and sizes of executed orders or
quotes in the thirty-two underlying NDX component options on the Phlx,
ISE, and GEMX markets calculated near the opening of trading on the
expiration date. The Exchange will observe the number of contracts
resulting from orders and quotes of the then-current NDX component
options executed on Phlx, ISE, and GEMX at each price during individual
one-second intervals of the Closing Settlement Period on the expiration
day.\12\ If no transactions occur on Phlx, ISE, or GEMX in an NDX
component option during any one-second observation period, the NBBO
midpoint of each of the NDX component options for which a transaction
has not occurred at the end of the one-second observation period will
be considered the One Second VWAP for that observation period for
purposes of the settlement methodology. The NBBO midpoint will be the
midpoint of the best bid and best offer from Phlx, ISE, and GEMX. Each
One Second VWAP for each component option is then used to calculate the
Volatility Index, resulting in the calculation of 300 sequential
Volatility Index values. Finally, the Exchange states that all 300
Volatility Index values will be arithmetically averaged (i.e., the sum
of 300 Volatility Index calculations is divided by 300) and the
resulting figure is rounded to the nearest .01 to arrive at the
settlement value.
---------------------------------------------------------------------------
\12\ The Exchange calculates a volume weighted average price for
each one-second observation period (a ``One Second VWAP'') for each
component option.
---------------------------------------------------------------------------
Contract Specifications
The proposed options on the Volatility Index are European-style and
cash-settled. The Exchange states that the trading hours for Volatility
Index options will be 9:30 a.m. to 4:00 p.m. ET. The Exchange proposes
to apply margin requirements for the purchase and sale of options on
the Volatility Index that are identical to those applied for its other
broad-based index options.
The Exchange states that trading of options on the Volatility Index
will be subject to the trading halt procedures applicable to other
index options traded on the Exchange. Options on the Volatility Index
will be quoted and traded in U.S. dollars. Accordingly, the Exchange
believes that all Exchange and The Options Clearing Corporation members
will be able to accommodate trading, clearance, and settlement of the
Volatility Index without alteration. All options on the Volatility
Index will have a minimum increment of $0.05 for options trading below
$3.00 and $0.10 for all other series.
The Exchange proposes to set the minimum strike price interval for
options on the Volatility Index at $0.50 or greater where the strike
price is less than $75, $1 or greater where the strike price is $200 or
less, and $5 or greater where the strike price is more than $200. The
Exchange proposes that there shall be no position or exercise limits
for options on the Volatility Index and that trading of options on the
Volatility Index will be subject to the same rules that presently
govern the trading of Exchange index options, including sales practice
rules, margin requirements, and trading rules.
The Exchange believes that it is unlikely that the Volatility Index
settlement value could be manipulated because the likelihood of gaming
the components over a 300-second period is extremely low. The Exchange
states that because the 32 component option inputs are determined each
second (meaning that Volatility Index components could change 300 times
during the settlement period), market participants would have to
predict market moves over the full settlement period in order to
manipulate the settlement value. Additionally, the Exchange believes
that traders are subject to highly competitive market forces of deep
and established market liquidity. For example, the Exchange notes that
during each second of the final settlement observation period on
January 16, 2019 and February 13, 2019, the average notional value of
each bid of the thirty-two components was $21.1 million; the average
notional value of each offer was $13.5 million. Finally, the Exchange
states that since the Volatility Index assesses each second of all
listed NDX options, this is a continuous assessment of competitive
price action and voluminous trading activity for all Nasdaq-100 Index
stock components. In support, the Exchange notes that during the final
settlement observation period (five-minute period) on January 16, 2019
and February 13, 2019, the average summation of traded volume for all
Nasdaq-100 Index component shares was 18.8 million shares. The Exchange
states that the average total value of all Nasdaq-100 Index shares
traded during the final settlement observation period was $1.93 billion
and the corresponding market capitalization for all Nasdaq-100 Index
components during the final settlement period was $7.8 trillion.
The Exchange represents that it has an adequate surveillance
program in place for options traded on the Volatility Index and intends
to apply those same program procedures that it applies to the
Exchange's other options products. Additionally, the Exchange states
that it is a member of the Intermarket Surveillance Group, through
which it can coordinate surveillance and investigative information
sharing in the stock and options markets with all of the U.S.
registered stock and options markets. Phlx believes that its
surveillance procedures currently in place, coupled with additional
surveillance measures, will allow it to adequately surveil for any
potential manipulation in the trading of Volatility Index options. The
Exchange states it will monitor the integrity of the Volatility Index
by analyzing trades, quotations, and orders that affect any of the 300
calculated reference prices for any of the NDX option series used for
the final settlement calculation for potential manipulation. In
particular, the Exchange states it will: (i) Monitor all NDX NBBO
quotes and trades (including but not limited to NDX quotes and trades
on the Exchange) during the opening for all options series that are
used as part of the final settlement; (ii) surveil for open interest
manipulation by monitoring VOLQ and NDX trading volume prior to
settlement; (iii) monitor trading on Phlx, ISE, and GEMX after the
Closing Settlement Period for possible wash trading, pre-arranged, or
related artificial activity; and (iv) compare quotes for settlement
against quotes for non-settlement in the 32 NDX option series used for
settlement between the opening and a period of time thereafter, with a
focus on identifying deviations of the midpoint, the bid-ask spread,
and other
[[Page 25921]]
market elements compared to the Nasdaq-100 Index value. The Exchange
also represents that it has the necessary system capacity to support
additional quotations and messages that will result from the listing
and trading of options on the Volatility Index.
The Exchange committed to providing the Commission an annual report
each year for 5 years on the anniversary of the first day of trading of
VOLQ options. The annual report shall consist of twelve monthly data
files, one for each month, with settlement information from the prior
year which contains: (1) One-second NBBO (bid price, bid size, offer
price, offer size, exchange code for bid and offer, time stamp and
timestamp reference) and Options Price Reporting Authority trade data
(trade price, volume, exchange code, trade indicator, exchange code)
for the VOLS NDX component options from 9:30:00 a.m. ET to 9:45:00 a.m.
ET; (2) all VOLS one-second index values (over the final settlement
window between 9:32:01 a.m. ET and 9:37:00 a.m. ET) used in deriving
the final settlement value for Nasdaq-100 Volatility Index futures
contracts; and (3) expiring VOLQ options open interest.
III. Discussion and Commission Findings
After careful review of the proposed rule change, as modified by
Amendment Nos. 1 and 2, as well as comment received, the Commission
finds that the proposed rule change, as modified by Amendment Nos. 1
and 2, is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\13\ In
particular, the Commission finds that the proposed rule change, as
modified by Amendment Nos. 1 and 2, is consistent with Section 6(b)(5)
of the Act,\14\ which requires, among other things, that the Exchange's
rules be designed to prevent fraudulent and manipulative acts and
practices, 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.
---------------------------------------------------------------------------
\13\ 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).
\14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In support of its proposal, the Exchange states that the Volatility
Index final settlement has exceedingly high hurdles for potential
manipulation. First, the Exchange believes that market participants
cannot predict which components will be included in the final
settlement. Second, the Exchange believes that traders are subject to
competitive market forces of deep and established market liquidity. In
addition, the Exchange amended its proposal to incorporate all trades
in the component options into the settlement calculation, rather than
only trades occurring on the Exchange, and to specify that legs of
complex order transactions would only be included in the calculation if
they were at or within the NBBO. The Exchange also committed to provide
five years of monthly settlement data on an annual basis.\15\
---------------------------------------------------------------------------
\15\ In Amendment No. 2, the Exchange removed the word ``non-
public'' from its description of the annual report it would provide
to the Commission. See Amendment No. 2, supra note 10. The provision
of annual settlement data for five years will assist the Commission
in monitoring settlement inputs and values and assessing how the
market for VOLQ and the underlying NDX component options may change
over time.
---------------------------------------------------------------------------
The Exchange also states that the proposal will facilitate the
listing and trading of an index option product with a novel structure,
which would enhance competition among market participants. A commenter,
who states it is the provider of the VOLQ methodology, also expressed
support for the proposal. The commenter states that VOLQ is a response
to requests from market participants and that competition and
innovation generated by VOLQ are in the public interest and will
benefit investors.\16\
---------------------------------------------------------------------------
\16\ See letter dated September 16, 2020 from Scott Nations,
President, Nations Indexes, to Vanessa Countryman, Secretary,
Commission, available at: https://www.sec.gov/comments/sr-phlx-2020-41/srphlx202041-7783670-223493.pdf.
---------------------------------------------------------------------------
The Commission believes that the Exchange's proposal, including the
settlement methodology, as amended, in conjunction with the Exchange's
existing and additional proposed surveillance procedures, will help to
ensure that the settlement value is not readily susceptible to
manipulation. The amended settlement methodology incorporates
additional trade information by including transactions on all markets
trading the component NDX options while ensuring that individual leg
executions of complex orders that may have traded through the NBBO are
not included in the settlement calculation. The Commission believes
this will contribute to a more robust settlement methodology. The
Volatility Index and the settlement value are calculated based on
quotes, orders, or trades in the component NDX options and the
settlement value calculation relies on 32 unique inputs each second
over 300 seconds. The 32 component NDX options that are the basis of
such inputs may change every second over the settlement window
depending on the value of the Nasdaq-100 Index. The Exchange states
that it will monitor for any potential manipulation of the Volatility
Index settlement value in the normal course of its surveillance.
Additionally, the Exchange has proposed enhanced surveillance
procedures to further analyze trades, quotations, and orders that
affect any of the 300 calculated reference prices for any NDX option
series used for the final settlement calculation. The Commission
believes the Exchange's existing and additional surveillance procedures
will allow the Exchange to monitor for anomalous trades, quotations,
and orders that may be indicative of manipulative trading or quoting
activity. The Commission finds that the Exchange's proposal regarding
surveillance of options on the Volatility Index and the component
option series will allow it to adequately surveil for any potential
manipulation in the trading of VOLQ. Therefore, the Commission finds
the settlement design, as amended, when combined with the Exchange's
existing and proposed enhanced surveillance procedures, will prevent
fraudulent and manipulative acts and practices and protect investors
and the public interest.
The Commission believes that the Exchange's proposal to impose no
position limits on the Volatility Index options is appropriate and
consistent with the Act. As stated above, the Volatility Index will
settle using published volume and/or quotes from NDX options. Given
that there are currently no position limits for NDX options,\17\ the
Commission believes it is appropriate for there to be no position or
exercise limits \18\ for options on the Volatility Index since the
potential manipulation and potential market disruption concerns that
position limits are designed to address are mitigated in the case of
this product. According to the Exchange, the market capitalization of
the NDX was approximately $11.42 trillion and contained approximately
74.7 billion component shares as of June 30, 2020. The Commission
believes that the enormous market capitalization of NDX and the deep,
liquid market for the underlying component securities significantly
reduce concerns regarding market manipulation or disruption in the
underlying market. Similar
[[Page 25922]]
reasoning would apply to options on the Volatility Index since the
value of options on the Volatility Index is derived from the volatility
of NDX, as implied by its options. Moreover, the Commission believes
that having no position limits for the proposed Volatility Index
options may benefit investors by bringing additional depth and
liquidity to these Volatility Index options without raising significant
concerns about potential manipulation or potential market disruption.
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\17\ See Phlx Options 4A, Section 6, ``Position Limits,''
section (a)(ii).
\18\ Phlx Options 4A, Section 10, ``Exercise Limits,'' provides
``In determining compliance with Options 9, Section 15, exercise
limits for index option contracts shall be equivalent to the
position limits described in Options 4A, Section 6.''
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The Commission believes that the proposed strike price intervals
and minimum trading increments for options on the Volatility Index are
appropriate and consistent with the Act. These aspects of the proposal
will provide investors with added flexibility in the trading of these
options and will further the public interest by allowing investors to
establish positions that are better tailored to meet their investment
objectives. In addition, the Exchange states it has the necessary
system capacity to support additional quotations and messages that will
result from the listing and trading of options on the Volatility Index.
As a national securities exchange, the Exchange is required, under
Section 6(b)(1) of the Act,\19\ to enforce compliance by its members
and persons associated with its members with the provisions of the Act,
Commission rules and regulations thereunder, and its own rules. In this
regard, the Exchange states that trading of options on the Volatility
Index will be subject to the same rules that currently govern the
trading of other index options on the Exchange. The Commission believes
that it is consistent with the Act to apply Exchange rules governing,
among other things, margin requirements and trading halt procedures to
the proposed Volatility Index options that are otherwise applicable to
options on broad-based indexes.\20\ The Commission believes that the
Exchange's rules governing the trading of the Volatility Index options
on the Exchange help to ensure the maintenance of fair and orderly
markets for the options on the Volatility Index, which is consistent
with the protection of investors and the public interest. Therefore,
the Commission finds that the Exchange's rules relating to trading of
the options on the Volatility Index on the Exchange are designed to
prevent fraudulent and manipulative acts and practices, 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.
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\19\ 15 U.S.C. 78f(b)(1).
\20\ The Commission's approval of the listing and trading of the
Volatility Index, which the Exchange proposes to treat as a broad-
based index for purposes of certain of its options rules, does not
address or relate to whether or not the index is broad-based for any
other purposes, including for purposes of the definition of
``narrow-based security index'' in Section 3(a)(55)(B) of the Act
and any related Commission orders.
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Accordingly, the Commission finds that the proposed rule change, as
modified by Amendment Nos. 1 and 2, is consistent with Section 6(b)(5)
of the Act \21\ and the rules and regulations thereunder applicable to
a national securities exchange.
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\21\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments on Amendment Nos. 1 and 2 to the Proposed
Rule Change
Interested persons are invited to submit written views, data, and
arguments concerning whether Amendment Nos. 1 and 2 are 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 [email protected]. Please include
File Number SR-Phlx-2020-41 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-Phlx-2020-41. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Phlx-2020-41 and should be submitted on
or before June 1, 2021.
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 1 and 2, prior to the thirtieth
day after the date of publication of notice of the filing of Amendment
Nos. 1 and 2 in the Federal Register. In Amendment No. 1, among other
things,\22\ the Exchange modifies certain aspects of the proposal,
including changes to the settlement methodology that incorporate
additional pricing information, and commits to provide the Commission
with annual settlement data for five years. In Amendment No. 2, the
Exchange removes the word ``non-public'' from the description of the
annual settlement data it will provide to the Commission.\23\ The
changes to the proposal and additional information in Amendment Nos. 1
and 2 assist the Commission in evaluating the Exchange's proposal and
in determining that it is consistent with the Act. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\24\ to approve the proposed rule change, as modified by Amendment
Nos. 1 and 2, on an accelerated basis.
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\22\ See supra note 9.
\23\ See supra note 10.
\24\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-Phlx-2020-41), as modified
by Amendment Nos. 1 and 2, be, and hereby is, approved on an
accelerated basis.
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\25\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-09889 Filed 5-10-21; 8:45 am]
BILLING CODE 8011-01-P
