Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing of Proposed Rule Change To Amend Options 4A, Section 12 Regarding the Closing Volume Weighted Average Price (“Closing VWAP”) for Listing and Trading of Options on the Nasdaq-100® Volatility Index, 55896-55900 [2021-21869]
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55896
Federal Register / Vol. 86, No. 192 / Thursday, October 7, 2021 / Notices
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act and Rule 19b–4(f)(6)(iii)
thereunder.
A proposed rule change filed under
Rule 19b–4(f)(6) 22 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),23 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange asked that the
Commission waive the 30-day operative
delay so that the proposal may become
operative immediately upon filing.
Extending the pilot Rules’ effectiveness
to the close of business on March 18,
2022 will extend the protections
provided by the Pilot Rules, which
would otherwise expire in less than 30
days. Waiver of the operative delay
would therefore permit uninterrupted
continuation of the MWCB pilot while
the Commission reviews the Exchange’s
proposed rule change to make the Pilot
Rules permanent. Therefore, the
Commission hereby waives the 30-day
operative delay and designates the
proposed rule change as operative upon
filing.24
At any time within 60 days of the
filing of such 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
under Section 19(b)(2)(B) 25 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
lotter on DSK11XQN23PROD with NOTICES1
• 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–
NYSECHX–2021–14 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
[Release No. 34–93237; File No. SR–Phlx–
2021–56]
• 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–NYSECHX–2021–14. 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–NYSECHX–2021–14 and
should be submitted on or before
October 28, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–21870 Filed 10–6–21; 8:45 am]
BILLING CODE 8011–01–P
22 17
CFR 240.19b–4(f)(6).
CFR 240.19b–4(f)(6)(iii).
24 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
25 15 U.S.C. 78s(b)(2)(B).
23 17
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Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing of
Proposed Rule Change To Amend
Options 4A, Section 12 Regarding the
Closing Volume Weighted Average
Price (‘‘Closing VWAP’’) for Listing and
Trading of Options on the Nasdaq100® Volatility Index
October 1, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 23, 2021, Nasdaq PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
rule regarding options on the Nasdaq100® Volatility Index within Options
4A, Section 12, Terms of Index Options
Contracts.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/phlx/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
1 15
26 17
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CFR 200.30–3(a)(12).
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 86, No. 192 / Thursday, October 7, 2021 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
Nasdaq-100® Volatility Index
(‘‘Volatility Index’’) within Options 4A,
Section 12, Terms of Index Options
Contracts. Specifically, the Exchange
proposes to amend the calculation of the
final settlement price for VOLQ options,
the Closing Volume Weighted Average
Price or ‘‘Closing VWAP,’’ in the event
any of the thirty-two underlying
Nasdaq-100® index (‘‘NDX’’) component
options do not have a trade/quote
during the 300 second period of time
(the ‘‘Closing Settlement Period’’).
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Background
The final settlement price for the
Volatility Index is calculated on
Wednesday of each week commencing
at 9:32:010 a.m. on the expiration day,
and continuing each second for the next
300 seconds (New York time).3 The
settlement value for the Volatility Index
is the Closing VWAP that is determined
by reference to the prices and sizes of
executed orders 4 or quotes in the thirtytwo underlying NDX component
options 5 on Phlx, Nasdaq ISE, LLC
(‘‘ISE’’) and Nasdaq GEMX, LLC
(‘‘GEMX’’) 6 calculated at the opening of
trading on the expiration date (usually
a Wednesday). At the end of individual
one-second time observations during the
Closing Settlement Period, which
commences at 9:32:010 on the
expiration day (or 2.00.01 minutes after
the open of trading in the event trading
does not commence at 9:30:000 a.m.
ET),7 and continues each second for the
3 The exercise settlement amount would be equal
to the difference between the final settlement price
and the exercise price of the option, multiplied by
$100. Exercise would result in the delivery of cash
on the business day following expiration.
4 The Exchange proposes to add rule text within
Options 4A, Section 12(b)(6)(D) to further describe
what is meant by executed orders. Today, the rule
text states, ‘‘Executed orders shall include simple
orders and complex orders however, individual leg
executions of a complex order will only be included
if the executed price of the leg is at or within the
NBBO.’’ The proposed change will be described in
the proposal section.
5 Dependent upon movement in the Nasdaq-100
Index, all of the Closing Settlement Period index
(VOLS) thirty-two underlying NDX component
options can change every second making live
market final settlement replication unfeasible over
300 seconds.
6 The Volatility Index’s component NDX options
are listed on Phlx as well as on the Exchange’s
affiliates, ISE and GEMX.
7 If the Exchange is unable to publish a settlement
value by 12:00 p.m. (New York Time) due to a
trading halt, the Exchange will determine and
publish a value on its website. In the event of a
trading halt, the Exchange will commence the
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next 300 seconds, the number of
contracts resulting from orders 8 and
quotes executed on Phlx, ISE and GEMX
at each price during the observation
period is multiplied by that price to
yield a Reference Number. All Reference
Numbers are then summed, and that
sum is then divided by the total number
of contracts traded during the
observation period [Sum of (contracts
traded at a price × price) ÷ total
contracts traded)] to calculate a Volume
Weighted Average Price for that
observation period (a ‘‘One Second
VWAP’’) for that component option. If
no transactions occur on Phlx, ISE and/
or GEMX, during any one-second
observation period, the NBBO midpoint
at the end of the one second observation
period will be considered the One
Second VWAP for that observation
period for purposes of this settlement
methodology. Specifically, the Closing
VWAP would seek the best bid and best
offer (which may consist of a quote or
an order) from among the listing
markets (Phlx, ISE and GEMX markets).
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, all 300
Volatility Index values are
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 disseminated
under the ticker symbol ‘‘VOLS.’’ 9
Proposal
The Exchange proposes to amend the
Closing VWAP to provide for an
alternative calculation of the Closing
Settlement Period if during any one
second of the Closing Settlement Period
any of the thirty-two NDX option series
does not have a trade/quote. The
alternative observation window would
be part of the proposed new calculation
of the Closing Settlement Period. The
Exchange would add the alternate
observation window to the existing
calculation of the Closing VWAP.
First, the Exchange proposes if,
during any one second of the
observation period, any of the thirty-two
NDX option series used for Closing
VWAP does not have a trade/quote, the
index calculator would look back and
calculation of the settlement window beginning
2.00.01 minutes after the re-opening of trading. See
Options 4A, Section 12(b)(6)(D)(II).
8 Executed orders include simple orders and
complex orders, however, individual leg executions
of a complex order will only be included if the
executed price of the leg is at or within the NBBO.
9 See Options 4A, Section 12(b)(6)(D)(II), ‘‘Terms
of Option Contracts.’’
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55897
use the most recent published quote 10
midpoint during that day for the One
Second VWAP for the option
component that does not have a trade/
quote. If there is no One Second VWAP
to utilize for any of the thirty-two NDX
option series during the Closing
Settlement Period, then the index
calculator will consider that Closing
Settlement Period invalid and will be
unable to determine a Closing VWAP at
that time.
Second, in the event the Closing
Settlement Period is invalid and a
Closing VWAP cannot be determined,
the index calculator will then roll the
Closing Settlement Period forward by
one second and determine if there is a
One Second VWAP for each of the
thirty-two NDX option series for all 300
consecutive seconds of the new Closing
Settlement Period. If there is a One
Second VWAP for all of the thirty-two
NDX option series for all 300
consecutive seconds, a Closing VWAP
will be calculated. If a One Second
VWAP is not present for all of the thirtytwo NDX option series during the new
observation period, the index calculator
will again roll the Closing Settlement
Period forward by one second. The
index calculator would continue to roll
the Closing Settlement Period forward
by one second until such time as it is
able to capture a One Second VWAP for
each of the thirty-two NDX option series
for all 300 consecutive seconds. At that
time, a Closing VWAP will be
calculated.
The proposal seeks to create an
automated, non-discretionary process by
which the Exchange would determine
the Closing VWAP in the event any of
the thirty-two underlying NDX
component options do not have a trade/
quote during the Closing Settlement
Period. By creating an automated
process, the Closing VWAP would be
calculated consistently with the
proposed rule. The Exchange does not
anticipate utilizing the alternative
Closing VWAP calculation on a regular
basis. In fact, a review of 43 expiration
dates 11 from January 2018 through July
2021 revealed invalid values for only 2
expiration dates.12 On both of the
expiration dates, the Exchange would
have obtained a One Second VWAP for
10 Only quotes would be considered, not trades.
The Exchange believes that quotes are more
reflective of true market value since the index
calculator would look back.
11 The Exchange reviewed the 9,660 NBBO inputs
for the VOLS computation from 9:32.01 for the five
minute Closing Settlement Period for each
expiration date.
12 The expiration dates were March 18, 2020 and
June 17, 2020. The Exchange notes that the options
industry experience unprecedented volumes in
2020.
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Federal Register / Vol. 86, No. 192 / Thursday, October 7, 2021 / Notices
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the component by looking forward
because the look back did not contain a
quote for the component that was
missing a One Second VWAP.
In the event of a trading halt in one
or more options, excluding a trading
halt in all Nasdaq-100 index options,
prior to the completion of the Closing
Settlement Period, the Exchange would
continue to look back for a One Second
VWAP prior to looking forward. The
Exchange believes that it is important to
maintain a consistent process for
obtaining missing values for the Closing
VWAP. As noted above, the Exchange
does not believe the alternative method
would be utilized with any frequency,
rather it should be utilized infrequently.
In the event a trading halt caused
Market Makers to not submit a Valid
Width Quote in certain components
during the Opening Process,13 the
alternative methodology would look
forward to obtain a value. Also, the
Exchange would utilize a quote from the
Opening Process only in the event an
options series was able to open. If the
Opening Process did not complete for
an options series, there would be no
value to obtain for a component during
a look back.14
Today, Options 4A, Section
12(b)(6)(D)(II) provides, ‘‘If the
Exchange is unable to publish a
settlement value by 12:00 p.m. (New
York time) due to a trading halt, the
Exchange will commence the
calculation of the settlement window
beginning 2.00.01 minutes after the reopening of trading and publish that
value on its website.’’ 15 The Exchange
proposes to replace this rule text with
language which provides, ‘‘In the event
of a trading halt in all Nasdaq-100 index
options, the Exchange would commence
the calculation of the settlement
window beginning 2:00:01 16 minutes
after the re-opening of trading and
publish that value on its website. In this
scenario, the Exchange would not look
back prior to the trading halt.’’ The
Exchange’s proposal amends the current
sentence to eliminate the 12:00 p.m.
timeframe which does not consider all
possible scenarios. A re-opening could
occur anytime during the trading day.
Further, specifically indicating a trading
halt of the Nasdaq-100 index options in
the rule text is more precise as the
impact to the Nasdaq-100 index options
13 The Phlx Opening Process is described within
Options 3, Section 8.
14 The Closing Settlement Period occurs within
seconds of the completion of the Opening Process.
15 See Phlx Options 4A, Section 12(b)(6)(D).
16 The time when the Exchange will commence
the calculation of the settlement window was
corrected from 2.00.001 minutes to 2:00:01 minutes.
The calculation begins on the second.
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is a direct concern for VOLQ. The
proposed language more directly
expands upon the manner in which the
Closing VWAP will be handled in the
event of a trading halt.
While the Exchange believes that the
Volatility Index Closing VWAP has
exceedingly high hurdles for potential
manipulation, the proposed
amendments would provide for a
Closing Settlement Period, which has
published liquidity for all of the thirtytwo NDX option series used for the
Closing VWAP. This proposed
amendment would permit the index
calculator to seek a One Second VWAP
by first looking back for the most recent
published quote midpoint for that
option that had no trade/quote. In the
event the Closing Settlement Period is
invalid and a Closing VWAP cannot be
determined, the index calculator will
then continuously roll the Closing
Settlement Period forward by one
second until there is a One Second
VWAP for all of the thirty-two NDX
option series for all 300 consecutive
seconds. This proposed change is
designed to ensure that all thirty-two
NDX components have a One Second
VWAP for the calculation of the Closing
VWAP.
For example, assume that during the
first 59 seconds of the observation
period, beginning at 9:32:01 a.m., all
thirty-two NDX option components had
a One Second VWAP. During the 60th
second, the required NDX component
June 18, 2021 14,100 call does not have
a trade and has a market of $0.00 bid @
$0.00 offer. The index calculator would
look back to the most recent quote,
which occurred at 09:32:57 a.m. and
would use that quote in the calculation
to determine a One Second VWAP for
the 60th second (09:33:00 a.m.).
However, if during the look back, no
quote has occurred since market open,
the observation period up to and
including the 60th second would be
considered invalid and the new
observation period would begin with
the next second. In that case, the new
observation period would begin at
09:33:01 a.m. and would continue for
300 seconds as long as there is a One
Second VWAP which can be
determined for all 32 NDX component
options.
During the scenario above, if during
the 58th, 59th, and 60th second, the
required NDX component June 18, 2021
14,100 call does not have a trade and
has a market of $0.00 bid @$0.00 offer,
then the index calculator would look
back to the most recent quote which
occurred at 09:32:57 a.m. and would use
that value in the calculation to
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determine the One Second VWAP for
the 58th, 59th, and 60th second.
The Exchange believes that its
proposal would ensure that the Closing
VWAP is calculated using options with
sufficient liquidity for each of the thirtytwo NDX components by seeking
component values that are represented
by trades and/or quotes. The Exchange
believes that initially looking back for
the most recent published quote
midpoint for that option will ensure an
efficient price for that option
component.17 If the Exchange is unable
to obtain a One Second VWAP for any
of the thirty-two NDX option series
during the Closing Settlement Period,
the Exchange will invalidate the Closing
Settlement Period and move on to
calculate the Closing VWAP utilizing a
forward rolling observation period of
one second.
The Exchange believes rolling the
Closing Settlement Period forward by
one second to obtain a One Second
VWAP for each of the thirty-two NDX
option series for all 300 consecutive
seconds of the new observation period
would ensure that the Closing VWAP is
calculated using sufficient liquidity for
each of the thirty-two NDX components
by seeking trades and/or quotes in a
new observation period. Utilizing a one
second period of time to acquire a new
observation window would allow the
Exchange to utilize an observation
window closest in time to the original
window. Also, moving forward in
increments of one second, as necessary,
would serve to methodically move
through the trading day for a potential
observation window that would satisfy
the Exchange’s liquidity requirements.
This method would continue to assess
the entire field of NDX options prices
each second to select specific listed
NDX options to obtain the prices of
synthetic precisely at-the-money
options. As with the initial Closing
Settlement Period, since the market is
subject to constant change during three
hundred individual one-second time
periods for which listed options will be
included in Closing VWAP, market
participants cannot predict which
option components will be included
because that would entail predicting
where the NDX price level (a function
of predicting the price of all onehundred component stocks) will be at
the end of each of the three hundred
individual one-second time periods. In
addition, the Exchange notes that the
look back period would likely not be
subject to manipulation as the historical
information would only be utilized in
17 The Exchange’s calculation is dependent upon
values for the 32 component options.
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Federal Register / Vol. 86, No. 192 / Thursday, October 7, 2021 / Notices
the event that liquidity was unavailable
in the original observation window,
which contains options components,
which cannot be predicted.
The Exchange reiterates that it is
unlikely that the Volatility Index
Closing VWAP could be manipulated. In
particular, because the thirty-two
component Volatility Index option
inputs 18 are reviewed each second as
the market changes to determine the atthe-money strikes (meaning that
Volatility Index components could
change 300 times during the Closing
Settlement Period), market participants
could manipulate the Closing VWAP
only if they could replicate such value
by guessing exact market moves over an
extended period of 300 million
microseconds. Because the likelihood of
replication is extremely low, the
Exchange believes that it is unlikely the
Closing VWAP could be manipulated.
Nonetheless, the Exchange, in its
normal course of surveillance, will
monitor for any potential manipulation
of the Volatility Index settlement value
according to the Exchange’s current
procedures. Additionally, the Exchange
would 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 Closing VWAP for potential
manipulation on the Exchange.
Finally, the Exchange proposes to
amend the term ‘‘executed orders’’ at
Options 4A, Section 12, (b)(6)(D)(II)
which currently provides, ‘‘Executed
orders shall include simple orders and
complex orders however, individual leg
executions of a complex order will only
be included if the executed price of the
leg is at or within the NBBO.’’ The
Exchange proposes to instead provide,
‘‘Executed orders shall include simple
orders and complex orders (excluding
out-of-sequence and late trades),
however, individual leg executions of a
complex order will only be included if
the executed price of the leg is at or
within the NBBO.’’ The Exchange
desires to exclude out-of-sequence and
late trades to avoid potential stale data
in the Closing VWAP calculation.
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Implementation
The Exchange proposes to issue an
Options Trader Alert announcing the
day it will launch options on Nasdaq100 Volatility Index. The Exchange
initially indicated that it would launch
18 The Exchange notes that due to the number of
proposed components, the mathematical formula
would prevent the Volatility Index from exceeding
12.5% in any single component and 43.5% for the
top 5 components.
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these options by Q3 2021.19 At this
time, the Exchange proposes to launch
VOLQ options on or before March 31,
2022.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,20 in general, and furthers the
objectives of Section 6(b)(5) of the Act,21
in particular, in that it will permit
options trading in the Volatility Index
pursuant to rules designed to prevent
fraudulent and manipulative acts and
practices and promote just and equitable
principles of trade by amending its
Volatility Index to create additional
alternative observations periods to
arrive at a Closing VWAP in the event
that any of the thirty-two NDX option
series used for Closing VWAP do not
have a One Second VWAP during the
five minute Closing Settlement Period.
Phlx’s proposal to amend the Closing
VWAP by proposing alternate
observations periods would ensure a
Closing Settlement Period which has
published liquidity for all of the thirtytwo NDX option series used for Closing
VWAP. The Exchange notes that this
alternate methodology may be utilized
where there is no liquidity in any of the
thirty-two NDX option series used for
Closing VWAP. This may be caused by
an Exchange system issue, market maker
issue, or some news or halt in an
underlying.
The proposal would promote just and
equitable principles of trade by creating
an automated, non-discretionary process
by which the Exchange would
determine the Closing VWAP in the
event any of the thirty-two underlying
NDX component options do not have a
trade/quote during the Closing
Settlement Period. The Closing VWAP
would be calculated consistently. The
Exchange anticipates the alternative
Closing VWAP calculation would be
utilized infrequently. In the event of a
trading halt in one or more options,
excluding a trading halt in all Nasdaq100 index options, prior to the
completion of the Closing Settlement
Period, the Exchange’s proposal to look
back for a One Second VWAP, prior to
looking forward, is consistent with the
Act because the Exchange’s process
would be consistent for obtaining
missing values for the Closing VWAP.
19 See Securities Exchange Act Release No. 91781
(May 5, 2021), 86 FR 25918 (May 11, 2021) (SR–
PHLX–2020–41) (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).
20 15 U.S.C. 78f(b).
21 15 U.S.C. 78f(b)(5).
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55899
Also, in the event a trading halt caused
Market Makers to not submit a Valid
Width Quote in certain components
during the Opening Process, the
alternative methodology would look
forward to obtain a value. Also, the
Exchange would utilize a quote from the
Opening Process only in the event an
options series was able to open. If the
Opening Process did not complete for
an options series, there would be no
value to obtain for a component during
a look back.22
This method would continue to assess
the entire field of NDX options prices
each second to select specific listed
NDX options to obtain the prices of
synthetic precisely at-the-money
options. As with the initial settlement
window, since the market is subject to
constant change during three hundred
individual one-second time periods for
which listed options will be included in
Closing VWAP, market participants
cannot predict which options
components will be included because
that would entail predicting where the
NDX price level (a function of
predicting the price of all one-hundred
component stocks) will be at the end of
each of the three hundred individual
one-second time periods. The Exchange
reiterates that it is unlikely that the
Volatility Index Closing VWAP could be
manipulated. In particular, because the
thirty-two component Volatility Index
option inputs are reviewed each second
as the market changes to determine the
at-the-money strikes (meaning that
Volatility Index components could
change 300 times during the settlement
period), market participants could
manipulate the Closing VWAP only if
they could replicate such value by
guessing exact market moves over an
extended period of 300 million
microseconds. Because the likelihood of
replication is extremely low, the
Exchange believes that it is unlikely the
Closing VWAP could be manipulated.
Similarly, with respect to the look back
period, it would be unlikely that
manipulation could occur as the
historical information would only be
utilized in the event that liquidity was
unavailable in the original observation
window, which contains options
components which cannot be predicted.
Nonetheless, the Exchange, in its
normal course of surveillance, will
monitor for any potential manipulation
of the Volatility Index Closing VWAP
and monitor the integrity of the
Volatility Index by analyzing trades,
quotations, and orders that affect any of
the 300 calculated reference prices for
22 The Closing Settlement Period occurs within
seconds of the completion of the Opening Process.
E:\FR\FM\07OCN1.SGM
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55900
Federal Register / Vol. 86, No. 192 / Thursday, October 7, 2021 / Notices
any of the NDX option series used for
the Closing VWAP for potential
manipulation on the Exchange.
Utilizing a time period of one second
to acquire a new observation window
would allow the Exchange to utilize an
observation window closest in time to
the original window. Also, moving
forward in increments of one second, as
necessary, would serve to methodically
move through the trading day for a
potential observation window that
would satisfy the Exchange’s liquidity
requirements.
The Exchange’s proposal to amend
the term ‘‘executed orders’’ to exclude
out-of-sequence and late trades is
consistent with the Act as these values
may represent potential stale data in the
Closing VWAP calculation. The
Exchange believes the midpoint better
reflects the price of a component.
Finally, the Exchange’s proposal to
amend current Options 4A, Section
12(b)(6)(D)(II) to remove the 12:00 p.m.
deadline for publishing a settlement
value is consistent with the Act because
a re-opening could occur anytime
during the trading day and, therefore,
citing specifically to a 12:00 p.m.
timeframe does not consider all possible
scenarios. Further, specifically
indicating a trading halt of the Nasdaq100 index options in the rule text is
more precise as the impact to the
Nasdaq-100 index options is a direct
concern for VOLQ. The proposed
language more directly expands upon
the manner in which the Closing VWAP
will be handled in the event of a trading
halt.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
lotter on DSK11XQN23PROD with NOTICES1
This proposed rule change does not
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
The Exchange notes that the proposed
alternative observation windows will
facilitate the listing and trading of the
Volatility Index by ensuring liquidity
for each of the option components. The
proposed structure will enhance
competition among market participants,
to the benefit of investors and the
marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
VerDate Sep<11>2014
17:46 Oct 06, 2021
Jkt 256001
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
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–2021–56 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–2021–56. 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
Frm 00102
Fmt 4703
Sfmt 4703
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–21869 Filed 10–6–21; 8:45 am]
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:
PO 00000
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-2021–56 and should
be submitted on or before October 28,
2021.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93227; File No. 4–698]
Joint Industry Plan; Notice of
Designation of a Longer Period for
Commission Action on a Proposed
Amendment to the National Market
System Plan Governing the
Consolidated Audit Trail
October 1, 2021.
On March 31, 2021, the Operating
Committee for Consolidated Audit Trail,
LLC (‘‘CAT LLC’’ or the ‘‘Company’’), on
behalf of the following parties to the
National Market System Plan Governing
the Consolidated Audit Trail (the ‘‘CAT
NMS Plan’’ or ‘‘Plan’’): 1 BOX Exchange
LLC; Cboe BYX Exchange, Inc., Cboe
BZX Exchange, Inc., Cboe EDGA
Exchange, Inc., Cboe EDGX Exchange,
Inc., Cboe C2 Exchange, Inc., Cboe
Exchange, Inc., Financial Industry
Regulatory Authority, Inc., Investors
Exchange LLC, Long-Term Stock
Exchange, Inc., Miami International
Securities Exchange LLC, MEMX, LLC,
MIAX Emerald, LLC, MIAX PEARL,
LLC, Nasdaq BX, Inc., Nasdaq GEMX,
LLC, Nasdaq ISE, LLC, Nasdaq MRX,
LLC, Nasdaq PHLX LLC, The NASDAQ
Stock Market LLC, New York Stock
Exchange LLC, NYSE American LLC,
NYSE Arca, Inc., NYSE Chicago, Inc.,
and NYSE National, Inc. (collectively,
the ‘‘Participants,’’ ‘‘self-regulatory
organizations,’’ or ‘‘SROs’’) filed with
the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
23 17
CFR 200.30–3(a)(12).
CAT NMS Plan is a national market system
plan approved by the Commission pursuant to
Section 11A of the Exchange Act and the rules and
regulations thereunder. See Securities Exchange Act
Release No. 79318 (November 15, 2016), 81 FR
84696 (November 23, 2016).
1 The
E:\FR\FM\07OCN1.SGM
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]]>Agencies
[Federal Register Volume 86, Number 192 (Thursday, October 7, 2021)]
[Notices]
[Pages 55896-55900]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21869]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93237; File No. SR-Phlx-2021-56]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing
of Proposed Rule Change To Amend Options 4A, Section 12 Regarding the
Closing Volume Weighted Average Price (``Closing VWAP'') for Listing
and Trading of Options on the Nasdaq-100[supreg] Volatility Index
October 1, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 23, 2021, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its rule regarding options on the
Nasdaq-100[supreg] Volatility Index within Options 4A, Section 12,
Terms of Index Options Contracts.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/phlx/rules, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 55897]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Nasdaq-100[supreg] Volatility
Index (``Volatility Index'') within Options 4A, Section 12, Terms of
Index Options Contracts. Specifically, the Exchange proposes to amend
the calculation of the final settlement price for VOLQ options, the
Closing Volume Weighted Average Price or ``Closing VWAP,'' in the event
any of the thirty-two underlying Nasdaq-100[supreg] index (``NDX'')
component options do not have a trade/quote during the 300 second
period of time (the ``Closing Settlement Period'').
Background
The final settlement price for the Volatility Index is calculated
on Wednesday of each week commencing at 9:32:010 a.m. on the expiration
day, and continuing each second for the next 300 seconds (New York
time).\3\ The settlement value for the Volatility Index is the Closing
VWAP that is determined by reference to the prices and sizes of
executed orders \4\ or quotes in the thirty-two underlying NDX
component options \5\ on Phlx, Nasdaq ISE, LLC (``ISE'') and Nasdaq
GEMX, LLC (``GEMX'') \6\ calculated at the opening of trading on the
expiration date (usually a Wednesday). At the end of individual one-
second time observations during the Closing Settlement Period, which
commences at 9:32:010 on the expiration day (or 2.00.01 minutes after
the open of trading in the event trading does not commence at 9:30:000
a.m. ET),\7\ and continues each second for the next 300 seconds, the
number of contracts resulting from orders \8\ and quotes executed on
Phlx, ISE and GEMX at each price during the observation period is
multiplied by that price to yield a Reference Number. All Reference
Numbers are then summed, and that sum is then divided by the total
number of contracts traded during the observation period [Sum of
(contracts traded at a price x price) / total contracts traded)] to
calculate a Volume Weighted Average Price for that observation period
(a ``One Second VWAP'') for that component option. If no transactions
occur on Phlx, ISE and/or GEMX, during any one-second observation
period, the NBBO midpoint at the end of the one second observation
period will be considered the One Second VWAP for that observation
period for purposes of this settlement methodology. Specifically, the
Closing VWAP would seek the best bid and best offer (which may consist
of a quote or an order) from among the listing markets (Phlx, ISE and
GEMX markets). 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, all 300 Volatility
Index values are 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
disseminated under the ticker symbol ``VOLS.'' \9\
---------------------------------------------------------------------------
\3\ The exercise settlement amount would be equal to the
difference between the final settlement price and the exercise price
of the option, multiplied by $100. Exercise would result in the
delivery of cash on the business day following expiration.
\4\ The Exchange proposes to add rule text within Options 4A,
Section 12(b)(6)(D) to further describe what is meant by executed
orders. Today, the rule text states, ``Executed orders shall include
simple orders and complex orders however, individual leg executions
of a complex order will only be included if the executed price of
the leg is at or within the NBBO.'' The proposed change will be
described in the proposal section.
\5\ Dependent upon movement in the Nasdaq-100 Index, all of the
Closing Settlement Period index (VOLS) thirty-two underlying NDX
component options can change every second making live market final
settlement replication unfeasible over 300 seconds.
\6\ The Volatility Index's component NDX options are listed on
Phlx as well as on the Exchange's affiliates, ISE and GEMX.
\7\ If the Exchange is unable to publish a settlement value by
12:00 p.m. (New York Time) due to a trading halt, the Exchange will
determine and publish a value on its website. In the event of a
trading halt, the Exchange will commence the calculation of the
settlement window beginning 2.00.01 minutes after the re-opening of
trading. See Options 4A, Section 12(b)(6)(D)(II).
\8\ Executed orders include simple orders and complex orders,
however, individual leg executions of a complex order will only be
included if the executed price of the leg is at or within the NBBO.
\9\ See Options 4A, Section 12(b)(6)(D)(II), ``Terms of Option
Contracts.''
---------------------------------------------------------------------------
Proposal
The Exchange proposes to amend the Closing VWAP to provide for an
alternative calculation of the Closing Settlement Period if during any
one second of the Closing Settlement Period any of the thirty-two NDX
option series does not have a trade/quote. The alternative observation
window would be part of the proposed new calculation of the Closing
Settlement Period. The Exchange would add the alternate observation
window to the existing calculation of the Closing VWAP.
First, the Exchange proposes if, during any one second of the
observation period, any of the thirty-two NDX option series used for
Closing VWAP does not have a trade/quote, the index calculator would
look back and use the most recent published quote \10\ midpoint during
that day for the One Second VWAP for the option component that does not
have a trade/quote. If there is no One Second VWAP to utilize for any
of the thirty-two NDX option series during the Closing Settlement
Period, then the index calculator will consider that Closing Settlement
Period invalid and will be unable to determine a Closing VWAP at that
time.
---------------------------------------------------------------------------
\10\ Only quotes would be considered, not trades. The Exchange
believes that quotes are more reflective of true market value since
the index calculator would look back.
---------------------------------------------------------------------------
Second, in the event the Closing Settlement Period is invalid and a
Closing VWAP cannot be determined, the index calculator will then roll
the Closing Settlement Period forward by one second and determine if
there is a One Second VWAP for each of the thirty-two NDX option series
for all 300 consecutive seconds of the new Closing Settlement Period.
If there is a One Second VWAP for all of the thirty-two NDX option
series for all 300 consecutive seconds, a Closing VWAP will be
calculated. If a One Second VWAP is not present for all of the thirty-
two NDX option series during the new observation period, the index
calculator will again roll the Closing Settlement Period forward by one
second. The index calculator would continue to roll the Closing
Settlement Period forward by one second until such time as it is able
to capture a One Second VWAP for each of the thirty-two NDX option
series for all 300 consecutive seconds. At that time, a Closing VWAP
will be calculated.
The proposal seeks to create an automated, non-discretionary
process by which the Exchange would determine the Closing VWAP in the
event any of the thirty-two underlying NDX component options do not
have a trade/quote during the Closing Settlement Period. By creating an
automated process, the Closing VWAP would be calculated consistently
with the proposed rule. The Exchange does not anticipate utilizing the
alternative Closing VWAP calculation on a regular basis. In fact, a
review of 43 expiration dates \11\ from January 2018 through July 2021
revealed invalid values for only 2 expiration dates.\12\ On both of the
expiration dates, the Exchange would have obtained a One Second VWAP
for
[[Page 55898]]
the component by looking forward because the look back did not contain
a quote for the component that was missing a One Second VWAP.
---------------------------------------------------------------------------
\11\ The Exchange reviewed the 9,660 NBBO inputs for the VOLS
computation from 9:32.01 for the five minute Closing Settlement
Period for each expiration date.
\12\ The expiration dates were March 18, 2020 and June 17, 2020.
The Exchange notes that the options industry experience
unprecedented volumes in 2020.
---------------------------------------------------------------------------
In the event of a trading halt in one or more options, excluding a
trading halt in all Nasdaq-100 index options, prior to the completion
of the Closing Settlement Period, the Exchange would continue to look
back for a One Second VWAP prior to looking forward. The Exchange
believes that it is important to maintain a consistent process for
obtaining missing values for the Closing VWAP. As noted above, the
Exchange does not believe the alternative method would be utilized with
any frequency, rather it should be utilized infrequently. In the event
a trading halt caused Market Makers to not submit a Valid Width Quote
in certain components during the Opening Process,\13\ the alternative
methodology would look forward to obtain a value. Also, the Exchange
would utilize a quote from the Opening Process only in the event an
options series was able to open. If the Opening Process did not
complete for an options series, there would be no value to obtain for a
component during a look back.\14\
---------------------------------------------------------------------------
\13\ The Phlx Opening Process is described within Options 3,
Section 8.
\14\ The Closing Settlement Period occurs within seconds of the
completion of the Opening Process.
---------------------------------------------------------------------------
Today, Options 4A, Section 12(b)(6)(D)(II) provides, ``If the
Exchange is unable to publish a settlement value by 12:00 p.m. (New
York time) due to a trading halt, the Exchange will commence the
calculation of the settlement window beginning 2.00.01 minutes after
the re-opening of trading and publish that value on its website.'' \15\
The Exchange proposes to replace this rule text with language which
provides, ``In the event of a trading halt in all Nasdaq-100 index
options, the Exchange would commence the calculation of the settlement
window beginning 2:00:01 \16\ minutes after the re-opening of trading
and publish that value on its website. In this scenario, the Exchange
would not look back prior to the trading halt.'' The Exchange's
proposal amends the current sentence to eliminate the 12:00 p.m.
timeframe which does not consider all possible scenarios. A re-opening
could occur anytime during the trading day. Further, specifically
indicating a trading halt of the Nasdaq-100 index options in the rule
text is more precise as the impact to the Nasdaq-100 index options is a
direct concern for VOLQ. The proposed language more directly expands
upon the manner in which the Closing VWAP will be handled in the event
of a trading halt.
---------------------------------------------------------------------------
\15\ See Phlx Options 4A, Section 12(b)(6)(D).
\16\ The time when the Exchange will commence the calculation of
the settlement window was corrected from 2.00.001 minutes to 2:00:01
minutes. The calculation begins on the second.
---------------------------------------------------------------------------
While the Exchange believes that the Volatility Index Closing VWAP
has exceedingly high hurdles for potential manipulation, the proposed
amendments would provide for a Closing Settlement Period, which has
published liquidity for all of the thirty-two NDX option series used
for the Closing VWAP. This proposed amendment would permit the index
calculator to seek a One Second VWAP by first looking back for the most
recent published quote midpoint for that option that had no trade/
quote. In the event the Closing Settlement Period is invalid and a
Closing VWAP cannot be determined, the index calculator will then
continuously roll the Closing Settlement Period forward by one second
until there is a One Second VWAP for all of the thirty-two NDX option
series for all 300 consecutive seconds. This proposed change is
designed to ensure that all thirty-two NDX components have a One Second
VWAP for the calculation of the Closing VWAP.
For example, assume that during the first 59 seconds of the
observation period, beginning at 9:32:01 a.m., all thirty-two NDX
option components had a One Second VWAP. During the 60th second, the
required NDX component June 18, 2021 14,100 call does not have a trade
and has a market of $0.00 bid @$0.00 offer. The index calculator would
look back to the most recent quote, which occurred at 09:32:57 a.m. and
would use that quote in the calculation to determine a One Second VWAP
for the 60th second (09:33:00 a.m.). However, if during the look back,
no quote has occurred since market open, the observation period up to
and including the 60th second would be considered invalid and the new
observation period would begin with the next second. In that case, the
new observation period would begin at 09:33:01 a.m. and would continue
for 300 seconds as long as there is a One Second VWAP which can be
determined for all 32 NDX component options.
During the scenario above, if during the 58th, 59th, and 60th
second, the required NDX component June 18, 2021 14,100 call does not
have a trade and has a market of $0.00 bid @$0.00 offer, then the index
calculator would look back to the most recent quote which occurred at
09:32:57 a.m. and would use that value in the calculation to determine
the One Second VWAP for the 58th, 59th, and 60th second.
The Exchange believes that its proposal would ensure that the
Closing VWAP is calculated using options with sufficient liquidity for
each of the thirty-two NDX components by seeking component values that
are represented by trades and/or quotes. The Exchange believes that
initially looking back for the most recent published quote midpoint for
that option will ensure an efficient price for that option
component.\17\ If the Exchange is unable to obtain a One Second VWAP
for any of the thirty-two NDX option series during the Closing
Settlement Period, the Exchange will invalidate the Closing Settlement
Period and move on to calculate the Closing VWAP utilizing a forward
rolling observation period of one second.
---------------------------------------------------------------------------
\17\ The Exchange's calculation is dependent upon values for the
32 component options.
---------------------------------------------------------------------------
The Exchange believes rolling the Closing Settlement Period forward
by one second to obtain a One Second VWAP for each of the thirty-two
NDX option series for all 300 consecutive seconds of the new
observation period would ensure that the Closing VWAP is calculated
using sufficient liquidity for each of the thirty-two NDX components by
seeking trades and/or quotes in a new observation period. Utilizing a
one second period of time to acquire a new observation window would
allow the Exchange to utilize an observation window closest in time to
the original window. Also, moving forward in increments of one second,
as necessary, would serve to methodically move through the trading day
for a potential observation window that would satisfy the Exchange's
liquidity requirements. This method would continue to assess the entire
field of NDX options prices each second to select specific listed NDX
options to obtain the prices of synthetic precisely at-the-money
options. As with the initial Closing Settlement Period, since the
market is subject to constant change during three hundred individual
one-second time periods for which listed options will be included in
Closing VWAP, market participants cannot predict which option
components will be included because that would entail predicting where
the NDX price level (a function of predicting the price of all one-
hundred component stocks) will be at the end of each of the three
hundred individual one-second time periods. In addition, the Exchange
notes that the look back period would likely not be subject to
manipulation as the historical information would only be utilized in
[[Page 55899]]
the event that liquidity was unavailable in the original observation
window, which contains options components, which cannot be predicted.
The Exchange reiterates that it is unlikely that the Volatility
Index Closing VWAP could be manipulated. In particular, because the
thirty-two component Volatility Index option inputs \18\ are reviewed
each second as the market changes to determine the at-the-money strikes
(meaning that Volatility Index components could change 300 times during
the Closing Settlement Period), market participants could manipulate
the Closing VWAP only if they could replicate such value by guessing
exact market moves over an extended period of 300 million microseconds.
Because the likelihood of replication is extremely low, the Exchange
believes that it is unlikely the Closing VWAP could be manipulated.
---------------------------------------------------------------------------
\18\ The Exchange notes that due to the number of proposed
components, the mathematical formula would prevent the Volatility
Index from exceeding 12.5% in any single component and 43.5% for the
top 5 components.
---------------------------------------------------------------------------
Nonetheless, the Exchange, in its normal course of surveillance,
will monitor for any potential manipulation of the Volatility Index
settlement value according to the Exchange's current procedures.
Additionally, the Exchange would 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 Closing VWAP for potential manipulation on
the Exchange.
Finally, the Exchange proposes to amend the term ``executed
orders'' at Options 4A, Section 12, (b)(6)(D)(II) which currently
provides, ``Executed orders shall include simple orders and complex
orders however, individual leg executions of a complex order will only
be included if the executed price of the leg is at or within the
NBBO.'' The Exchange proposes to instead provide, ``Executed orders
shall include simple orders and complex orders (excluding out-of-
sequence and late trades), however, individual leg executions of a
complex order will only be included if the executed price of the leg is
at or within the NBBO.'' The Exchange desires to exclude out-of-
sequence and late trades to avoid potential stale data in the Closing
VWAP calculation.
Implementation
The Exchange proposes to issue an Options Trader Alert announcing
the day it will launch options on Nasdaq-100 Volatility Index. The
Exchange initially indicated that it would launch these options by Q3
2021.\19\ At this time, the Exchange proposes to launch VOLQ options on
or before March 31, 2022.
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release No. 91781 (May 5,
2021), 86 FR 25918 (May 11, 2021) (SR-PHLX-2020-41) (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).
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\20\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\21\ in particular, in that it will permit options
trading in the Volatility Index pursuant to rules designed to prevent
fraudulent and manipulative acts and practices and promote just and
equitable principles of trade by amending its Volatility Index to
create additional alternative observations periods to arrive at a
Closing VWAP in the event that any of the thirty-two NDX option series
used for Closing VWAP do not have a One Second VWAP during the five
minute Closing Settlement Period. Phlx's proposal to amend the Closing
VWAP by proposing alternate observations periods would ensure a Closing
Settlement Period which has published liquidity for all of the thirty-
two NDX option series used for Closing VWAP. The Exchange notes that
this alternate methodology may be utilized where there is no liquidity
in any of the thirty-two NDX option series used for Closing VWAP. This
may be caused by an Exchange system issue, market maker issue, or some
news or halt in an underlying.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The proposal would promote just and equitable principles of trade
by creating an automated, non-discretionary process by which the
Exchange would determine the Closing VWAP in the event any of the
thirty-two underlying NDX component options do not have a trade/quote
during the Closing Settlement Period. The Closing VWAP would be
calculated consistently. The Exchange anticipates the alternative
Closing VWAP calculation would be utilized infrequently. In the event
of a trading halt in one or more options, excluding a trading halt in
all Nasdaq-100 index options, prior to the completion of the Closing
Settlement Period, the Exchange's proposal to look back for a One
Second VWAP, prior to looking forward, is consistent with the Act
because the Exchange's process would be consistent for obtaining
missing values for the Closing VWAP. Also, in the event a trading halt
caused Market Makers to not submit a Valid Width Quote in certain
components during the Opening Process, the alternative methodology
would look forward to obtain a value. Also, the Exchange would utilize
a quote from the Opening Process only in the event an options series
was able to open. If the Opening Process did not complete for an
options series, there would be no value to obtain for a component
during a look back.\22\
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\22\ The Closing Settlement Period occurs within seconds of the
completion of the Opening Process.
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This method would continue to assess the entire field of NDX
options prices each second to select specific listed NDX options to
obtain the prices of synthetic precisely at-the-money options. As with
the initial settlement window, since the market is subject to constant
change during three hundred individual one-second time periods for
which listed options will be included in Closing VWAP, market
participants cannot predict which options components will be included
because that would entail predicting where the NDX price level (a
function of predicting the price of all one-hundred component stocks)
will be at the end of each of the three hundred individual one-second
time periods. The Exchange reiterates that it is unlikely that the
Volatility Index Closing VWAP could be manipulated. In particular,
because the thirty-two component Volatility Index option inputs are
reviewed each second as the market changes to determine the at-the-
money strikes (meaning that Volatility Index components could change
300 times during the settlement period), market participants could
manipulate the Closing VWAP only if they could replicate such value by
guessing exact market moves over an extended period of 300 million
microseconds. Because the likelihood of replication is extremely low,
the Exchange believes that it is unlikely the Closing VWAP could be
manipulated. Similarly, with respect to the look back period, it would
be unlikely that manipulation could occur as the historical information
would only be utilized in the event that liquidity was unavailable in
the original observation window, which contains options components
which cannot be predicted. Nonetheless, the Exchange, in its normal
course of surveillance, will monitor for any potential manipulation of
the Volatility Index Closing VWAP and monitor the integrity of the
Volatility Index by analyzing trades, quotations, and orders that
affect any of the 300 calculated reference prices for
[[Page 55900]]
any of the NDX option series used for the Closing VWAP for potential
manipulation on the Exchange.
Utilizing a time period of one second to acquire a new observation
window would allow the Exchange to utilize an observation window
closest in time to the original window. Also, moving forward in
increments of one second, as necessary, would serve to methodically
move through the trading day for a potential observation window that
would satisfy the Exchange's liquidity requirements.
The Exchange's proposal to amend the term ``executed orders'' to
exclude out-of-sequence and late trades is consistent with the Act as
these values may represent potential stale data in the Closing VWAP
calculation. The Exchange believes the midpoint better reflects the
price of a component.
Finally, the Exchange's proposal to amend current Options 4A,
Section 12(b)(6)(D)(II) to remove the 12:00 p.m. deadline for
publishing a settlement value is consistent with the Act because a re-
opening could occur anytime during the trading day and, therefore,
citing specifically to a 12:00 p.m. timeframe does not consider all
possible scenarios. Further, specifically indicating a trading halt of
the Nasdaq-100 index options in the rule text is more precise as the
impact to the Nasdaq-100 index options is a direct concern for VOLQ.
The proposed language more directly expands upon the manner in which
the Closing VWAP will be handled in the event of a trading halt.
B. Self-Regulatory Organization's Statement on Burden on Competition
This proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act. The Exchange notes that the proposed alternative observation
windows will facilitate the listing and trading of the Volatility Index
by ensuring liquidity for each of the option components. The proposed
structure will enhance competition among market participants, to the
benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-Phlx-2021-56 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-2021-56. 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-2021-56 and should be submitted on
or before October 28, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21869 Filed 10-6-21; 8:45 am]
BILLING CODE 8011-01-P
