Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Proposed Rule Change To Make Permanent Certain P.M.-Settled Pilots, 13182-13197 [2023-04224]
Download as PDF
<![CDATA[
13182
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
away market center should be permitted
to route, as the order would be subject
to the away market center’s rules
regarding compliance with Rule 201 of
Regulation SHO upon posting.
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 37 and Rule 19b–
4(f)(6) thereunder.38
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),39 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. The Exchange states the
proposed rule change provides clarity
on how orders modified to sell short
exempt are accomplished and the
priority of orders marked sell short
exempt. The Exchange believes that the
proposed rule change related to
modifications from sell long to sell short
(or vice versa) or sell short exempt to
sell short (or vice versa) that occur
during an SSCB will affect only a small
percentage of overall order
modifications.40 Finally, the Exchange
states that the proposed change to Rule
11.11(a) will permit orders containing
routing instructions entered by all Users
that would post to an away market
during an SSCB to route to away market
centers immediately upon becoming
operative. The Commission believes that
ddrumheller on DSK120RN23PROD with NOTICES1
37 15
U.S.C. 78s(b)(3)(A).
38 17 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.
39 17 CFR 240.19b–4(f)(6)(iii).
40 See supra note 29.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
waiver of the 30-day operative delay is
consistent with the protection of
investors and the public interest
because the proposed rule change does
not raise any new or novel issues.
Accordingly, the Commission hereby
waives the operative delay and
designates the proposal operative upon
filing.41
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 will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
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–CboeBZX–2023–012, and
should be submitted on or before March
23, 2023.
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.42
J. Matthew DeLesDernier,
Deputy 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–
CboeBZX–2023–012.
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–CboeBZX–2023–012. 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
41 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).
PO 00000
Frm 00103
Fmt 4703
Sfmt 4703
[FR Doc. 2023–04229 Filed 3–1–23; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–96979; File No. SR–ISE–
2023–08]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing of Proposed
Rule Change To Make Permanent
Certain P.M.-Settled Pilots
February 24, 2023.
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 February
23, 2023, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
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 make
permanent the pilot to permit the listing
and trading of options based on 1⁄5 the
value of the Nasdaq-100 Index
42 17
CFR 200.30–3(a)(12), (59).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\02MRN1.SGM
02MRN1
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
(‘‘Nasdaq-100’’ or ‘‘NDX’’) and the
Exchange’s nonstandard expirations
pilot program which are both currently
set to expire on May 4, 2023.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/ise/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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
ISE proposes to make permanent 2
pilots, which are both set to expire on
May 4, 2023: (1) the Exchange’ s pilot
to permit the listing and trading of
options based on 1⁄5 the value of the
Nasdaq-100 Index (‘‘NQX Pilot’’), and
(2) the Exchange’s nonstandard
expirations pilot program
(‘‘Nonstandard Pilot’’).
ddrumheller on DSK120RN23PROD with NOTICES1
NQX Pilot
ISE filed a rule change to permit the
listing and trading of index options on
the Nasdaq 100 Reduced Value Index
(‘‘NQX’’) on a twelve month pilot basis.3
NQX options trade independently of
and in addition to NDX options, and the
NQX options are subject to the same
rules that presently govern the trading
of index options based on the Nasdaq100, including sales practice rules,
margin requirements, trading rules, and
position and exercise limits. Similar to
NDX, NQX options are European-style
and cash-settled, and have a contract
multiplier of 100. The contract
specifications for NQX options mirror in
all respects those of the NDX options
contract listed on the Exchange, except
that NQX options are based on 1⁄5 of the
value of the Nasdaq-100, and are p.m.3 See Securities Exchange Act Release No. 82911
(March 20, 2018), 83 FR 12966 (March 26, 2018)
(SR–ISE–2017–106) (Approval Order).
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
settled pursuant to Options 4A, Section
12(a)(6).
The Exchange proposes to amend ISE
Options 4A, Section 12(a)(6)(i) to make
permanent the current NQX Pilot. The
NQX Pilot was extended various times
with the last extension through May 4,
2023.4 The Exchange continues to have
sufficient capacity to handle additional
quotations and message traffic
associated with the listing and trading
of NQX options. In addition, index
options are integrated into the
Exchange’s existing surveillance system
architecture and are thus subject to the
relevant surveillance processes. The
Exchange also continues to have
adequate surveillance procedures to
monitor trading in NQX options thereby
aiding in the maintenance of a fair and
orderly market. Additionally, there is
continued investor interest in NQX.
Nonstandard Pilot
ISE filed a proposed rule change for
the listing and trading on the Exchange,
on a twelve month pilot basis, of p.m.settled options on broad-based indexes
with nonstandard expirations dates.5
The Nonstandard Pilot permits both
Weekly Expirations and End of Month
(‘‘EOM’’) expirations similar to those of
the a.m.-settled broad-based index
options, except that the exercise
settlement value of the options subject
to the pilot are based on the index value
derived from the closing prices of
component stocks. The Nonstandard
Pilot was extended various times with
the last extension through May 4, 2023.6
4 See Securities Exchange Act Release Nos.86071
(June 10, 2019), 84 FR 27822 (June 14, 2019) (SR–
ISE–2019–18); 87379 (October 22, 2019), 84 FR
57793 (October 28, 2019) (SR–ISE–2019–27); 88683
(April 17, 2020), 85 FR 22768 (April 23, 2020) (SR–
ISE–2020–18); 90257 (October 22, 2020), 85 FR
68387 (October 28, 2020) (SR–ISE–2020–33); 91485
(April 6, 2021), 86 FR 19052 (April 12, 2021) (SR–
ISE–2021–05); 93448 (October 28, 2021), 86 FR
60717 (November 3, 2021) (SR–ISE–2021–22);
94632 (April 7, 2022), 87 FR 21940 (April 13, 2022)
(SR–ISE–2022–09); and 96177 (October 28, 2022),
87 FR 66335 (November 3, 2022) (SR–ISE–2022–
23).
5 See Securities Exchange Act Release No. 82612
(February 1, 2018), 83 FR 5470 (February 7, 2018)
(approving SR–ISE–2017–111) (Order Approving a
Proposed Rule Change to Establish a Nonstandard
Expirations Pilot Program).
6 See Securities Exchange Act Release Nos. 85030
(February 1, 2019), 84 FR 2633 (February 7, 2019)
(SR–ISE–2019–01); 85672 (April 17, 2019), 84 FR
16899 (April 23, 2019) (SR–ISE–2019–11); 87380
(October 22, 2019), 84 FR 57786 (October 28, 2019)
(SR–ISE–2019–28); 88681 (April 17, 2020), 85 FR
22775 (April 23, 2020) (SR–ISE–2020–17); 90265
(October 23, 2020), 85 FR 68605 (October 29, 2020)
(SR–ISE–2020–34); 91486 (April 6, 2021), 86 FR
19048 (April 12, 2021) (SR–ISE–2021–06); and
93449 (October 28, 2021), 86 FR 60679 (November
3, 2021) (SR–ISE–2021–23); 94632 (April 7, 2022),
87 FR 21940 (April 13, 2022) (SR–ISE–2022–09);
and 95992 (October 6, 2022), 87 FR 62163 (October
13, 2022) (SR–ISE–2022–20).
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
13183
Supplementary Material .07(a) to
Options 4A, Section 12 provides that
the Exchange may open for trading
Weekly Expirations on any broad-based
index eligible for standard options
trading to expire on any Monday,
Wednesday, or Friday (other than the
third Friday-of-the-month or days that
coincide with an EOM expiration).
Weekly Expirations are subject to all
provisions of Options 4A, Section 12
and are treated the same as options on
the same underlying index that expire
on the third Friday of the expiration
month. Unlike the standard monthly
options, however, Weekly Expirations
are p.m.-settled.
Pursuant to Supplementary Material
.07(b) to Options 4A, Section 12 the
Exchange may open for trading EOM
expirations on any broad-based index
eligible for standard options trading to
expire on the last trading day of the
month. EOM expirations are subject to
all provisions of Options 4A, Section 12
and treated the same as options on the
same underlying index that expire on
the third Friday of the expiration
month. However, the EOM expirations
are p.m.-settled.
At this time, the Exchange proposes to
make permanent the Nonstandard Pilot.
The Exchange has sufficient systems
capacity to handle p.m.-settled options
on broad-based indexes with
nonstandard expirations dates and has
not encountered any issues or adverse
market effects as a result of listing them.
Additionally, there is continued
investor interest in these products.
In support of the permanency of the
NQX Pilot and the Nonstandard Pilot,
the Exchange empirically assessed the
impact of p.m.-settled NDX options on
options market quality and examined
market capacity around the market
close.7 Specifically, the Exchange
analyzed trading volume, open interest,
spreads, and closing auction volumes.
In recent years, ISE has implemented
changes and introduced new types of
index options tied to the Nasdaq-100
Index® (ticker symbol ‘‘NDX’’). This
report presents a set of empirical
findings relating the impact of these
changes, submitted in support of a
request for permanency of the NQX
Pilot and the Nonstandard Pilot.
7 This includes p.m.-settled products trading on
ISE (NQX Pilot and the Nonstandard Pilot) as well
as p.m.-settled products trading on Phlx (XND Pilot
and the Nonstandard Pilot). Phlx filed a similar
request for permanency of its p.m.-settled pilots.
See SR–Phlx–2023–04 (not yet noticed).
E:\FR\FM\02MRN1.SGM
02MRN1
ddrumheller on DSK120RN23PROD with NOTICES1
13184
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
A general timeline of events since
2017 is as follows:
• In January 2017, the Exchange
discontinued licensing agreements with
competing options exchanges for the
listing and trading of NDX options. This
discontinuation led to a gradual
reduction in the number of NDX
expiries listed on these exchanges. By
2019 trading in NDX-related options
therefore became exclusively done on
three Nasdaq-affiliated exchanges:
Nasdaq Phlx, LLC (‘‘Phlx’’), ISE, and
Nasdaq GEMX, LLC (‘‘GEMX’’).
• In January 2018, the expiration of
NDX options on Fridays, other than the
third Friday-of-the-month, was changed
from a.m.-settled to p.m.-settled. ThirdFriday expirations continued to be a.m.settled as before. The p.m.-settled index
options were given the new trading
symbol ‘‘NDXP’’. These contracts were
exclusively listed on Phlx and ISE.
• In June 2018, a new contract was
introduced based on the Nasdaq-100
Index but with reduced notional value.
The underlying index of the new
contract, symbol ‘‘NQX,’’ was set at onefifth the value of the NDX (with contract
multiplier remaining at $100). This
contract trades exclusively on ISE, and
is p.m. settled on Fridays.
• In September 2018, a p.m.-settled
index option, ‘‘NDXP,’’ was introduced
that expired on Wednesdays of each
week. It was listed exclusively on Phlx
and ISE.
• In February 2020, a p.m.-settled
NDXP index option was introduced that
expired on Mondays of each week. It
was listed exclusively on Phlx and ISE.
• In April 2021, a second reduced
value contract was introduced. The
underlying index, ‘‘XND’’, is set at onehundredth (1%) of the NDX (with
contract multiplier remaining at $100).
The notional value is therefore equal to
the level of the Nasdaq-100 Index. This
contract trades on Phlx and is p.m.settled.
• On July 29, 2022, ISE received
approval to list and trade p.m.-settled
NDX index options that expire on
Tuesday or Thursday under its
Nonstandard Expirations Pilot
Program.8
• On October 3, 2022, ISE
commenced listing p.m.-settled
quarterly option on the Nasdaq-100
Index.
Following terminological convention,
the Exchange refers to the traditional
third Friday expiration series as
‘‘monthly’’ contracts, while the other
8 The Exchange notes that Tuesday and Thursday
weeklies on the Nasdaq-100 Index have been
trading for less than one month. See https://
www.nasdaqtrader.com/MicroNews.
aspx?id=OTA2022-26.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
series are referred to as ‘‘weekly’’
contracts. In this report, the new p.m.settled index options will be written as
NDXP-Fri, NDXP-Wed, and NDXP-Mon
based on their expiration day. The NDX
contracts that formerly expired on
Fridays, other than the third Friday-ofthe-month, will be referred to as NDXWeekly, indicating their status as
weekly contracts. The monthly third
Friday NDX contract will be denoted
NDX-Monthly. NQX and XND are
considered weekly contracts. It may be
noted that when Friday is a market
holiday, the expiration moves to the
prior Thursday.9 When Wednesday is a
holiday, expiration of Wednesday
contracts moves forward to Tuesday.
When Monday is a holiday, Monday
expirations move back to Tuesday.10
The purpose of this report is to
empirically assess the impact of these
changes on NDX options markets, with
a special focus on the market quality of
the incumbent a.m.-settled NDX index
options and market capacity around the
market close. The Exchange provides a
comprehensive analysis in this report
on the impact of p.m.-settled index
options on a.m.-settled NDX index
options, including option trading
volume, option open interests and
option liquidity.11 In assessing the
impact of the innovations on market
quality, the Exchange uses options on
the Invesco QQQ Trust Series 1
(‘‘QQQ’’) 12 as a control group. While
activity in QQQ options would capture
trading interest in the Nasdaq-100 Index
generally and may reflect market
conditions, it would be largely
unaffected by the innovations
considered in this report. QQQ options
include monthly third Friday
expirations, weekly non-third Friday
expirations, and contracts expiring the
end of the quarter.13
Historically there have been concerns
that p.m.-settled index options could
result in increased market and price
volatility in the underlying component
stocks, due to the unwinding of hedgerelated positions at the close on
expiration. A study conducted on behalf
of the Securities and Exchange
Commission’s Division of Economic and
Risk Analysis 14 shows that the market
9 See Supplementary Material .07(a) of ISE
Options 4A, Section 12.
10 Id.
11 Today, NDX options are a.m.-settled and p.m.settled.
12 Invesco QQQTM is an exchange-traded fund
based on the Nasdaq-100 Index.
13 For the purpose of spread analysis we match
on option price, moneyness category, time to
maturity and option’s expiration month.
14 See Securities and Exchange Commission,
Division of Economic Risk and Analysis,
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
share for p.m.-settled options on S&P
500® Index has grown substantially
since 2007. As the expiration date for
p.m.-settled index options is more
scattered compared to that for a.m.settled options, only a smaller
percentage of open interest expires on
each date. As a result, p.m.-settled index
option expirations are unlikely to cause
any disruptive effect on the market. The
DERA Staff PM Pilot Memo also shows
that expiring open interest of a.m.settled options may have had an
economically small impact on the
volatility of the Nasdaq-100 index
around the open.15 The DERA Staff PM
Pilot Memo further shows that, although
p.m.-settled index option trading
volume may have a statistically
significant relationship with the
volatility of the underlying index
around the market close, the economic
significance was generally small. In its
report, the Exchange provides
additional analysis on market capacity
around the market close. As the closing
auction price is the most widely used
reference price for mutual funds and for
many exchange-traded products, closing
auction volume has grown substantially
in recent years. In this report, the
Exchange shows that the closing auction
volume on the equity market have
become much larger than the opening
auction, which may indicate that there
is sufficient liquidity in closing auctions
to absorb liquidity demand associated
with p.m.-settlement of NDX and NQX
index options.
In addition to analysis on closing
auctions, the report presents findings on
three market characteristics: trading
volume, open interest, and spreads. The
Exchange finds that the trading volume
and the notional open interests for
options that had NDX and NQX as the
underlying increased during our sample
period. In conclusion, there is no
evidence that NDX and NQX options
contracts, which are p.m.-settled, would
result in reduced trading activity or
degradation in market quality of the
a.m.-settled index options.
Memorandum, Cornerstone Analysis of PM CashSettled Index Option Pilots (February 2, 2021)
(‘‘DERA Staff PM Pilot Memo’’), available at:
https://www.sec.gov/dera/staff-papers/studies-andreports/analysis-of-pm-cash-settled-index-optionpilots.
15 Table 20 of the DERA Staff PM Pilot Memo
suggests that a $10 billion increase in option
settlement quantity is associated with an increase
in absolute return of 0.025% near the open. The
report also shows that expiring open interest of
a.m.-settled options had no significant impact on
the volatility of the underlying index near the open
for the S&P 500 Index.
E:\FR\FM\02MRN1.SGM
02MRN1
13185
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
Analysis of Volume
The introduction of p.m.-settled index
options and its impact on the trading
activity of a.m.-settled options is likely
the single most important factor under
consideration. Volume is the primary
indicator of trading interest and it drives
market quality to a large extent.
Consolidated volume information is
available from The Options Price
Reporting Authority (‘‘OPRA’’), the
source of information used in this
section. The sample period used for this
report is 2017 through April 2022.
Consolidation of Trading on Nasdaq
Affiliated Exchanges
As noted above, trading in NDX
options began to consolidate exclusively
onto Nasdaq-owned affiliated exchanges
starting in 2017; the impact on volume
was not immediate. Since January 2017,
non-Nasdaq exchanges ceased listing
new NDX options series, but continued
with previously listed NDX options. The
following table shows the percentage of
NDX options contract volume traded on
non-Nasdaq exchanges, which at the
time included Cboe Exchange, Inc.
(‘‘Cboe’’), NYSE American LLC, and
NYSE Arca, Inc. Of these three markets,
Cboe was the largest in volume. The
Nasdaq affiliated exchanges trading
NDX options were Phlx, ISE and GEMX.
TABLE 1–NDX VOLUME ON NON-NASDAQ EXCHANGES
Year
2017 .........................................................................................................................................................................
2018 .........................................................................................................................................................................
NDX options volume from non-Nasdaq
exchanges after 2018.
Contract Volume and Notional Volume
Contract volume in the regular-sized
Nasdaq-100 Index contracts may be
broken down into five time series: (1)
A number of observations can be
drawn from the graph.
• The overall total contract volume
remained almost flat until the pandemic
market recovery started in the Spring of
2020. From Fall 2020 forward there has
been substantial growth in volume. It
appears that most of the recent growth
has come from the NDX-Weekly
contracts.
16 As noted herein, this refers to the monthly
third Friday a.m.-settled NDX contract.
17 As noted above, this refers to the p.m.-settled
NDX contracts that formerly expired on Fridays,
other than the third Friday-of-the-month.
18 NDXP-Wed and NDXP-Mon are the p.m.-settled
NDX contracts expiring on Wednesday and
Monday, respectively.
19 The full data supporting the graph is shown in
the appendix.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00106
Fmt 4703
Sfmt 4703
1
2
3
4
1
2
3
4
22.2
16.4
2.2
5.5
0.3
0.7
0.1
4.2
the incumbent NDX-Monthly; 16 (2) the
NDX-Weekly contract transitioning to
NDXP-Fri; 17 and (3) the introduction of
NDXP-Wed and NDXP-Mon.18 The
following graph shows monthly totals
for each of these five groups.19
BILLING CODE 8011–01–P
• The volumes of NDX-Monthly and
NDX-Weekly were roughly equivalent
during 2017. This is noteworthy for the
fact that for any given month there
would usually be at least three, and
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.022</GPH>
ddrumheller on DSK120RN23PROD with NOTICES1
By 2018 volume on the non-Nasdaq
exchanges had largely disappeared. The
surge in volume during the final quarter
of 2018 was likely due to the end-ofyear final closing of positions—note the
similar bump in 2017. There was no
Non-Nasdaq
share
%
Quarter
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
sometimes four times, the number of
front-month expiries for the weekly
contract. The Exchange can infer, then,
that the monthly contracts tend to have
substantially higher volume per series
than the weekly contracts.
• When NDX-Weekly transitioned to
NDXP-Fri, the volume relationship with
NDX-Monthly remained roughly the
same.
• Soon after launch, the NDXP-Wed
contracts achieved volume levels not
much lower than the NDXP-Fri
contracts, and, in turn, not much lower
than the monthly contracts.
• Soon after launch, the NDXPMonday contracts achieved volume
levels not much lower than the NDXPFri contracts, and, in turn, not much
lower than the monthly contracts.
• By the end of the sample period,
each of the four remaining contract
types had roughly the same value (again
recognizing the differing number of
expiries).
Each of the current contract types
garner substantial trading volume.
Regarding the NDX-Weekly/NDXP-Fri
transition, Figure 2, which ends in
August 2018, takes a closer look at the
timeframe immediately prior to the
launch of NDXP-Wed. The transition
month of January 2018 is not shown
(both contract types had volume during
January).
Though NDXP-Fri volume was
relatively low in May 2018, there is no
sign of a substantial sustained drop in
volume accompanying the transition.
During the timeframe under
consideration in this report there has
been a remarkable increase in the level
of the Nasdaq-100 Index, a rough
tripling of the index from early 2017 to
April 2022. The notional value of a
regular-sized contract is $100 times the
level of the index, and so it has tripled
during the sample period, and is
currently roughly $1.3 million. In light
of these changes, it is useful to consider
volume from the perspective of notional
value traded rather than contracts.
Figure 3 shows the sum of monthly
notional value traded for NDX-Monthly
and for the total of all five of the
contract types. The notional value
traded was computed as the sum of
contracts traded times the monthly
average value of the Nasdaq-100 Index
times $100. The graph also shows linear
trend lines for each time series.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00107
Fmt 4703
Sfmt 4703
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.023</GPH>
ddrumheller on DSK120RN23PROD with NOTICES1
13186
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
It appears that while the notional
volume of the incumbent monthly
contract has been flat, the total volume
of all contract types exhibit a positive
trend, with remarkable growth since the
Fall of 2020. It appears, therefore, that
the introduction of p.m.-settlement is
associated with an increase in NDX
options trading.
Comparison With QQQ Volume
EN02MR23.025</GPH>
Figure 4 presents a time series of the
ratio of the sum of monthly contract
volume in the indicated index option
contracts to the sum of contract volume
in QQQ options. For NDX-Monthly
index options, only QQQ volume from
third Friday expiring contracts was
used. Since both the index and ETF
options have the same underlying
index, the observed trend is similar if
notional volumes were used instead.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00108
Fmt 4703
Sfmt 4725
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.024</GPH>
ddrumheller on DSK120RN23PROD with NOTICES1
The positive volume trend may be
due to the remarkable performance of
the Nasdaq-100 Index during this
timeframe. To rule out this alternative
explanation, the exchange compare the
volume in NDX/NDXP index options to
QQQ ETF options. It is worth noting
that the notional volume of a QQQ
option contract has been much lower
than that of an index option. During the
sample period, the average notional
value of an index option contract was
about $936,000, while a single QQQ
contract had notional value of about
$23,000.
13187
13188
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
The graph shows a substantial decline
in the relative level of the index option
volume during 2017. This decline is too
large to be explained by the reduction
in the share of options trading on nonNasdaq exchanges. The decline
stabilized at the start of 2018.
NQX Volume
Since launch, NQX volume has
grown, both in absolute terms and
relative to NDX/NDXP volume. The
period of extreme market volatility
surrounding the pandemic crisis in the
Spring of 2020 led to a volume spike, as
did the market recovery of the Fall of
2020. Even so, the relative level of NQX
volume was very low relative to that of
the regular-valued indexes. Due to the
low level of NQX volume, it seems
unlikely that its introduction had a
significant impact on the market quality
of the full-sized NDX contracts.
Therefore, no further analysis was
attempted on NQX options.
shows XND monthly contract volume
for the first year of trading.
In spite of the very high notional
volume of NDX/NDXP options, volume
in the reduced-value NQX options has
never been higher than NDXP trading
volume (perhaps due to the availability
of QQQ options). Figure 5 shows
The low level of XND options volume
suggests that the introduction of XND
did not have a noticeable impact on the
trading of the incumbent NDX/NDXP
contracts.
Analysis of Open Interest
The Exchange next considered trends
in open interest for the Nasdaq-100
Index options. The Options Clearing
Corporation (‘‘OCC’’) data was utilized
as source data for this analysis. Open
interest measures positions held
overnight; positions that are established
and closed during the day are not
captured.
Figure 6 shows the open interest, in
contracts, as of the last trading day of
the indicated month.
XND Volume
20 As noted herein, XND began trading in April
2021.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.026</GPH>
EN02MR23.027</GPH>
Trading in XND options contracts is
relatively new.20 The following table
ddrumheller on DSK120RN23PROD with NOTICES1
monthly volume for all NQX contracts.
Shown are both the volume in terms of
contracts traded, as well as NQX volume
relative to the total volume of NDX/
NDXP contracts. For the latter
calculation, the NQX contract volume
was divided by 5 to reflect its reduced
notional value.
13189
while it increased in the second half of
2022. The open interest in the
Wednesday and Monday contracts has
always been relatively low.
Further insight is shown in the
following graph, which shows the ratio
of open interest in weekly contracts to
that of the monthly contract (that is, the
open interest sum of NDX-Weekly,
NDXP-Fri, -Wed, and Mon divided by
the open interest in NDX-Monthly).
The graph shows a clear decline in
the ratio of weekly to monthly open
interest, starting at the beginning of
2018, but the declining trend stabilized
at the end of Q1 2018. When considered
with the volume information shown
above, this may be because options
traders with longer holding horizons
may be more likely to trade the monthly
contract, while those with shorter intraday positions are more likely to use the
weekly contracts. This tendency is
reflected in the listing of expiries. At
any given time, expirations out to a year
or more are available for the monthlies,
while expirations only out a month or
so are available for the weeklies.
As noted above, the notional value of
Nasdaq-100 Index options has roughly
tripled during this timeframe. It is
therefore useful to consider the trends
in open interest from a notional
perspective, as shown in the following
graph.
EN02MR23.029</GPH>
The open interest in NDX-Monthly is
remarkably stable during this timeframe,
and is substantially higher than that of
the weekly contracts. After transitioning
to p.m.-settlement, the open interest in
NDXP-Fri contract started to decline
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00110
Fmt 4703
Sfmt 4703
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.028</GPH>
ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
A clear positive trend is evident for
the monthly contract in terms of
notional value. The weeklies showed a
flat trend that has increased since the
Fall of 2020.
As discussed above, we designate
QQQ options as a control group for our
analysis. Figure 9 shows the ratio (in
contracts) of Nasdaq-100 Index options
to QQQ options. As noted herein, the
trend is unaffected when measuring
open interest in contracts or notional
value. The graph shows the ratio for
monthly contracts for NDX and QQQ, as
well as for NDX/NDXP and QQQ.
This graph closely mirrors the volume
graph shown above in Figure 9. There
was a distinct decline during 2017 in
month-end open interest, but the trend
stabilized at the start of 2018 and has
remained flat since then.
Analysis of Spreads
An important dimension of market
quality is the cost of trading. Following
Holden and Jacobsen (2014),21 the
Exchange used duration weighted
relative quoted spread as a measure of
the cost of trading. In this section, the
Exchange examines whether there is any
deterioration of spreads to a.m.-settled
21 See Holden, C. and Jacobsen, S., 2014,
Liquidity Measurement Problems in Fast,
Competitive Markets: Expensive and Cheap
Solutions. Journal of Finance. 69, 1747–17852
(https://onlinelibrary.wiley.com/doi/abs/10.1111/
jofi.12127).
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.031</GPH>
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
EN02MR23.030</GPH>
ddrumheller on DSK120RN23PROD with NOTICES1
13190
ddrumheller on DSK120RN23PROD with NOTICES1
In the above model, Spread is the
relative quoted spread. InverseofPrice is
the inverse of the option price. Call/Put
Dummy is a dummy variable that equals
1 for call options and 0 otherwise.
Expiry is the number of the days to the
expiration date. Moneyness is a dummy
variable for moneyness category of each
option. Specifically, all option contracts
were classified into 5 moneyness
categories. The moneyness for call
options was calculated as:
22 Although the Exchange believes that sampling
the first trading day of each month between date
January 2017 and April 2022 would reflect the
trend of market quality, the Exchange acknowledges
that in some cases there may some information loss
given a particular trading day. For example, a
volatile trading day may not be representative of the
market for that trading month.
23 See Kaul, G., Nimalendran, m., and Zhang D.,
2004, Informed Trading and Option Spreads.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
(contract nearest expiration) on the first
trading day of each month.22 The
Exchange considered an NBBO
quotation to be ‘‘live’’ and used in the
computation when the National Best
Offer (NBO) was non-zero.
In the following section, the
Exchanges shows the impact of the
introduction of p.m.-settled index
options on the liquidity of NDX
contracts by showing the average
monthly NDX spread over time (in
Figure 10) as well as comparing the
trend of relative quoted spread of NDX
contracts with that of QQQ contracts
(Figures 11 and 12). Figure 10 shows the
average monthly relative quoted spread
for all options with NDX as the
underlying. To better reflect the trend of
the relative quoted spread, the Exchange
plotted the average relative quoted
spread benchmarked against (subtracted
by) the average spread of 2017 as the
dotted line in Figure 10. The dotted
vertical line highlights the time when
p.m.-settled index options were
introduced. Specifically, the time series
in the dotted line was computed using
the following steps. First, the Exchange
calculated the duration weighted
average relative quoted spread for each
contract on each day. Second, the
Exchange took the average of the above
daily spread across all contracts with
NDX as the underlying for each day.
Third, the Exchange calculated the
average relative quoted spread for all
months in 2017. Finally, the 2017
average was subtracted from the
monthly average to create a time series
dataset. As can be seen from the plot, a
consistent decrease in the relative
quoted spread is prevalent from 2017 to
2022 and most importantly, there is no
obvious change in the trend following
the introduction of p.m.-settled index
options.
Although the above method is
intuitive, it is well known that the
option premia are correlated with
option characteristics such as expiry,
strike price, and whether the contract is
a put or a call option. Also, option
premia tend to increase when the
expected volatility of the underlying
asset increases, and premia increase
may in turn cause the spread to
increase. Inspired by Kaul, Nimalendran
and Zhang (2004) 23 and Albuquerque,
Song and Chen (2020),24 the Exchange
also employed the following regression
model to control for factors related to
option characteristics unrelated to the
NQX Pilot and the Nonstandard Pilot: 25
for put options, where ‘‘S’’ is the stock
price and ‘‘X’’ is the exercise price. The
cut-offs for the five moneyness groups
were: ¥30%; ¥10%; 10%; and 30%.
Month Fixed Effect is a dummy variable
for each month.
In constructing the plot, the
coefficients for those month fixed effects
were adjusted. The raw coefficients for
each month were collected from the
regression output. The first month in the
sample, January 2017, implicitly had a
coefficient of zero. The average
coefficient for the 12 months in 2017
was then calculated. Finally, the average
coefficients across all 12 months in 2017
were subtracted from the raw
coefficients to create a time series
dataset, which is depicted as the
unbroken line in Figure 10.
As can be seen from the plot, there is
a steady decrease in the relative quoted
spread for NDX option contracts. The
average relative quoted spread for NDX
contracts decreased by about 30%–40%
from the beginning of 2017 until the end
of the sample period. Since the
regression model controls for factors
that affect the spread, the unbroken line
Working Paper (https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=547462).
24 See Albuquerque, R., Song, S., and Yao, C.,
2020, The Price Effects of Liquidity Shocks: A
Study of SEC’s Tick-Size Experiment. Journal of
Financial Economics. 138, 700–724 (https://
www.sciencedirect.com/science/article/pii/
S0304405X20301884).
25 The calculation was inspired by Kaul, G.,
Nimalendran, m., and Zhang D., and Albuquerque,
R., Song, S., and Yao, C. See notes 21 and 22 above.
The Exchange includes control variables used in
Albuquerque, R., Song, S., and Yao, C. (2020)
liquidity analysis and constructs Moneyness
Categories following Kaul, Nimalendran and Zhang
(2004).
PO 00000
Frm 00112
Fmt 4703
Sfmt 4703
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.033</GPH>
Nasdaq-100 Index options by
introducing p.m.-settled index options.
A particular challenge for measuring
quoted spreads is created by the large
number of options series tied to a
particular underlying. In addition to the
range of expiries, a given expiration will
have many available strike prices. This
set of combinations then is doubled by
considering calls and puts. Many listed
options series will be very infrequently
traded. For example, at the start of the
sample period on January 3, 2017, there
were 3,720 individual options series
that had NDX as the underlying, made
up from 14 expiration dates and 382
strike prices. Of these listed options
series, only 458 had traded volume on
that date, with 233 options series with
volume of at least 10 contracts. Nearer
to the end of the sample period, on
April 29, 2022, there were 16,624 listed
options series with NDX or NDXP as the
underlying, consisting of 33 expiration
dates and 675 strikes. Of the listed
options series, 2,192 had some volume
and 538 had volume of at least 10
contracts.
To assess the trend in the relative
NBBO quoted spread, the Exchange
limited the number of options series
under consideration by reviewing
spreads in the front-month contracts
13191
EN02MR23.032</GPH>
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
based on the regression model tends to
be less volatile. However, there is no
large difference in the results between
the average spread and results based on
the regression models, but there is some
divergence at certain points in time. The
Exchange conjectures that the
divergence is due to higher option
premia caused by the elevated levels of
volatility. In summary, based on both
methods, a consistent decrease in
relative quoted spread is observed from
2017 to 2022.
The Exchange then compared the
spread trend of NDX monthly contracts
to that of QQQ monthly contracts. The
average monthly spread for QQQ
contracts was constructed the same way
as that for the NDX monthly contracts
(as described in detail above). Figure 11,
below, displays the patterns of relative
quoted spread for NDX and QQQ, which
are remarkably similar and decreased
during the sample period. Figure 12,
below, highlights the difference in
Figure 11 as between NDX and QQQ.
Relative to a QQQ control, there is
therefore no evidence of a deterioration
of NDX monthly spreads during the
sample period. In summary, the results
suggest that there is gradual decrease in
both the NDX monthly contracts spread
and the QQQ contracts spread during
the sample period.
As the introduction of p.m.-settled
index options may affect the transaction
cost for NDX monthly contracts, it is
unlikely to affect the spread of QQQ
options. Therefore, the Exchange uses
the following regression to formally test
whether the spread of NDX contract
changed after the introduction of p.m.settled index options. NDX and QQQ
options are included in the sample for
the period between January 2017 and
December 2018. This regression looks at
a sample period starting from one year
before and ending one year after the
introduction of p.m.-settled index
options.
Similar to regression model (1),
Spread is the relative quoted spread.
InverseofPrice is the inverse of the
option price. Call/Put Dummy is a
dummy variable that equals 1 for call
options and 0 otherwise. Expiry is the
number of the days to the expiration
date.27 Moneyness is a dummy variable
for moneyness category of each option.
NDX is a dummy variable that equals
one if the underlying asset of the option
is NDX index and zero otherwise. Post
is a dummy variable that equals to one
for days after January 2018 and zero
otherwise. The Exchange also includes
the interaction terms of the post dummy
and the NDX dummy (NDX * Post).
Table 3 shows that the coefficient of
the interaction term is negative but it is
statistically insignificant. Therefore, the
Exchange concludes that the
introduction of p.m.-settled index
options did not negatively affect the
liquidity of a.m.-settled NDX options.28
26 NBBO data was unavailable between August 1,
2021 and August 11, 2021, and, therefore, August
2021 was excluded from the plot. Also, with respect
to Figure 10, Regression plots the coefficients of
dummies for each month (i.e., fixed effects).
Average Spread plots the average monthly relative
quoted spread subtracted by the 2017 average
relative quoted spread.
27 The Exchange notes that there was no
transformation.
28 Id.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.035</GPH>
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
EN02MR23.034</GPH>
ddrumheller on DSK120RN23PROD with NOTICES1
13192
EN02MR23.037</GPH>
13193
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00114
Fmt 4703
Sfmt 4725
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.036</GPH>
ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
13194
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
TABLE 3—REGRESSION RESULTS
ddrumheller on DSK120RN23PROD with NOTICES1
Constant .............................................................................................................................................
NDX ...................................................................................................................................................
Post ....................................................................................................................................................
NDX * Post ..........................................................................................................................................
InverseofPrice ....................................................................................................................................
Call/Put Dummy .................................................................................................................................
Expiry .................................................................................................................................................
Moneyness Categories Fixed Effect ..................................................................................................
Month Fixed Effect .............................................................................................................................
*** 0.26 .....
*** 0.28 .....
¥0.01 ......
* ¥0.02 ....
*** 0.00 .....
*** 0.26 .....
*** 0.00 .....
Yes.
Yes.
std
t
0.01
0.01
0.02
0.01
0.00
0.01
0.00
37.50
28.62
¥0.80
¥1.73
48.65
37.77
46.29
The report considered one additional
question regarding quoted spreads—
whether the move from a.m.-settlement
to p.m.-settlement for Friday weeklies
(NDX-Weekly to NDXP-Fri) led to
changes in spreads for those contracts.
This sample timeframe was from July
2017 through August 2018, prior to the
launch of NDXP-Wed contracts. As
before, the Exchange presented both the
simple average monthly relative quoted
spread as well as the average spread
calculated using the regression model.
The relative quoted spread went
down at the first part of 2018 and up in
May and June 2018; it remained
comparable to the 2017 average.
Overall, the Exchange sees no
evidence of deterioration of spreads
associated with the introduction of
p.m.-settled NDX options.
Market Capacity Around the Market
Close
was generally small. The DERA Staff PM
Pilot Memo provided,
The Exchange next analyzed the
impact that p.m.-settled index options
may have on the closing process of the
equity markets.31 The DERA Staff PM
Pilot Memo concluded that while p.m.settled index options activity may have
had a statistically detectable impact on
volatility, the economic significance
However, the report suggests that the
magnitude of the effect of expiring p.m. cashsettled index options open interest on the
measure of volatility and price reversals for
index futures, the underlying cash index, and
index component securities is economically
very small.32
Simple-NDX plots the average monthly relative
quoted spread subtracted by the 2017 average
relative quoted spread for NDX contracts. SimpleNDXP plots the average monthly relative quoted
spread subtracted by the 2017 average relative
quoted spread for NDXP contracts.
31 This analysis considers the DERA Staff PM
Pilot Memo.
32 See DERA Staff PM Pilot Memo at page 1.
29 Id.
30 With
respect to Figure 13, Reg-NDX plots the
coefficients of dummies for each month for NDX
contracts. Reg-NDXP plots the coefficients of
dummies for each month for NDXP contracts.
VerDate Sep<11>2014
21:27 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.038</GPH>
coef
13195
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
The following provides an illustration
using some of the regression results
from the DERA Staff PM Pilot Memo.
Among the volatility variables analyzed
by the DERA Staff PM Pilot Memo was
the ‘‘Magnitude of Maximum Reversal
Overlapping Close’’ of index futures
impact of a very large increase in
settlement volume: an increase from its
25th percentile to its 75th percentile.
The following table shows the steps of
the calculation.
prices. The DERA Staff PM Pilot Memo
found that this metric was higher when
the options settlement volume was
higher, for both the S&P 500 and the
Nasdaq-100 Index options. Using data
provided in the DERA Staff PM Pilot
Memo, the Exchange can estimate the
TABLE 4 33
ddrumheller on DSK120RN23PROD with NOTICES1
S&P500 .........................................................
Nq-100 ...........................................................
75th
0.40
0.07
Regression
coefficient
Diff.
1.66
0.17
1.26
0.10
Impact
0.317
2.39
0.40
0.24
Median of
variable
1.96
1.58
Rel. impact
(%)
20.4
15.4
The percentiles of settlement volume
(in units of $10 billion notional) are
shown in Table 25 of the DERA Staff PM
Pilot Memo, which indicated that the
volume of S&P 500 contracts was much
higher than that of Nasdaq-100
contracts. The regression coefficients are
from Table 5 (S&P 500) and Table 19
(Nasdaq-100) of the DERA Staff PM Pilot
Memo. The estimated impact is the
product of the volume difference times
the coefficient. Table 5 of the DERA
Staff PM Pilot Memo provided the
median of the volatility metric during
the sample period. The relative impact
is the estimated impact divided by the
sample median, i.e., the estimated
change in the volatility metric, relative
to its median value, due to an increase
in settlement volume. As shown, the
relative impact was small for both
indexes, about 20% for the S&P 500 and
15% for the Nasdaq-100.
The Exchange provides some
additional analysis on market capacity
around the market close. Specifically,
the Exchange believes it is important to
recognize that in recent years the
closing auctions on the equity markets
have steadily grown to a point where
they are much larger than the opening
auctions. To illustrate this point, the
following chart shows the percentage of
dollar volume of Nasdaq-100 Index
components executed in the opening
and closing auctions on Fridays.
BILLING CODE 8011–01–C
percentage is slightly declining, the
closing percentage slightly increasing
during this timeframe. As another
illustration, consider the opening and
closing dollar volume percentages for
Fridays, other than the third Friday-ofthe-month, from the second half of 2017
compared with the first half of 2018.
This timeframe corresponds to the
introduction of NDXP options,34 in
which non-third Friday series moved to
p.m.-settled. The following table present
the average percentages.
34 NDXP options are p.m.-settled index options on
broad-based indexes with nonstandard expirations
dates which are also the subject of a pilot program.
NDXP are listed on ISE and Phlx.
The percentage of volume executed in
the close is uniformly higher than that
of the open. The spikes in the closing
percentages represent third Fridays, and
in a few cases Fridays that corresponded
to the end of a month. The opening
33 See
DERA Staff PM Pilot Memo.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
E:\FR\FM\02MRN1.SGM
02MRN1
EN02MR23.039</GPH>
Settlement volume
25th
13196
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
TABLE 5—DOLLAR VOLUME FOR NASDAQ-100 COMPONENTS ON NON-3RD FRIDAYS
Auction vol. as percentage of total vol.
Opening
Jul–Dec 2017 ...........................................................................................................................................
Jan–Jun 2018 ..........................................................................................................................................
Difference .................................................................................................................................................
As would be expected, the relative
size of the opening auction declined,
and the closing auction increased by
roughly the same amount. The
percentage of about 0.35% would be an
estimate of the volume impact of NDX/
NDXP options settlement on the equity
market auctions. This percentage is
small to begin with, but it is a much
smaller proportion of the closing
auction than the opening auction.
Therefore, the Exchange believes that
the liquidity available at or around the
close would be able to mitigate any
excess volatility created by the options
settlement at the market close.
As a third example, the Exchange
considered the level of options
settlement volume relative to the size of
the closing and opening auctions.35 To
provide the most up-to-date view of the
current situation, the Exchange
examined activity from the start of 2021
through April 2022. The below table
shows the notional settlement volume
(in billions of dollars) along with the
Closing
1.48
1.13
¥0.35
6.40
6.76
0.36
notional volume in the auctions for
Nasdaq-100 Index components.
Settlement volume is the average dollar
volume settled at OCC, Closing Auction
is the average dollar volume executed in
the closing auction, Pct of Close is
calculated as Settlement Volume
divided by Closing Auction, Open
Auction is the average notional volume
executed in the open auction, and Pct of
Open is calculated as Settlement
Volume divided by Opening Auction.
TABLE 6—SETTLEMENT VOLUME FOR NDX/NDXP VS AUCTIONS: JAN 2021– APR 2022
Settlement
volume
Exp. day
Closing
auction
Percentage of
close
Opening
auction
Percentage of
open
NDXP
Monday ................................................................................
Wed ......................................................................................
Non 3rd Fri ...........................................................................
$2.4
2.7
4.1
$9.9
9.0
9.6
25.9
30.2
44.7
........................
........................
........................
........................
........................
........................
23.0
78.0
$6.6
230.4
NDX
ddrumheller on DSK120RN23PROD with NOTICES1
3rd Friday .............................................................................
Table 6 shows that the settlement
volume for NDXP settlements averages
between 26% and 45% of the closing
auction volume, the Friday NDXP
settlements being the largest. NDX
settlement volumes are larger, and
relative to the opening auction—the
relevant auction—they average more
than twice the size of the auctions. By
contrast, the relative size of the
settlement volume would be about a
third less if it were compared to the
closing auctions on the third Fridays. As
documented in the DERA Staff PM Pilot
Memo, p.m.-settled option activities
only have a very small impact on the
volatility of the underlying index.
Additionally, the size of the option
settlement value is relatively small
compared with the size of the closing
auction value. Therefore, the Exchange
believes that it is difficult to manipulate
the underlying Nasdaq-100 Index during
35 Options settlement volume is the primary size
metric used in the DERA Staff PM Pilot Memo.
Options settlement volume is the notional volume
settled in the closing auction.
36 15 U.S.C. 78f(b).
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
13.1
the closing auction. The equity closing
auctions have grown to be substantial
liquidity events (for the period
examined the closing auction volume is
larger than the opening auction volume)
and would therefore be suited for
handling the excess liquidity demand
created by index options settlement.
Technical Amendment to Rule Text
The Exchange proposes to amend
Supplementary Material .07 to Options
4A, Section 12 to remove ‘‘c’’ and reletter ‘‘d’’ as ‘‘c.’’
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,36 in general, and furthers the
objectives of Section 6(b)(5) of the Act,37
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
37 15
U.S.C. 78f(b)(5).
Securities Exchange Act Release No. 62911
(September 14, 2010), 75 FR 57539 (September 21,
2010) (SR–CBOE–2009–075) (Order Approving
Notice of Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, to Establish a Pilot
38 See
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest by
proposing to make permanent the NQX
Pilot and the Nonstandard Pilot.
Previously, the Commission has
raised concerns about expanding p.m.
settlement.38 Specifically, the
Commission noted in the Cboe Pilot
Order that it had concerns about the
adverse effects and impact of p.m.
settlement upon market volatility and
the operation of fair and orderly markets
on the underlying cash market at or near
the close of trading.39 The Commission
noted in the Cboe Pilot Order that the
information requested of Cboe would
enable the Commission to evaluate
whether allowing p.m. settlement for
EOW and EOMs will result in increased
market and price volatility in the
underlying component stocks.40
Program to List P.M.-Settled End of Week and End
of Month Expirations for Options on Broad-Based
Indexes) (‘‘Cboe Pilot Order’’).
39 Id at 57540.
40 Id at 57540.
E:\FR\FM\02MRN1.SGM
02MRN1
ddrumheller on DSK120RN23PROD with NOTICES1
Federal Register / Vol. 88, No. 41 / Thursday, March 2, 2023 / Notices
Further, the p.m. settlement Pilot
information should help the
Commission assess the impact on the
markets and determine whether other
changes are necessary.41 Furthermore,
the Exchange’s ongoing analysis of the
Pilot should help it monitor any
potential risks from large p.m.-settled
positions and take appropriate action if
warranted.42
Similar to Cboe, ISE has provided
pilot data to the Commission with
respect to its NQX Pilot and
Nonstandard Pilot. The Exchange’s
analysis presents data that the
introduction of p.m.-settlement has led
to an increase in options trading tied to
the Nasdaq-100 Index. The Exchange
notes within its analysis that it seems
unlikely that the introduction of NQX
option contracts or XND contracts 43 had
a significant impact on the market
quality of the full-sized Nasdaq-100
Index option contracts. The Exchange
observed a consistent decrease in
relative quoted spread is observed from
2017 to 2022 for NDX options. When the
Exchange compared the spread trend of
NDX monthly contracts to that of QQQ
monthly contracts, the results suggest
that there is gradual decrease in both the
NDX monthly contracts spread and the
QQQ contracts spread during the
sample period.
The Exchange also considered
whether the move from a.m.-settlement
to p.m.-settlement for Friday weeklies
(NDX-Weekly to NDXP-Fri) led to
changes in spreads for those contracts.
Overall, the Exchange sees no evidence
of deterioration of spreads associated
with the changes the Exchange has
made to its Nasdaq-100 Index product
offering by introducing p.m.-settled
products.
Finally, in considering impact on the
closing process in equity markets, the
Exchange concluded that it is difficult
to manipulate the underlying Nasdaq100 Index. Specifically, the equity
closing auctions have grown to be
substantial liquidity events that are
much larger than the opening auctions,
and would therefore be better suited for
handling the excess liquidity demand
created by index options settlement.
The Exchange believes the expiration of
p.m.-settlement options would not
adversely affect the options market or
the underlying cash equities market.
Further, the Exchange has sufficient
systems capacity to handle p.m.-settled
options on broad-based indexes with
nonstandard expirations dates and has
41 Id
at 57540.
42 Id at 57540.
43 See note 7 above.
VerDate Sep<11>2014
18:21 Mar 01, 2023
Jkt 259001
not encountered any issues or adverse
market effects as a result of listing them.
Accordingly, the Exchange believes
that weekly expirations and EOMs,
including the NQX expirations, in the
p.m.-settled products should create
greater trading and hedging
opportunities and flexibility and
provide customers with the ability to
more closely tailor their investment
objectives.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. Making
permanent the NQX Pilot and the
Nonstandard Pilot will not impose an
undue burden on competition, rather, it
will continue to provide investors with
greater trading and hedging
opportunities and flexibility, as well as
the ability to more closely tailor their
investment objectives.
Additionally, the Exchange does not
believe the proposal will impose any
burden on intermarket competition as
market participants are welcome to
become Members and trade at ISE if
they determine that this proposed rule
change has made ISE more attractive or
favorable. Finally, all options exchanges
are free to compete by listing and
trading their own broad-based index
options with weekly or end of month
expirations.
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
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) by order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
PO 00000
Frm 00118
Fmt 4703
Sfmt 9990
13197
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ISE–2023–08 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–ISE–2023–08. 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–ISE–2023–08, and should
be submitted on or before March 23,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.44
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–04224 Filed 3–1–23; 8:45 am]
BILLING CODE 8011–01–P
44 17
E:\FR\FM\02MRN1.SGM
CFR 200.30–3(a)(12).
02MRN1
]]>Agencies
[Federal Register Volume 88, Number 41 (Thursday, March 2, 2023)]
[Notices]
[Pages 13182-13197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-04224]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96979; File No. SR-ISE-2023-08]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
of Proposed Rule Change To Make Permanent Certain P.M.-Settled Pilots
February 24, 2023.
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 February 23, 2023, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II 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 make permanent the pilot to permit the
listing and trading of options based on \1/5\ the value of the Nasdaq-
100 Index
[[Page 13183]]
(``Nasdaq-100'' or ``NDX'') and the Exchange's nonstandard expirations
pilot program which are both currently set to expire on May 4, 2023.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/ise/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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
ISE proposes to make permanent 2 pilots, which are both set to
expire on May 4, 2023: (1) the Exchange' s pilot to permit the listing
and trading of options based on \1/5\ the value of the Nasdaq-100 Index
(``NQX Pilot''), and (2) the Exchange's nonstandard expirations pilot
program (``Nonstandard Pilot'').
NQX Pilot
ISE filed a rule change to permit the listing and trading of index
options on the Nasdaq 100 Reduced Value Index (``NQX'') on a twelve
month pilot basis.\3\ NQX options trade independently of and in
addition to NDX options, and the NQX options are subject to the same
rules that presently govern the trading of index options based on the
Nasdaq-100, including sales practice rules, margin requirements,
trading rules, and position and exercise limits. Similar to NDX, NQX
options are European-style and cash-settled, and have a contract
multiplier of 100. The contract specifications for NQX options mirror
in all respects those of the NDX options contract listed on the
Exchange, except that NQX options are based on \1/5\ of the value of
the Nasdaq-100, and are p.m.-settled pursuant to Options 4A, Section
12(a)(6).
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 82911 (March 20,
2018), 83 FR 12966 (March 26, 2018) (SR-ISE-2017-106) (Approval
Order).
---------------------------------------------------------------------------
The Exchange proposes to amend ISE Options 4A, Section 12(a)(6)(i)
to make permanent the current NQX Pilot. The NQX Pilot was extended
various times with the last extension through May 4, 2023.\4\ The
Exchange continues to have sufficient capacity to handle additional
quotations and message traffic associated with the listing and trading
of NQX options. In addition, index options are integrated into the
Exchange's existing surveillance system architecture and are thus
subject to the relevant surveillance processes. The Exchange also
continues to have adequate surveillance procedures to monitor trading
in NQX options thereby aiding in the maintenance of a fair and orderly
market. Additionally, there is continued investor interest in NQX.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release Nos.86071 (June 10,
2019), 84 FR 27822 (June 14, 2019) (SR-ISE-2019-18); 87379 (October
22, 2019), 84 FR 57793 (October 28, 2019) (SR-ISE-2019-27); 88683
(April 17, 2020), 85 FR 22768 (April 23, 2020) (SR-ISE-2020-18);
90257 (October 22, 2020), 85 FR 68387 (October 28, 2020) (SR-ISE-
2020-33); 91485 (April 6, 2021), 86 FR 19052 (April 12, 2021) (SR-
ISE-2021-05); 93448 (October 28, 2021), 86 FR 60717 (November 3,
2021) (SR-ISE-2021-22); 94632 (April 7, 2022), 87 FR 21940 (April
13, 2022) (SR-ISE-2022-09); and 96177 (October 28, 2022), 87 FR
66335 (November 3, 2022) (SR-ISE-2022-23).
---------------------------------------------------------------------------
Nonstandard Pilot
ISE filed a proposed rule change for the listing and trading on the
Exchange, on a twelve month pilot basis, of p.m.-settled options on
broad-based indexes with nonstandard expirations dates.\5\ The
Nonstandard Pilot permits both Weekly Expirations and End of Month
(``EOM'') expirations similar to those of the a.m.-settled broad-based
index options, except that the exercise settlement value of the options
subject to the pilot are based on the index value derived from the
closing prices of component stocks. The Nonstandard Pilot was extended
various times with the last extension through May 4, 2023.\6\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 82612 (February 1,
2018), 83 FR 5470 (February 7, 2018) (approving SR-ISE-2017-111)
(Order Approving a Proposed Rule Change to Establish a Nonstandard
Expirations Pilot Program).
\6\ See Securities Exchange Act Release Nos. 85030 (February 1,
2019), 84 FR 2633 (February 7, 2019) (SR-ISE-2019-01); 85672 (April
17, 2019), 84 FR 16899 (April 23, 2019) (SR-ISE-2019-11); 87380
(October 22, 2019), 84 FR 57786 (October 28, 2019) (SR-ISE-2019-28);
88681 (April 17, 2020), 85 FR 22775 (April 23, 2020) (SR-ISE-2020-
17); 90265 (October 23, 2020), 85 FR 68605 (October 29, 2020) (SR-
ISE-2020-34); 91486 (April 6, 2021), 86 FR 19048 (April 12, 2021)
(SR-ISE-2021-06); and 93449 (October 28, 2021), 86 FR 60679
(November 3, 2021) (SR-ISE-2021-23); 94632 (April 7, 2022), 87 FR
21940 (April 13, 2022) (SR-ISE-2022-09); and 95992 (October 6,
2022), 87 FR 62163 (October 13, 2022) (SR-ISE-2022-20).
---------------------------------------------------------------------------
Supplementary Material .07(a) to Options 4A, Section 12 provides
that the Exchange may open for trading Weekly Expirations on any broad-
based index eligible for standard options trading to expire on any
Monday, Wednesday, or Friday (other than the third Friday-of-the-month
or days that coincide with an EOM expiration). Weekly Expirations are
subject to all provisions of Options 4A, Section 12 and are treated the
same as options on the same underlying index that expire on the third
Friday of the expiration month. Unlike the standard monthly options,
however, Weekly Expirations are p.m.-settled.
Pursuant to Supplementary Material .07(b) to Options 4A, Section 12
the Exchange may open for trading EOM expirations on any broad-based
index eligible for standard options trading to expire on the last
trading day of the month. EOM expirations are subject to all provisions
of Options 4A, Section 12 and treated the same as options on the same
underlying index that expire on the third Friday of the expiration
month. However, the EOM expirations are p.m.-settled.
At this time, the Exchange proposes to make permanent the
Nonstandard Pilot. The Exchange has sufficient systems capacity to
handle p.m.-settled options on broad-based indexes with nonstandard
expirations dates and has not encountered any issues or adverse market
effects as a result of listing them. Additionally, there is continued
investor interest in these products.
In support of the permanency of the NQX Pilot and the Nonstandard
Pilot, the Exchange empirically assessed the impact of p.m.-settled NDX
options on options market quality and examined market capacity around
the market close.\7\ Specifically, the Exchange analyzed trading
volume, open interest, spreads, and closing auction volumes. In recent
years, ISE has implemented changes and introduced new types of index
options tied to the Nasdaq-100 Index[supreg] (ticker symbol ``NDX'').
This report presents a set of empirical findings relating the impact of
these changes, submitted in support of a request for permanency of the
NQX Pilot and the Nonstandard Pilot.
---------------------------------------------------------------------------
\7\ This includes p.m.-settled products trading on ISE (NQX
Pilot and the Nonstandard Pilot) as well as p.m.-settled products
trading on Phlx (XND Pilot and the Nonstandard Pilot). Phlx filed a
similar request for permanency of its p.m.-settled pilots. See SR-
Phlx-2023-04 (not yet noticed).
---------------------------------------------------------------------------
[[Page 13184]]
A general timeline of events since 2017 is as follows:
In January 2017, the Exchange discontinued licensing
agreements with competing options exchanges for the listing and trading
of NDX options. This discontinuation led to a gradual reduction in the
number of NDX expiries listed on these exchanges. By 2019 trading in
NDX-related options therefore became exclusively done on three Nasdaq-
affiliated exchanges: Nasdaq Phlx, LLC (``Phlx''), ISE, and Nasdaq
GEMX, LLC (``GEMX'').
In January 2018, the expiration of NDX options on Fridays,
other than the third Friday-of-the-month, was changed from a.m.-settled
to p.m.-settled. Third-Friday expirations continued to be a.m.-settled
as before. The p.m.-settled index options were given the new trading
symbol ``NDXP''. These contracts were exclusively listed on Phlx and
ISE.
In June 2018, a new contract was introduced based on the
Nasdaq-100 Index but with reduced notional value. The underlying index
of the new contract, symbol ``NQX,'' was set at one-fifth the value of
the NDX (with contract multiplier remaining at $100). This contract
trades exclusively on ISE, and is p.m. settled on Fridays.
In September 2018, a p.m.-settled index option, ``NDXP,''
was introduced that expired on Wednesdays of each week. It was listed
exclusively on Phlx and ISE.
In February 2020, a p.m.-settled NDXP index option was
introduced that expired on Mondays of each week. It was listed
exclusively on Phlx and ISE.
In April 2021, a second reduced value contract was
introduced. The underlying index, ``XND'', is set at one-hundredth (1%)
of the NDX (with contract multiplier remaining at $100). The notional
value is therefore equal to the level of the Nasdaq-100 Index. This
contract trades on Phlx and is p.m.-settled.
On July 29, 2022, ISE received approval to list and trade
p.m.-settled NDX index options that expire on Tuesday or Thursday under
its Nonstandard Expirations Pilot Program.\8\
---------------------------------------------------------------------------
\8\ The Exchange notes that Tuesday and Thursday weeklies on the
Nasdaq-100 Index have been trading for less than one month. See
https://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2022-26.
---------------------------------------------------------------------------
On October 3, 2022, ISE commenced listing p.m.-settled
quarterly option on the Nasdaq-100 Index.
Following terminological convention, the Exchange refers to the
traditional third Friday expiration series as ``monthly'' contracts,
while the other series are referred to as ``weekly'' contracts. In this
report, the new p.m.-settled index options will be written as NDXP-Fri,
NDXP-Wed, and NDXP-Mon based on their expiration day. The NDX contracts
that formerly expired on Fridays, other than the third Friday-of-the-
month, will be referred to as NDX-Weekly, indicating their status as
weekly contracts. The monthly third Friday NDX contract will be denoted
NDX-Monthly. NQX and XND are considered weekly contracts. It may be
noted that when Friday is a market holiday, the expiration moves to the
prior Thursday.\9\ When Wednesday is a holiday, expiration of Wednesday
contracts moves forward to Tuesday. When Monday is a holiday, Monday
expirations move back to Tuesday.\10\
---------------------------------------------------------------------------
\9\ See Supplementary Material .07(a) of ISE Options 4A, Section
12.
\10\ Id.
---------------------------------------------------------------------------
The purpose of this report is to empirically assess the impact of
these changes on NDX options markets, with a special focus on the
market quality of the incumbent a.m.-settled NDX index options and
market capacity around the market close. The Exchange provides a
comprehensive analysis in this report on the impact of p.m.-settled
index options on a.m.-settled NDX index options, including option
trading volume, option open interests and option liquidity.\11\ In
assessing the impact of the innovations on market quality, the Exchange
uses options on the Invesco QQQ Trust Series 1 (``QQQ'') \12\ as a
control group. While activity in QQQ options would capture trading
interest in the Nasdaq-100 Index generally and may reflect market
conditions, it would be largely unaffected by the innovations
considered in this report. QQQ options include monthly third Friday
expirations, weekly non-third Friday expirations, and contracts
expiring the end of the quarter.\13\
---------------------------------------------------------------------------
\11\ Today, NDX options are a.m.-settled and p.m.-settled.
\12\ Invesco QQQ\TM\ is an exchange-traded fund based on the
Nasdaq-100 Index.
\13\ For the purpose of spread analysis we match on option
price, moneyness category, time to maturity and option's expiration
month.
---------------------------------------------------------------------------
Historically there have been concerns that p.m.-settled index
options could result in increased market and price volatility in the
underlying component stocks, due to the unwinding of hedge-related
positions at the close on expiration. A study conducted on behalf of
the Securities and Exchange Commission's Division of Economic and Risk
Analysis \14\ shows that the market share for p.m.-settled options on
S&P 500[supreg] Index has grown substantially since 2007. As the
expiration date for p.m.-settled index options is more scattered
compared to that for a.m.-settled options, only a smaller percentage of
open interest expires on each date. As a result, p.m.-settled index
option expirations are unlikely to cause any disruptive effect on the
market. The DERA Staff PM Pilot Memo also shows that expiring open
interest of a.m.-settled options may have had an economically small
impact on the volatility of the Nasdaq-100 index around the open.\15\
The DERA Staff PM Pilot Memo further shows that, although p.m.-settled
index option trading volume may have a statistically significant
relationship with the volatility of the underlying index around the
market close, the economic significance was generally small. In its
report, the Exchange provides additional analysis on market capacity
around the market close. As the closing auction price is the most
widely used reference price for mutual funds and for many exchange-
traded products, closing auction volume has grown substantially in
recent years. In this report, the Exchange shows that the closing
auction volume on the equity market have become much larger than the
opening auction, which may indicate that there is sufficient liquidity
in closing auctions to absorb liquidity demand associated with p.m.-
settlement of NDX and NQX index options.
---------------------------------------------------------------------------
\14\ See Securities and Exchange Commission, Division of
Economic Risk and Analysis, Memorandum, Cornerstone Analysis of PM
Cash-Settled Index Option Pilots (February 2, 2021) (``DERA Staff PM
Pilot Memo''), available at: https://www.sec.gov/dera/staff-papers/studies-and-reports/analysis-of-pm-cash-settled-index-option-pilots.
\15\ Table 20 of the DERA Staff PM Pilot Memo suggests that a
$10 billion increase in option settlement quantity is associated
with an increase in absolute return of 0.025% near the open. The
report also shows that expiring open interest of a.m.-settled
options had no significant impact on the volatility of the
underlying index near the open for the S&P 500 Index.
---------------------------------------------------------------------------
In addition to analysis on closing auctions, the report presents
findings on three market characteristics: trading volume, open
interest, and spreads. The Exchange finds that the trading volume and
the notional open interests for options that had NDX and NQX as the
underlying increased during our sample period. In conclusion, there is
no evidence that NDX and NQX options contracts, which are p.m.-settled,
would result in reduced trading activity or degradation in market
quality of the a.m.-settled index options.
[[Page 13185]]
Analysis of Volume
The introduction of p.m.-settled index options and its impact on
the trading activity of a.m.-settled options is likely the single most
important factor under consideration. Volume is the primary indicator
of trading interest and it drives market quality to a large extent.
Consolidated volume information is available from The Options Price
Reporting Authority (``OPRA''), the source of information used in this
section. The sample period used for this report is 2017 through April
2022.
Consolidation of Trading on Nasdaq Affiliated Exchanges
As noted above, trading in NDX options began to consolidate
exclusively onto Nasdaq-owned affiliated exchanges starting in 2017;
the impact on volume was not immediate. Since January 2017, non-Nasdaq
exchanges ceased listing new NDX options series, but continued with
previously listed NDX options. The following table shows the percentage
of NDX options contract volume traded on non-Nasdaq exchanges, which at
the time included Cboe Exchange, Inc. (``Cboe''), NYSE American LLC,
and NYSE Arca, Inc. Of these three markets, Cboe was the largest in
volume. The Nasdaq affiliated exchanges trading NDX options were Phlx,
ISE and GEMX.
---------------------------------------------------------------------------
\16\ As noted herein, this refers to the monthly third Friday
a.m.-settled NDX contract.
\17\ As noted above, this refers to the p.m.-settled NDX
contracts that formerly expired on Fridays, other than the third
Friday-of-the-month.
\18\ NDXP-Wed and NDXP-Mon are the p.m.-settled NDX contracts
expiring on Wednesday and Monday, respectively.
\19\ The full data supporting the graph is shown in the
appendix.
Table 1-NDX Volume on Non-Nasdaq Exchanges
------------------------------------------------------------------------
Non-Nasdaq
Year Quarter share %
------------------------------------------------------------------------
2017.................................... 1 22.2
2 16.4
3 2.2
4 5.5
2018.................................... 1 0.3
2 0.7
3 0.1
4 4.2
------------------------------------------------------------------------
By 2018 volume on the non-Nasdaq exchanges had largely disappeared.
The surge in volume during the final quarter of 2018 was likely due to
the end-of-year final closing of positions--note the similar bump in
2017. There was no NDX options volume from non-Nasdaq exchanges after
2018.
Contract Volume and Notional Volume
Contract volume in the regular-sized Nasdaq-100 Index contracts may
be broken down into five time series: (1) the incumbent NDX-Monthly;
\16\ (2) the NDX-Weekly contract transitioning to NDXP-Fri; \17\ and
(3) the introduction of NDXP-Wed and NDXP-Mon.\18\ The following graph
shows monthly totals for each of these five groups.\19\
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN02MR23.022
A number of observations can be drawn from the graph.
The overall total contract volume remained almost flat
until the pandemic market recovery started in the Spring of 2020. From
Fall 2020 forward there has been substantial growth in volume. It
appears that most of the recent growth has come from the NDX-Weekly
contracts.
The volumes of NDX-Monthly and NDX-Weekly were roughly
equivalent during 2017. This is noteworthy for the fact that for any
given month there would usually be at least three, and
[[Page 13186]]
sometimes four times, the number of front-month expiries for the weekly
contract. The Exchange can infer, then, that the monthly contracts tend
to have substantially higher volume per series than the weekly
contracts.
When NDX-Weekly transitioned to NDXP-Fri, the volume
relationship with NDX-Monthly remained roughly the same.
Soon after launch, the NDXP-Wed contracts achieved volume
levels not much lower than the NDXP-Fri contracts, and, in turn, not
much lower than the monthly contracts.
Soon after launch, the NDXP-Monday contracts achieved
volume levels not much lower than the NDXP-Fri contracts, and, in turn,
not much lower than the monthly contracts.
By the end of the sample period, each of the four
remaining contract types had roughly the same value (again recognizing
the differing number of expiries).
Each of the current contract types garner substantial trading
volume.
Regarding the NDX-Weekly/NDXP-Fri transition, Figure 2, which ends
in August 2018, takes a closer look at the timeframe immediately prior
to the launch of NDXP-Wed. The transition month of January 2018 is not
shown (both contract types had volume during January).
[GRAPHIC] [TIFF OMITTED] TN02MR23.023
Though NDXP-Fri volume was relatively low in May 2018, there is no
sign of a substantial sustained drop in volume accompanying the
transition.
During the timeframe under consideration in this report there has
been a remarkable increase in the level of the Nasdaq-100 Index, a
rough tripling of the index from early 2017 to April 2022. The notional
value of a regular-sized contract is $100 times the level of the index,
and so it has tripled during the sample period, and is currently
roughly $1.3 million. In light of these changes, it is useful to
consider volume from the perspective of notional value traded rather
than contracts.
Figure 3 shows the sum of monthly notional value traded for NDX-
Monthly and for the total of all five of the contract types. The
notional value traded was computed as the sum of contracts traded times
the monthly average value of the Nasdaq-100 Index times $100. The graph
also shows linear trend lines for each time series.
[[Page 13187]]
[GRAPHIC] [TIFF OMITTED] TN02MR23.024
It appears that while the notional volume of the incumbent monthly
contract has been flat, the total volume of all contract types exhibit
a positive trend, with remarkable growth since the Fall of 2020. It
appears, therefore, that the introduction of p.m.-settlement is
associated with an increase in NDX options trading.
Comparison With QQQ Volume
The positive volume trend may be due to the remarkable performance
of the Nasdaq-100 Index during this timeframe. To rule out this
alternative explanation, the exchange compare the volume in NDX/NDXP
index options to QQQ ETF options. It is worth noting that the notional
volume of a QQQ option contract has been much lower than that of an
index option. During the sample period, the average notional value of
an index option contract was about $936,000, while a single QQQ
contract had notional value of about $23,000.
Figure 4 presents a time series of the ratio of the sum of monthly
contract volume in the indicated index option contracts to the sum of
contract volume in QQQ options. For NDX-Monthly index options, only QQQ
volume from third Friday expiring contracts was used. Since both the
index and ETF options have the same underlying index, the observed
trend is similar if notional volumes were used instead.
[GRAPHIC] [TIFF OMITTED] TN02MR23.025
[[Page 13188]]
The graph shows a substantial decline in the relative level of the
index option volume during 2017. This decline is too large to be
explained by the reduction in the share of options trading on non-
Nasdaq exchanges. The decline stabilized at the start of 2018.
NQX Volume
In spite of the very high notional volume of NDX/NDXP options,
volume in the reduced-value NQX options has never been higher than NDXP
trading volume (perhaps due to the availability of QQQ options). Figure
5 shows monthly volume for all NQX contracts. Shown are both the volume
in terms of contracts traded, as well as NQX volume relative to the
total volume of NDX/NDXP contracts. For the latter calculation, the NQX
contract volume was divided by 5 to reflect its reduced notional value.
[GRAPHIC] [TIFF OMITTED] TN02MR23.026
Since launch, NQX volume has grown, both in absolute terms and
relative to NDX/NDXP volume. The period of extreme market volatility
surrounding the pandemic crisis in the Spring of 2020 led to a volume
spike, as did the market recovery of the Fall of 2020. Even so, the
relative level of NQX volume was very low relative to that of the
regular-valued indexes. Due to the low level of NQX volume, it seems
unlikely that its introduction had a significant impact on the market
quality of the full-sized NDX contracts. Therefore, no further analysis
was attempted on NQX options.
XND Volume
Trading in XND options contracts is relatively new.\20\ The
following table shows XND monthly contract volume for the first year of
trading.
---------------------------------------------------------------------------
\20\ As noted herein, XND began trading in April 2021.
[GRAPHIC] [TIFF OMITTED] TN02MR23.027
The low level of XND options volume suggests that the introduction
of XND did not have a noticeable impact on the trading of the incumbent
NDX/NDXP contracts.
Analysis of Open Interest
The Exchange next considered trends in open interest for the
Nasdaq-100 Index options. The Options Clearing Corporation (``OCC'')
data was utilized as source data for this analysis. Open interest
measures positions held overnight; positions that are established and
closed during the day are not captured.
Figure 6 shows the open interest, in contracts, as of the last
trading day of the indicated month.
[[Page 13189]]
[GRAPHIC] [TIFF OMITTED] TN02MR23.028
The open interest in NDX-Monthly is remarkably stable during this
timeframe, and is substantially higher than that of the weekly
contracts. After transitioning to p.m.-settlement, the open interest in
NDXP-Fri contract started to decline while it increased in the second
half of 2022. The open interest in the Wednesday and Monday contracts
has always been relatively low.
Further insight is shown in the following graph, which shows the
ratio of open interest in weekly contracts to that of the monthly
contract (that is, the open interest sum of NDX-Weekly, NDXP-Fri, -Wed,
and Mon divided by the open interest in NDX-Monthly).
[GRAPHIC] [TIFF OMITTED] TN02MR23.029
The graph shows a clear decline in the ratio of weekly to monthly
open interest, starting at the beginning of 2018, but the declining
trend stabilized at the end of Q1 2018. When considered with the volume
information shown above, this may be because options traders with
longer holding horizons may be more likely to trade the monthly
contract, while those with shorter intra-day positions are more likely
to use the weekly contracts. This tendency is reflected in the listing
of expiries. At any given time, expirations out to a year or more are
available for the monthlies, while expirations only out a month or so
are available for the weeklies.
As noted above, the notional value of Nasdaq-100 Index options has
roughly tripled during this timeframe. It is therefore useful to
consider the trends in open interest from a notional perspective, as
shown in the following graph.
[[Page 13190]]
[GRAPHIC] [TIFF OMITTED] TN02MR23.030
A clear positive trend is evident for the monthly contract in terms
of notional value. The weeklies showed a flat trend that has increased
since the Fall of 2020.
As discussed above, we designate QQQ options as a control group for
our analysis. Figure 9 shows the ratio (in contracts) of Nasdaq-100
Index options to QQQ options. As noted herein, the trend is unaffected
when measuring open interest in contracts or notional value. The graph
shows the ratio for monthly contracts for NDX and QQQ, as well as for
NDX/NDXP and QQQ.
[GRAPHIC] [TIFF OMITTED] TN02MR23.031
This graph closely mirrors the volume graph shown above in Figure
9. There was a distinct decline during 2017 in month-end open interest,
but the trend stabilized at the start of 2018 and has remained flat
since then.
Analysis of Spreads
An important dimension of market quality is the cost of trading.
Following Holden and Jacobsen (2014),\21\ the Exchange used duration
weighted relative quoted spread as a measure of the cost of trading. In
this section, the Exchange examines whether there is any deterioration
of spreads to a.m.-settled
[[Page 13191]]
Nasdaq-100 Index options by introducing p.m.-settled index options. A
particular challenge for measuring quoted spreads is created by the
large number of options series tied to a particular underlying. In
addition to the range of expiries, a given expiration will have many
available strike prices. This set of combinations then is doubled by
considering calls and puts. Many listed options series will be very
infrequently traded. For example, at the start of the sample period on
January 3, 2017, there were 3,720 individual options series that had
NDX as the underlying, made up from 14 expiration dates and 382 strike
prices. Of these listed options series, only 458 had traded volume on
that date, with 233 options series with volume of at least 10
contracts. Nearer to the end of the sample period, on April 29, 2022,
there were 16,624 listed options series with NDX or NDXP as the
underlying, consisting of 33 expiration dates and 675 strikes. Of the
listed options series, 2,192 had some volume and 538 had volume of at
least 10 contracts.
---------------------------------------------------------------------------
\21\ See Holden, C. and Jacobsen, S., 2014, Liquidity
Measurement Problems in Fast, Competitive Markets: Expensive and
Cheap Solutions. Journal of Finance. 69, 1747-17852 (https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12127).
---------------------------------------------------------------------------
To assess the trend in the relative NBBO quoted spread, the
Exchange limited the number of options series under consideration by
reviewing spreads in the front-month contracts (contract nearest
expiration) on the first trading day of each month.\22\ The Exchange
considered an NBBO quotation to be ``live'' and used in the computation
when the National Best Offer (NBO) was non-zero.
---------------------------------------------------------------------------
\22\ Although the Exchange believes that sampling the first
trading day of each month between date January 2017 and April 2022
would reflect the trend of market quality, the Exchange acknowledges
that in some cases there may some information loss given a
particular trading day. For example, a volatile trading day may not
be representative of the market for that trading month.
---------------------------------------------------------------------------
In the following section, the Exchanges shows the impact of the
introduction of p.m.-settled index options on the liquidity of NDX
contracts by showing the average monthly NDX spread over time (in
Figure 10) as well as comparing the trend of relative quoted spread of
NDX contracts with that of QQQ contracts (Figures 11 and 12). Figure 10
shows the average monthly relative quoted spread for all options with
NDX as the underlying. To better reflect the trend of the relative
quoted spread, the Exchange plotted the average relative quoted spread
benchmarked against (subtracted by) the average spread of 2017 as the
dotted line in Figure 10. The dotted vertical line highlights the time
when p.m.-settled index options were introduced. Specifically, the time
series in the dotted line was computed using the following steps.
First, the Exchange calculated the duration weighted average relative
quoted spread for each contract on each day. Second, the Exchange took
the average of the above daily spread across all contracts with NDX as
the underlying for each day. Third, the Exchange calculated the average
relative quoted spread for all months in 2017. Finally, the 2017
average was subtracted from the monthly average to create a time series
dataset. As can be seen from the plot, a consistent decrease in the
relative quoted spread is prevalent from 2017 to 2022 and most
importantly, there is no obvious change in the trend following the
introduction of p.m.-settled index options.
Although the above method is intuitive, it is well known that the
option premia are correlated with option characteristics such as
expiry, strike price, and whether the contract is a put or a call
option. Also, option premia tend to increase when the expected
volatility of the underlying asset increases, and premia increase may
in turn cause the spread to increase. Inspired by Kaul, Nimalendran and
Zhang (2004) \23\ and Albuquerque, Song and Chen (2020),\24\ the
Exchange also employed the following regression model to control for
factors related to option characteristics unrelated to the NQX Pilot
and the Nonstandard Pilot: \25\
---------------------------------------------------------------------------
\23\ See Kaul, G., Nimalendran, m., and Zhang D., 2004, Informed
Trading and Option Spreads. Working Paper (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=547462).
\24\ See Albuquerque, R., Song, S., and Yao, C., 2020, The Price
Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment.
Journal of Financial Economics. 138, 700-724 (https://www.sciencedirect.com/science/article/pii/S0304405X20301884).
\25\ The calculation was inspired by Kaul, G., Nimalendran, m.,
and Zhang D., and Albuquerque, R., Song, S., and Yao, C. See notes
21 and 22 above. The Exchange includes control variables used in
Albuquerque, R., Song, S., and Yao, C. (2020) liquidity analysis and
constructs Moneyness Categories following Kaul, Nimalendran and
Zhang (2004).
[GRAPHIC] [TIFF OMITTED] TN02MR23.032
In the above model, Spread is the relative quoted spread.
InverseofPrice is the inverse of the option price. Call/Put Dummy is a
dummy variable that equals 1 for call options and 0 otherwise. Expiry
is the number of the days to the expiration date. Moneyness is a dummy
variable for moneyness category of each option. Specifically, all
option contracts were classified into 5 moneyness categories. The
moneyness for call options was calculated as:
[GRAPHIC] [TIFF OMITTED] TN02MR23.033
for put options, where ``S'' is the stock price and ``X'' is the
exercise price. The cut-offs for the five moneyness groups were: -30%;
-10%; 10%; and 30%. Month Fixed Effect is a dummy variable for each
month.
In constructing the plot, the coefficients for those month fixed
effects were adjusted. The raw coefficients for each month were
collected from the regression output. The first month in the sample,
January 2017, implicitly had a coefficient of zero. The average
coefficient for the 12 months in 2017 was then calculated. Finally, the
average coefficients across all 12 months in 2017 were subtracted from
the raw coefficients to create a time series dataset, which is depicted
as the unbroken line in Figure 10.
As can be seen from the plot, there is a steady decrease in the
relative quoted spread for NDX option contracts. The average relative
quoted spread for NDX contracts decreased by about 30%-40% from the
beginning of 2017 until the end of the sample period. Since the
regression model controls for factors that affect the spread, the
unbroken line
[[Page 13192]]
based on the regression model tends to be less volatile. However, there
is no large difference in the results between the average spread and
results based on the regression models, but there is some divergence at
certain points in time. The Exchange conjectures that the divergence is
due to higher option premia caused by the elevated levels of
volatility. In summary, based on both methods, a consistent decrease in
relative quoted spread is observed from 2017 to 2022.
[GRAPHIC] [TIFF OMITTED] TN02MR23.034
The Exchange then compared the spread trend of NDX monthly
contracts to that of QQQ monthly contracts. The average monthly spread
for QQQ contracts was constructed the same way as that for the NDX
monthly contracts (as described in detail above). Figure 11, below,
displays the patterns of relative quoted spread for NDX and QQQ, which
are remarkably similar and decreased during the sample period. Figure
12, below, highlights the difference in Figure 11 as between NDX and
QQQ. Relative to a QQQ control, there is therefore no evidence of a
deterioration of NDX monthly spreads during the sample period. In
summary, the results suggest that there is gradual decrease in both the
NDX monthly contracts spread and the QQQ contracts spread during the
sample period.
---------------------------------------------------------------------------
\26\ NBBO data was unavailable between August 1, 2021 and August
11, 2021, and, therefore, August 2021 was excluded from the plot.
Also, with respect to Figure 10, Regression plots the coefficients
of dummies for each month (i.e., fixed effects). Average Spread
plots the average monthly relative quoted spread subtracted by the
2017 average relative quoted spread.
---------------------------------------------------------------------------
As the introduction of p.m.-settled index options may affect the
transaction cost for NDX monthly contracts, it is unlikely to affect
the spread of QQQ options. Therefore, the Exchange uses the following
regression to formally test whether the spread of NDX contract changed
after the introduction of p.m.-settled index options. NDX and QQQ
options are included in the sample for the period between January 2017
and December 2018. This regression looks at a sample period starting
from one year before and ending one year after the introduction of
p.m.-settled index options.
[GRAPHIC] [TIFF OMITTED] TN02MR23.035
Similar to regression model (1), Spread is the relative quoted
spread. InverseofPrice is the inverse of the option price. Call/Put
Dummy is a dummy variable that equals 1 for call options and 0
otherwise. Expiry is the number of the days to the expiration date.\27\
Moneyness is a dummy variable for moneyness category of each option.
NDX is a dummy variable that equals one if the underlying asset of the
option is NDX index and zero otherwise. Post is a dummy variable that
equals to one for days after January 2018 and zero otherwise. The
Exchange also includes the interaction terms of the post dummy and the
NDX dummy (NDX * Post).
---------------------------------------------------------------------------
\27\ The Exchange notes that there was no transformation.
---------------------------------------------------------------------------
Table 3 shows that the coefficient of the interaction term is
negative but it is statistically insignificant. Therefore, the Exchange
concludes that the introduction of p.m.-settled index options did not
negatively affect the liquidity of a.m.-settled NDX options.\28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
[[Page 13193]]
[GRAPHIC] [TIFF OMITTED] TN02MR23.036
[GRAPHIC] [TIFF OMITTED] TN02MR23.037
[[Page 13194]]
Table 3--Regression Results
----------------------------------------------------------------------------------------------------------------
coef std t
----------------------------------------------------------------------------------------------------------------
Constant....................................... *** 0.26....................... 0.01 37.50
NDX............................................ *** 0.28....................... 0.01 28.62
Post........................................... -0.01.......................... 0.02 -0.80
NDX * Post..................................... * -0.02........................ 0.01 -1.73
InverseofPrice................................. *** 0.00....................... 0.00 48.65
Call/Put Dummy................................. *** 0.26....................... 0.01 37.77
Expiry......................................... *** 0.00....................... 0.00 46.29
Moneyness Categories Fixed Effect.............. Yes............................
Month Fixed Effect............................. Yes............................
----------------------------------------------------------------------------------------------------------------
The report considered one additional question regarding quoted
spreads--whether the move from a.m.-settlement to p.m.-settlement for
Friday weeklies (NDX-Weekly to NDXP-Fri) led to changes in spreads for
those contracts. This sample timeframe was from July 2017 through
August 2018, prior to the launch of NDXP-Wed contracts. As before, the
Exchange presented both the simple average monthly relative quoted
spread as well as the average spread calculated using the regression
model.
---------------------------------------------------------------------------
\29\ Id.
[GRAPHIC] [TIFF OMITTED] TN02MR23.038
The relative quoted spread went down at the first part of 2018 and
up in May and June 2018; it remained comparable to the 2017 average.
---------------------------------------------------------------------------
\30\ With respect to Figure 13, Reg-NDX plots the coefficients
of dummies for each month for NDX contracts. Reg-NDXP plots the
coefficients of dummies for each month for NDXP contracts. Simple-
NDX plots the average monthly relative quoted spread subtracted by
the 2017 average relative quoted spread for NDX contracts. Simple-
NDXP plots the average monthly relative quoted spread subtracted by
the 2017 average relative quoted spread for NDXP contracts.
---------------------------------------------------------------------------
Overall, the Exchange sees no evidence of deterioration of spreads
associated with the introduction of p.m.-settled NDX options.
Market Capacity Around the Market Close
The Exchange next analyzed the impact that p.m.-settled index
options may have on the closing process of the equity markets.\31\ The
DERA Staff PM Pilot Memo concluded that while p.m.-settled index
options activity may have had a statistically detectable impact on
volatility, the economic significance was generally small. The DERA
Staff PM Pilot Memo provided,
---------------------------------------------------------------------------
\31\ This analysis considers the DERA Staff PM Pilot Memo.
However, the report suggests that the magnitude of the effect of
expiring p.m. cash-settled index options open interest on the
measure of volatility and price reversals for index futures, the
underlying cash index, and index component securities is
economically very small.\32\
---------------------------------------------------------------------------
\32\ See DERA Staff PM Pilot Memo at page 1.
[[Page 13195]]
---------------------------------------------------------------------------
The following provides an illustration using some of the regression
results from the DERA Staff PM Pilot Memo. Among the volatility
variables analyzed by the DERA Staff PM Pilot Memo was the ``Magnitude
of Maximum Reversal Overlapping Close'' of index futures prices. The
DERA Staff PM Pilot Memo found that this metric was higher when the
options settlement volume was higher, for both the S&P 500 and the
Nasdaq-100 Index options. Using data provided in the DERA Staff PM
Pilot Memo, the Exchange can estimate the impact of a very large
increase in settlement volume: an increase from its 25th percentile to
its 75th percentile. The following table shows the steps of the
calculation.
Table 4 \33\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Settlement volume
------------------------------------------------ Regression Impact Median of Rel. impact
25th 75th Diff. coefficient variable (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
S&P500.................................. 0.40 1.66 1.26 0.317 0.40 1.96 20.4
Nq-100.................................. 0.07 0.17 0.10 2.39 0.24 1.58 15.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
The percentiles of settlement volume (in units of $10 billion
notional) are shown in Table 25 of the DERA Staff PM Pilot Memo, which
indicated that the volume of S&P 500 contracts was much higher than
that of Nasdaq-100 contracts. The regression coefficients are from
Table 5 (S&P 500) and Table 19 (Nasdaq-100) of the DERA Staff PM Pilot
Memo. The estimated impact is the product of the volume difference
times the coefficient. Table 5 of the DERA Staff PM Pilot Memo provided
the median of the volatility metric during the sample period. The
relative impact is the estimated impact divided by the sample median,
i.e., the estimated change in the volatility metric, relative to its
median value, due to an increase in settlement volume. As shown, the
relative impact was small for both indexes, about 20% for the S&P 500
and 15% for the Nasdaq-100.
---------------------------------------------------------------------------
\33\ See DERA Staff PM Pilot Memo.
---------------------------------------------------------------------------
The Exchange provides some additional analysis on market capacity
around the market close. Specifically, the Exchange believes it is
important to recognize that in recent years the closing auctions on the
equity markets have steadily grown to a point where they are much
larger than the opening auctions. To illustrate this point, the
following chart shows the percentage of dollar volume of Nasdaq-100
Index components executed in the opening and closing auctions on
Fridays.
[GRAPHIC] [TIFF OMITTED] TN02MR23.039
BILLING CODE 8011-01-C
The percentage of volume executed in the close is uniformly higher
than that of the open. The spikes in the closing percentages represent
third Fridays, and in a few cases Fridays that corresponded to the end
of a month. The opening percentage is slightly declining, the closing
percentage slightly increasing during this timeframe. As another
illustration, consider the opening and closing dollar volume
percentages for Fridays, other than the third Friday-of-the-month, from
the second half of 2017 compared with the first half of 2018. This
timeframe corresponds to the introduction of NDXP options,\34\ in which
non-third Friday series moved to p.m.-settled. The following table
present the average percentages.
---------------------------------------------------------------------------
\34\ NDXP options are p.m.-settled index options on broad-based
indexes with nonstandard expirations dates which are also the
subject of a pilot program. NDXP are listed on ISE and Phlx.
[[Page 13196]]
Table 5--Dollar Volume for Nasdaq-100 Components on Non-3rd Fridays
------------------------------------------------------------------------
Auction vol. as percentage of total
vol.
---------------------------------------
Opening Closing
------------------------------------------------------------------------
Jul-Dec 2017.................... 1.48 6.40
Jan-Jun 2018.................... 1.13 6.76
Difference...................... -0.35 0.36
------------------------------------------------------------------------
As would be expected, the relative size of the opening auction
declined, and the closing auction increased by roughly the same amount.
The percentage of about 0.35% would be an estimate of the volume impact
of NDX/NDXP options settlement on the equity market auctions. This
percentage is small to begin with, but it is a much smaller proportion
of the closing auction than the opening auction. Therefore, the
Exchange believes that the liquidity available at or around the close
would be able to mitigate any excess volatility created by the options
settlement at the market close.
As a third example, the Exchange considered the level of options
settlement volume relative to the size of the closing and opening
auctions.\35\ To provide the most up-to-date view of the current
situation, the Exchange examined activity from the start of 2021
through April 2022. The below table shows the notional settlement
volume (in billions of dollars) along with the notional volume in the
auctions for Nasdaq-100 Index components. Settlement volume is the
average dollar volume settled at OCC, Closing Auction is the average
dollar volume executed in the closing auction, Pct of Close is
calculated as Settlement Volume divided by Closing Auction, Open
Auction is the average notional volume executed in the open auction,
and Pct of Open is calculated as Settlement Volume divided by Opening
Auction.
---------------------------------------------------------------------------
\35\ Options settlement volume is the primary size metric used
in the DERA Staff PM Pilot Memo. Options settlement volume is the
notional volume settled in the closing auction.
Table 6--Settlement Volume for NDX/NDXP vs Auctions: Jan 2021- Apr 2022
----------------------------------------------------------------------------------------------------------------
Settlement Closing Percentage of Opening Percentage of
Exp. day volume auction close auction open
----------------------------------------------------------------------------------------------------------------
NDXP
----------------------------------------------------------------------------------------------------------------
Monday.......................... $2.4 $9.9 25.9 .............. ..............
Wed............................. 2.7 9.0 30.2 .............. ..............
Non 3rd Fri..................... 4.1 9.6 44.7 .............. ..............
----------------------------------------------------------------------------------------------------------------
NDX
----------------------------------------------------------------------------------------------------------------
3rd Friday...................... 13.1 23.0 78.0 $6.6 230.4
----------------------------------------------------------------------------------------------------------------
Table 6 shows that the settlement volume for NDXP settlements
averages between 26% and 45% of the closing auction volume, the Friday
NDXP settlements being the largest. NDX settlement volumes are larger,
and relative to the opening auction--the relevant auction--they average
more than twice the size of the auctions. By contrast, the relative
size of the settlement volume would be about a third less if it were
compared to the closing auctions on the third Fridays. As documented in
the DERA Staff PM Pilot Memo, p.m.-settled option activities only have
a very small impact on the volatility of the underlying index.
Additionally, the size of the option settlement value is relatively
small compared with the size of the closing auction value. Therefore,
the Exchange believes that it is difficult to manipulate the underlying
Nasdaq-100 Index during the closing auction. The equity closing
auctions have grown to be substantial liquidity events (for the period
examined the closing auction volume is larger than the opening auction
volume) and would therefore be suited for handling the excess liquidity
demand created by index options settlement.
Technical Amendment to Rule Text
The Exchange proposes to amend Supplementary Material .07 to
Options 4A, Section 12 to remove ``c'' and re-letter ``d'' as ``c.''
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\36\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\37\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest by proposing to make permanent the NQX Pilot and the
Nonstandard Pilot.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78f(b).
\37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Previously, the Commission has raised concerns about expanding p.m.
settlement.\38\ Specifically, the Commission noted in the Cboe Pilot
Order that it had concerns about the adverse effects and impact of p.m.
settlement upon market volatility and the operation of fair and orderly
markets on the underlying cash market at or near the close of
trading.\39\ The Commission noted in the Cboe Pilot Order that the
information requested of Cboe would enable the Commission to evaluate
whether allowing p.m. settlement for EOW and EOMs will result in
increased market and price volatility in the underlying component
stocks.\40\
[[Page 13197]]
Further, the p.m. settlement Pilot information should help the
Commission assess the impact on the markets and determine whether other
changes are necessary.\41\ Furthermore, the Exchange's ongoing analysis
of the Pilot should help it monitor any potential risks from large
p.m.-settled positions and take appropriate action if warranted.\42\
---------------------------------------------------------------------------
\38\ See Securities Exchange Act Release No. 62911 (September
14, 2010), 75 FR 57539 (September 21, 2010) (SR-CBOE-2009-075)
(Order Approving Notice of Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, to Establish a Pilot Program to List P.M.-
Settled End of Week and End of Month Expirations for Options on
Broad-Based Indexes) (``Cboe Pilot Order'').
\39\ Id at 57540.
\40\ Id at 57540.
\41\ Id at 57540.
\42\ Id at 57540.
---------------------------------------------------------------------------
Similar to Cboe, ISE has provided pilot data to the Commission with
respect to its NQX Pilot and Nonstandard Pilot. The Exchange's analysis
presents data that the introduction of p.m.-settlement has led to an
increase in options trading tied to the Nasdaq-100 Index. The Exchange
notes within its analysis that it seems unlikely that the introduction
of NQX option contracts or XND contracts \43\ had a significant impact
on the market quality of the full-sized Nasdaq-100 Index option
contracts. The Exchange observed a consistent decrease in relative
quoted spread is observed from 2017 to 2022 for NDX options. When the
Exchange compared the spread trend of NDX monthly contracts to that of
QQQ monthly contracts, the results suggest that there is gradual
decrease in both the NDX monthly contracts spread and the QQQ contracts
spread during the sample period.
---------------------------------------------------------------------------
\43\ See note 7 above.
---------------------------------------------------------------------------
The Exchange also considered whether the move from a.m.-settlement
to p.m.-settlement for Friday weeklies (NDX-Weekly to NDXP-Fri) led to
changes in spreads for those contracts. Overall, the Exchange sees no
evidence of deterioration of spreads associated with the changes the
Exchange has made to its Nasdaq-100 Index product offering by
introducing p.m.-settled products.
Finally, in considering impact on the closing process in equity
markets, the Exchange concluded that it is difficult to manipulate the
underlying Nasdaq-100 Index. Specifically, the equity closing auctions
have grown to be substantial liquidity events that are much larger than
the opening auctions, and would therefore be better suited for handling
the excess liquidity demand created by index options settlement. The
Exchange believes the expiration of p.m.-settlement options would not
adversely affect the options market or the underlying cash equities
market.
Further, the Exchange has sufficient systems capacity to handle
p.m.-settled options on broad-based indexes with nonstandard
expirations dates and has not encountered any issues or adverse market
effects as a result of listing them.
Accordingly, the Exchange believes that weekly expirations and
EOMs, including the NQX expirations, in the p.m.-settled products
should create greater trading and hedging opportunities and flexibility
and provide customers with the ability to more closely tailor their
investment objectives.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Making permanent the NQX Pilot
and the Nonstandard Pilot will not impose an undue burden on
competition, rather, it will continue to provide investors with greater
trading and hedging opportunities and flexibility, as well as the
ability to more closely tailor their investment objectives.
Additionally, the Exchange does not believe the proposal will
impose any burden on intermarket competition as market participants are
welcome to become Members and trade at ISE if they determine that this
proposed rule change has made ISE more attractive or favorable.
Finally, all options exchanges are free to compete by listing and
trading their own broad-based index options with weekly or end of month
expirations.
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 up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ISE-2023-08 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-ISE-2023-08. 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-ISE-2023-08, and should be submitted on
or before March 23, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
---------------------------------------------------------------------------
\44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-04224 Filed 3-1-23; 8:45 am]
BILLING CODE 8011-01-P
