Self-Regulatory Organizations; MIAX International Securities Exchange LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Amend MIAX Rule 307, Position Limits, 53555-53560 [2023-16881]
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
exercise limits as proposed).32
Therefore, the Exchange believes the
proposed rule change will enhance
intermarket competition by providing
investors with a choice of exchange
venues on which to trade cash-settled
FLEX ETF Options.
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 33 and Rule 19b–
4(f)(6)(iii) thereunder.34
A proposed rule change filed under
Rule 19b–4(f)(6) 35 normally does not
become operative prior to 30 days after
the date of filing. However, pursuant to
Rule 19b–4(f)(6)(iii),36 the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
the proposed rule change may become
operative upon filing. The Exchange
states, among other things, that waiver
of the 30-day operative delay will
protect investors by providing them
with an immediate choice and an
additional venue where they can trade
cash-settled FLEX ETF Options. The
Commission approved a substantially
similar proposal by another exchange
that was subject to notice and comment
and found consistent with the Act.37 For
these reasons, and because the proposed
rule change does not raise any novel
regulatory issues that have not been
addressed, the Commission believes
waiving the 30-day operative delay is
32 See
supra note 12.
U.S.C. 78s(b)(3)(A).
34 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
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.
35 17 CFR 240.19b–4(f)(6).
36 17 CFR 240.19b–4(f)(6)(iii).
37 See supra note 12.
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consistent with the protection of
investors and the public interest.
Therefore, the Commission hereby
waives the operative delay and
designates the proposal operative upon
filing.38
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
CBOE–2023–036 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–CBOE–2023–036. 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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CBOE–2023–036 and should be
submitted on or before August 29, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–16885 Filed 8–7–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98045; File No. SR–MIAX–
2023–19]
Self-Regulatory Organizations; MIAX
International Securities Exchange LLC;
Order Instituting Proceedings To
Determine Whether To Approve or
Disapprove a Proposed Rule Change
To Amend MIAX Rule 307, Position
Limits
August 2, 2023.
I. Introduction
On April 21, 2023, Miami
International Securities Exchange LLC
(‘‘MIAX’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’), pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ‘‘Act’’),1 and
Rule 19b–4 thereunder,2 a proposed rule
change to amend Exchange Rule 307,
Position Limits, to establish a process
for adjusting option position limits
following a stock split or reverse stock
split in the underlying security. The
proposed rule change was published for
comment in the Federal Register on
May 8, 2023.3 On June 14, 2023,
pursuant to Section 19(b)(2) of the Act,4
the Commission designated a longer
period within which to approve the
39 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 97421
(May 2, 2023), 88 FR 29725 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
1 15
38 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether to
approve or disapprove the proposed
rule change.5 The Commission has
received one comment regarding the
proposal.6 This order institutes
proceedings pursuant to Section
19(b)(2)(B) of the Act 7 to determine
whether to approve or disapprove the
proposed rule change.
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II. Description of the Proposal
Currently, Exchange Rule 307(d)
establishes option position limits of
25,000 contracts, 50,000 contracts,
75,000 contracts, 200,000 contracts, or
250,000 contracts on the same side of
the market for the same underlying
security or such other number of option
contracts as may be fixed from time to
time by the Exchange. The position
limit applicable to an option is based on
the trading volume and outstanding
shares of the underlying security.8
Exchange Rule 307(e) states that the
Exchange will review the status of
underlying securities every six months
to determine which position limit
should apply. A higher limit will be
effective on the date set by the
Exchange, and any change to a lower
limit will take effect after the last
expiration then trading, unless the
requirement for the same or a higher
5 See Securities Exchange Act Release No. 97727
(June 14, 2023), 88 FR 40366 (June 21, 2023). The
Commission designated August 6, 2023, as the date
by which the Commission shall approve or
disapprove, or institute proceedings to determine
whether to approve or disapprove, the proposed
rule change.
6 See letter from Ellen Greene, Managing Director,
Equities & Options Market Structure, SIFMA, to
Vanessa Countryman, Secretary, Commission, dated
July 5, 2023 (‘‘SIFMA Letter’’).
7 15 U.S.C. 78s(b)(2)(B).
8 Exchange Rule 307(d) establishes the following
position limits: 25,000 contracts for an option on an
underlying security that does not meet the
requirements for a higher option contract limit;
50,000 contracts for an option on an underlying
security that has either a most recent six month
trading volume of at least 20 million shares, or a
most recent six month trading volume of at least 15
million shares and at least 40 million shares
outstanding; 75,000 contracts for an option on an
underlying security that has either a most recent six
month trading volume of at least 40 million shares,
or a most recent six month trading volume of at
least 30 million shares and at least 120 million
shares outstanding; 200,000 contracts for an option
on an underlying security that has either a most
recent six month trading volume of at least 80
million shares or a most recent six month trading
volume of at least 60 million shares and at least 240
million shares outstanding; and 250,000 contracts
for an option on an underlying security that has
either a most recent six month trading volume of
at least 100 million shares, or a most recent six
month trading volume of at least 75 million shares
and at least 300 million shares outstanding. In
addition, Exchange Rule 307, Interpretation and
Policy .01 establishes position limits over 250,000
contracts for options on certain underlying
exchange-traded funds. See Notice, 88 FR at 29726.
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limit is met at the time of the
intervening six month review.9 If,
subsequent to a six month review, an
increase in volume and/or outstanding
shares would make a stock eligible for
a higher position limit prior to the next
review, the Exchange in its discretion
may immediately increase such position
limit.10
The Exchange proposes to amend
Exchange Rule 307 to make permanent
the position limit changes that currently
occur when an underlying security
undergoes a corporate stock split.11 The
Exchange states that following a stock
split, the Options Clearing Corporation
(‘‘OCC’’) adjusts the position limit for
options on the underlying security by
the factor of the split.12 The Exchange
states, for example, that when a stock
underlying an option with a position
limit of 250,000 contracts undergoes a
four-for-one stock split, the option will
have a new position limit of 1,000,000
contracts.13 The Exchange further states
that although the stock split is a
permanent corporate action in the
underlying stock, the position limit
adjustment is temporary and lasts only
until the time of expiration of the last
option listed at the time of the stock
split.14
Proposed Exchange Rule 307(g) would
apply the split adjustment factor to the
current position limit to establish a new
option position limit following a stock
split in the underlying security.15
Specifically, proposed Exchange Rule
307(g)(1) states that the position limit
that was in effect at the time of the stock
split shall be adjusted by multiplying
the current position limit value in effect
for the underlying by the stock split
ratio.16 (For example, if the current
position limit is 250,000 contracts and
there is a four-for-one (4:1) stock split in
the underlying, the new position limit
would be 1,000,000 contracts (4 ×
250,000)). Proposed Exchange Rule
3071(g)(2) further states that the
position limit that was in effect at the
time of a reverse stock split shall be
adjusted by dividing the current
position limit value in effect for the
underlying by the reverse stock split
ratio. For example, if the current
9 See
Exchange Rule 307(e).
10 Id.
11 See
Notice, 88 FR at 29726–7.
Notice, 88 FR at 29727. The Exchange does
not believe that the OCC immediately adjusts
position limits for reverse stock splits. See id. at n.8.
13 See Notice, 88 FR at 29727.
14 Id.
15 Id.
16 Proposed Exchange Rule 307(g)(3) states that
for purposes of Exchange Rule 307(g), the term
‘‘stock’’ shall pertain solely to equity securities and
not be inclusive of exchange-traded funds.
12 See
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position limit is 250,000 contracts and
there is a one-for-two (1:2) reverse stock
split in the underlying, the new position
limit would be 125,000 contracts
(250,000/2). Further, for reverse stock
splits, the new position limit would be
the greater of the adjusted position limit
or the lowest position limit defined in
Exchange Rule 307(d).17
The Exchange states that its proposal
presents a logical approach to
addressing stock splits in underlying
securities because it maintains the
integrity of the position limit to shares
outstanding ratio pre- and post-split,
and promotes consistency and stability
in the marketplace.18 The Exchange
states, by way of example, that a
position limit of 250,000 contracts on an
underlying security that has
4,000,000,000 shares outstanding
represents control of 25,000,000 shares
or 0.625% of the total shares
outstanding.19 If the underlying security
has a four-for-one stock split, the
number of shares outstanding would
increase to 16,000,000,000.20 The
Exchange states that to maintain the
same position limit to shares
outstanding ratio, the option position
limit should increase fourfold to
1,000,000 contracts, where control of
100,000,000 shares would represent
control of 0.625% of the total shares
outstanding.21
The Exchange states that, today, when
the last option listed at the time of the
stock split expires, the position limit is
re-evaluated according to the criteria in
Exchange Rule 307(d)(1)–(5), (where the
maximum contract limit is 250,000
contracts), and the position limit is
permanently readjusted in accordance
with that criteria.22 The Exchange states
that the reversion of the position limit,
even to the maximum limit of 250,000
contracts, unnecessarily restricts trading
by imposing a stricter position limit
relative to the number of shares
outstanding post-stock split than existed
pre-stock split.23 The Exchange states
that its proposal will maintain the
position limit to shares outstanding
ratio so that the pre-split ratio and postsplit ratio are identical, and will
eliminate any market disruptions that
may occur as a result of the current
process for handling stock splits.24
The Exchange also proposes to amend
Exchange Rule 307(e) to apply the split
17 See
18 See
proposed Exchange Rule 307(g)(2).
Notice, 88 FR at 29727.
19 Id.
20 Id.
21 Id.
22 Id.
23 Id.
24 Id.
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factor to the reevaluation process
provided in that rule. The Exchange
proposes to amend Exchange Rule
307(e) to provide that for underlying
securities whose position limit has been
adjusted pursuant to paragraph (g), the
split factor shall be used for analysis
under paragraph (d). For example,
paragraph (d)(5) establishes the position
limit based on either the most recent
six-month trading volume of the
underlying security totaling at least 100
million shares, or the most recent sixmonth trading volume of the underlying
security totaling at least 75 million
shares and the underlying security
having at least 300 million share
outstanding. Therefore, to be eligible for
the 250,000-contract limit, an
underlying stock that underwent a fourfor-one stock split would be required to
have either most-recent six-month
trading volume of at least 400 million
shares (100,000,000 × 4), or most-recent
six-month trading volume of at least 300
million shares (75,000,000 × 4) with at
least 1,200,000,000 shares outstanding
(300,000,000 × 4). For reverse stock
splits, the split factor would be similarly
applied and used as a divisor in the
calculations rather than as a multiplier.
The Exchange states that the proposal
provides a uniform and consistent
approach for reevaluating position
limits for underlying securities that
were subject to a stock split because the
split factor is properly applied
(multiplied for share splits and divided
for reverse share splits) to each
threshold value under Exchange Rule
307(d) to establish the proper position
limit.25 The Exchange states that the
current reversion process, in which
position limits are adjusted at the time
of the stock split but revert back to the
original position limit when the last
listed option at the time of the split
expires, does not benefit investors or the
public interest because the original
position limit is no longer meaningfully
related to the current shares
outstanding.26 The Exchange states that
the proposal maintains the established
position limit relative to shares
outstanding pre- and post-stock split
and provides a defined calculation in
the Exchange’s rule to account for stock
splits in underlying securities.27 In
addition, the Exchange states that the
proposal provides a corollary method
for handling reverse stock splits that
employs similar logic.28
The Exchange states that in August
2020 the industry experienced an issue
25 Id.
26 See
Notice, 88 FR at 29728.
27 Id.
28 Id.
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with a four-for-one stock split in Apple
Inc. (‘‘AAPL’’) that the proposal is
tangentially designed to address.29 The
Exchange states that prior to the stock
split, there were approximately
4,000,000,000 shares of AAPL
outstanding and the position limit for
AAPL was 250,000 contracts
(25,000,000 shares).30 The Exchange
states that on August 28, 2020, the OCC
indicated that that effective August 31,
2020, a contract multiplier of four and
a strike divisor of four would be applied
to AAPL contracts and strikes.31 The
Exchange states that the OCC also
adjusted the position limit for AAPL by
the same factor, setting the position
limit to 100,000,000 shares (1,000,000
contracts).32 The Exchange states that
when the last AAPL option listed at the
time of the stock split in 2020 expired
in 2022, the OCC reverted back to the
original position limit for AAPL of
25,000,000 shares (250,000 contracts).33
The Exchange states that although this
position limit technically adheres to the
Exchange’s rules, it is more restrictive
than the original position limit.34 The
Exchange states that prior to the stock
split, AAPL had approximately
4,000,000,000 shares outstanding and
the position limit of 250,000 contracts
represented control of 25,000,000 shares
or 0.625% of the outstanding shares.35
The Exchange further states that, after
the stock split, AAPL had
approximately 16,000,000,000 shares
outstanding.36 The Exchange states that
the immediate adjustment of the
position limit from 250,000 contracts to
1,000,000 contracts reflects control of
100,000,000 shares or 0.625% of the
shares outstanding, which retains the
pre-stock split ratio.37 The Exchange
states that readjusting the position limit
back to 25,000,000 shares (250,000
contracts) when there are
16,000,000,000 shares outstanding
reduces the position limit to 0.156% of
the shares outstanding, making the poststock split position limit more
restrictive than the pre-stock split
position limit.38
The Exchange states that the reversion
to the pre-stock split position limit
29 Id.
30 Id.
31 See Notice, 88 FR at 29728, citing OCC Memo
#47509, Apple Inc.—4 for 1 Stock Split (August 28,
2020) available on its public website at https://
infomemo.theocc.com/infomemos?number=47509.
32 See Notice, 88 FR at 29728. The Exchange
states that the OCC publishes position limits each
day on its website.
33 Id.
34 Id.
35 Id.
36 Id.
37 Id.
38 Id.
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53557
disrupts the market in a number of
ways.39 The Exchange states that the
reversion to the pre-split position limit
prevents market participants from
effectively pursuing their trading and
investment strategies because the
position limit relative to shares
outstanding has become more
restrictive.40 In addition, the Exchange
states that the reversion to the pre-stock
split position limit introduces an
element of risk because market
participants must unwind their postsplit positions to remain compliant with
position limit rules.41 The Exchange
also states that the reversion to the presplit position limit may negatively
impact trading volumes because market
participants that use option contracts to
hedge their risks will not be able to
maintain the same levels of market
exposure.42
Using AAPL as an example, the
Exchange states that pre-split, a market
participant could have had an options
position of 250,000 contracts that
represented 0.0625% [sic] of the total
shares outstanding and that, post-split,
the market participant could have had
an options position of 1,000,000
contracts, which would still represent
0.0625% [sic] of the total shares
outstanding.43 The Exchange states that
after the reversion to the pre-split
position limit (250,000 contracts), the
market participant would be forced to
reduce its trading activity because the
maximum position limit would then
represent 0.1563% of the total shares
outstanding.44 The Exchange states that
this reduction in trading volume also
represents a reduction in available
liquidity.45 The Exchange further states
that robust liquidity facilitates price
discovery and benefits competition by
improving bid/ask spreads, and that
tighter bid/ask spreads lead to better
execution prices.46 The Exchange states
that the reversion to the pre-split
position limit negatively impacts
liquidity, trading volume, and possibly
execution prices.47
The Exchange states that other
options exchanges could adopt similar
rules to harmonize position limit
adjustments as a result of stock splits in
39 Id.
40 Id.
41 Id.
42 Id.
43 Id. The Commission understands the
percentage figure referenced by the Exchange in this
example should be 0.625%, not 0.0625%.
44 Id.
45 Id.
46 Id.
47 Id.
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the underlying securities.48 The
Exchange states that all market
participants are able to determine
position limits on a daily basis because
the OCC publishes a Position Limit file
and a Position Limit Change file, which
reflects position limit adjustments and
provides the Start Date and Starting
Position Limit coupled with the End
Date and Ending Position Limit.49
III. Proceedings To Determine Whether
To Approve or Disapprove SR–MIAX–
2023–19 and Grounds for Disapproval
Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 50 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of proceedings is appropriate
at this time in view of the legal and
policy issues raised by the proposal, as
discussed below. Institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described
below, the Commission seeks and
encourages interested persons to
provide comment on the proposed rule
change.
Pursuant to Section 19(b)(2)(B) of the
Act,51 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of, and input from
commenters with respect to, the
consistency of the proposed rule change
with the Act and, in particular, Section
6(b)(5) of the Act,52 which requires that
the rules of a national securities
exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest, and not be designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
Under the Commission’s Rules of
Practice, the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the [Act] and the rules
and regulations issued thereunder . . .
is on the self-regulatory organization
that proposed the rule change.’’ 53 The
description of a proposed rule change,
48 Id.
49 See
50 15
Notice, 88 FR at 29728–9.
U.S.C. 78s(b)(2)(B).
its purpose and operation, its effect, and
a legal analysis of its consistency with
applicable requirements must all be
sufficiently detailed and specific to
support an affirmative Commission
finding,54 and any failure of a selfregulatory organization to provide this
information may result in the
Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Act and the applicable rules
and regulations.55
As discussed above, the Exchange
proposes to adopt new rule provisions
that would automatically adjust an
option’s position limit proportional to
and following a stock split or reverse
stock split in the underlying security.
Specifically, proposed Exchange Rule
307(g)(1) would provide that, following
a stock split, the new position limit for
options on the stock would be a value
equal to the option position limit in
effect at the time of the split multiplied
by the stock split ratio. For a reverse
stock split, the position limit in effect at
the time of the reverse stock split would
be adjusted by dividing the position
limit value by the reverse stock split
ratio. In addition, the Exchange
proposes to amend Exchange Rule
307(e) to provide that, for an option
with a position limit that has been
adjusted pursuant to proposed Exchange
Rule 307(g), the split factor would be
used for the position limit analysis in
Exchange Rule 307(d).
The Exchange states that the current
reversion to the pre-stock split position
limit following the expiration of the last
option listed at the time of the split
prevents market participants from
effectively pursuing their trading and
investment strategies because the option
position limit relative to shares
outstanding becomes more restrictive.56
The Exchange also states that the
reversion to the pre-stock split position
limit introduces an element of risk
because market participants must
unwind their post-split positions prior
to the reversion to the pre-split position
limit level to remain compliant with
position limit rules.57 Further, the
Exchange states that the reversion to the
pre-split position limit may negatively
impact trading volumes because market
participants that use option contracts to
hedge their risks would not be able to
maintain the same levels of market
exposure.58
54 See
52 15
U.S.C. 78f(b)(5).
700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
53 Rule
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id.
id.
56 See Notice, 88 FR at 29728.
57 Id.
58 Id.
55 See
51 Id.
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The Commission has received one
comment regarding the proposal.59 The
commenter expressed broad support for
the proposal, reiterating many of the
statements made by the Exchange.
According to the commenter, the
reversion to the original position limit
when the last listed option at the time
of a split expires renders the limit no
longer meaningfully related to the
current shares outstanding, and
unnecessarily restricts trading by
imposing a stricter position limit
relative to the number of shares
outstanding post-stock split.60 The
commenter stated that the proposal
would eliminate this disparate
treatment between the underlying stock
split and the options position limit
because both adjustments would be
permanent.61 The commenter also
stated that the proposal maintains the
integrity of the position limit to shares
outstanding ratio both pre- and postsplit, provides a consistent and uniform
approach for reevaluating position
limits on underlying securities that were
subject to a stock split, and creates
stability in the marketplace by
preserving the expectations of market
participants who are trading and
hedging in the options contracts subject
to the position limit changes.62 In
addition, the commenter stated that,
besides AAPL, several other companies
with significant market capitalization
have undergone recent stock splits,
including Tesla Inc., Alphabet Inc. and
Nvidia Corporation (‘‘NVDA’’).63 The
commenter stated that NVDA shares
underwent a four-for-one stock split,
increasing the option position limit
from 250,000 contracts to 1,000,000
contracts until the last contract expired
in June 2023, at which point the limit
reverted to 250,000 contracts.64 The
commenter stated that allowing the
position limit to remain at 1,000,000
contracts would allow investors who are
trading and hedging in the options
contracts to manage their positions
consistent with the new amount of
shares outstanding.65
Position and exercise limits serve as
a regulatory tool designed to address
manipulative schemes and adverse
market impact surrounding the use of
options.66 Currently, the maximum
stock option position limits permitted
59 See
SIFMA Letter.
at 1–2.
61 Id. at 2.
62 Id.
63 Id.
64 Id.
65 Id.
66 See, e.g., Securities Exchange Act Release No.
68086 (October 23, 2012), 77 FR 65600 (October 29,
2012) (SR–CBOE–2012–066).
60 Id.
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under exchange rules are 250,000
contracts. Although OCC provides a
temporary adjustment to option position
limits following a stock split, exchange
rules currently do not provide for the
automatic adjustment of an option’s
position limit proportional to splits in
the underlying stock. The proposal is
novel because it would amend the
Exchange’s rules to permit such
automatic position limit adjustments,
including adjustments that could result
in increases in stock option position
limits to levels that exceed 250,000
contracts. For example, in 2022,
Amazon.com, Inc. (‘‘Amazon’’)
underwent a 20:1 stock split.67 Under
the proposal, the position limit for
options on a stock that undergoes a 20:1
split would increase by a factor of 20—
for example, from 250,000 contracts to
5,000,000 contracts—regardless of the
most recent six-month trading volume
or number of shares outstanding of the
underlying stock. Even a more modest
position limit increase, such as a
fourfold increase for an option on a
stock that undergoes a 4:1 stock split,
would be a substantial increase from
current levels. The proposed automatic
increase in position limits for options
on stocks that undergo a stock split
raises the potential for adverse impacts
in the market for the underlying stocks.
As discussed above, the Exchange and
the commenter state that increasing the
option position limit by the stock split
factor will allow a market participant to
continue to maintain an options
position representing the same
percentage of outstanding shares of the
underlying stock following a stock split.
However, the trading volume in the
underlying stock—not the ability to
establish an options position
representing a consistent percentage of
the outstanding shares pre- and postsplit—is one of the relevant metrics for
determining the position limit for
options on stocks.68 Neither the
Exchange nor the commenter have
provided data indicating that trading
volume in a stock generally increases
following a stock split, or that any such
increases, to the extent that they exist,
generally are sufficient to support an
increase in the option position limit by
an amount equal to the stock split
factor. For example, neither the
Exchange nor the commenter present
data demonstrating that, in general, the
trading volume in a stock that
undergoes a 4:1 stock split increases to
67 See Amazon.com, Inc. Current Report (Form 8–
K) (March 9, 2022), available at https://
www.sec.gov/Archives/edgar/data/1018724/
000101872422000009/amzn-20220309.htm.
68 See, e.g., Exchange Rule 307(d).
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such an extent that the position limit for
options on that stock should increase
fourfold over the pre-split option
position limit. On the contrary, the
Commission understands that some data
suggest that trading volume in a stock
may be unchanged or decrease
following a stock split.69
Further, the proposal does not explain
why it would be appropriate for a stock
option potentially to have a split-factoradjusted position limit that is higher
than what is allowed by Exchange Rule
307(d) for corresponding underlying
stock-volume-traded measures. For
example, under Exchange Rule 307(d), a
most recent six-month trading volume
in the underlying security of at least 20
million shares qualifies the option for a
50,000-contract position limit, and a
most recent six-month trading volume
in the underlying security of at least 40
million shares qualifies the option for a
75,000-contract position limit. Under
the proposal, if an option at the 50,000contract limit had a most recent sixmonth trading volume in its underlying
stock of 20 million shares and the stock
split two-for-one, the option’s position
limit would increase to 100,000
contracts and could remain there so
long as the underlying stock’s most
recent six-month trading volume was at
least 40 million shares. Under Exchange
Rule 307(d), however, a most recent sixmonth trading volume of 40 million
shares in the underlying security
qualifies an option for a 75,000-contract
limit, not a 100,000-contract limit. The
proposal does not explain why this and
other potential discrepancies with
position limits currently allowed by
Exchange Rule 307(d) are appropriate
69 A Cboe study on the impact of stock splits on
trading activities finds that split-adjusted median
executed share volume in mega-capitalization
stocks increased slightly one-week post-split but, in
the two-week to six-month period post-split, the
median executed share volume decreased about
48%, compared to volume a week pre-split. See
Cboe study on the impact of stock split on trading
activities at: https://www.cboe.com/insights/posts/
stock-splits-lead-to-split-results-in-trading/. This
study also finds that the median number of options
contracts traded in mega-capitalization stocks
decreased approximately 49% one week post-split
and remained down through the six-month period
post-split. Further, this study finds that splitadjusted median executed share volume in largecapitalization stocks increased slightly two weeks
post-split but then decreased in the one to sixmonth period post-split, and that split-adjusted
median executed share volume in mid- and smallcap stocks decreased in the one-week to six-month
period post-split. In addition, the Commission
understands that some evidence suggests that, as a
general matter, share trading volume may be
unchanged or decrease after a stock split. See, e.g.,
Patrick Dennis, Stock Splits and Liquidity: the Case
of the Nasdaq–100 Index Tracking Stock, the
Financial Review, 38, 2003, 415–433; Thomas E.
Copeland, Liquidity Changes Following Stock
Splits, the Journal of Finance, 34, 1, 1979, 115–141.
PO 00000
Frm 00109
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Sfmt 4703
53559
for options with stock-split adjusted
position limits.
In addition, although the Exchange
states that the reversion to pre-split
option position limits prevents market
participants from effectively pursuing
their trading, hedging, and investment
strategies following a stock split, the
proposal provides no details to support
these assertions, such as the number of
customers affected or the trading,
hedging, or investment strategies that
these customers are unable to execute
because of lower post-split position
limits. Similarly, although the Exchange
states that the reversion to pre-split
position limits negatively impacts
liquidity, trading volume, and possibly
execution prices,70 the proposal
provides no data to support these
assertions.
The proposal also does not describe
how the Exchange would implement the
proposed split-factor adjusted position
limit increases or the proposed review
of their appropriateness. The proposal
does not specify, for example, whether
the Exchange intends to follow the
OCC’s policy of increasing the option
position limit immediately after a stock
split and allowing the new limit to
remain in effect until the last option
listed at the time of the stock split
expires, regardless of the trading volume
or shares outstanding of the underlying
stock. Similarly, the proposal does not
specify the timing for the proposed
split-factor adjusted reviews in
Exchange Rule 307(e). Exchange Rule
307(e) currently provides for a sixmonth review of option position limits.
However, the proposal does not specify,
for example, whether the review for
purposes of determining the
appropriateness of a split-factor
adjusted position limit would occur six
months after the stock split, six months
following the expiration of the last
option listed at the time of the stock
split, or at some other point in time
following the stock split.
Finally, the Exchange does not
propose a corresponding change to the
option exercise limits in Exchange Rule
309. Apart from the exemptions in
Exchange Rule 308, Exchange Rule
309(a)(1) generally prohibits members
from exercising within any five
consecutive business days aggregate
long positions in any class of options
traded on the Exchange in excess of
25,000 or 50,000 or 75,000 or 200,000 or
250,000 option contracts or such other
number of option contracts as may be
fixed from time to time by the Exchange
as the exercise limit for that class of
options. It is not clear whether the
70 See
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Federal Register / Vol. 88, No. 151 / Tuesday, August 8, 2023 / Notices
proposed change to option position
limits would accomplish the goals of the
proposal without a corresponding
change to Exchange Rule 309(a)(1).71
Accordingly, the proposal does not
provide an adequate basis for the
Commission to conclude that the
proposal would be consistent with
Section 6(b)(5) of the Act.
ddrumheller on DSK120RN23PROD with NOTICES1
IV. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their data, views, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposed rule change is consistent with
Section 6(b)(5), or any other provision of
the Act, or the rules and regulations
thereunder. Although there do not
appear to be any issues relevant to
approval or disapproval which would
be facilitated by an oral presentation of
data, views, and arguments, the
Commission will consider, pursuant to
Rule 19b-4 under the Act,72 any request
for an opportunity to make an oral
presentation.73
The Commission asks that
commenters address the sufficiency and
merit of the Exchange’s statements in
support of the proposal in addition to
any other comments they may wish to
submit about the proposed rule change.
In particular, the Commission seeks
comment on its concerns expressed
above regarding the proposal’s
consistency with the Act, and seeks
commenters’ views as to whether the
proposal could have an adverse market
impact.
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposed rule change should be
approved or disapproved by August 29,
2023. Any person who wishes to file a
rebuttal to any other person’s
submission must file that rebuttal by
71 Although Exchange Rule 309(c) states that
‘‘limits shall be determined in the manner
described in Rule 307,’’ Exchange Rule 309(a)(1)
establishes a maximum exercise limit of 250,000
contracts.
72 17 CFR 240.19b–4.
73 Section 19(b)(2) of the Act, as amended by the
Securities Acts Amendments of 1975, Pub. L. 94–
29 (June 4, 1975), grants to the Commission
flexibility to determine what type of proceeding—
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Acts Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
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September 12, 2023. 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 No. SR–
MIAX–2023–19 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–MIAX–2023–19. 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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–MIAX–2023–19 and should be
submitted on or before August 29, 2023.
Rebuttal comments should be submitted
September 12, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.74
Sherry R. Haywood.
Assistant Secretary.
[FR Doc. 2023–16881 Filed 8–7–23; 8:45 am]
BILLING CODE 8011–01–P
74 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98047; File No. SR–FINRA–
2022–031]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving a
Proposed Rule Change To Adopt
FINRA Rules 6151 (Disclosure of Order
Routing Information for NMS
Securities) and 6470 (Disclosure of
Order Routing Information for OTC
Equity Securities)
August 2, 2023.
I. Introduction
On November 16, 2022, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’
or ‘‘SEC’’), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
require members to (i) publish order
routing reports for orders in OTC Equity
Securities,3 and (ii) submit their order
routing reports for both OTC Equity
Securities and NMS securities 4 to
FINRA for publication on the FINRA
website. The proposed rule change was
published for comment in the Federal
Register on December 6, 2022.5 On
January 18, 2023, pursuant to Section
19(b)(2) of the Exchange Act,6 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to approve or
disapprove the proposed rule change.7
On March 3, 2023, the Commission
instituted proceedings to determine
whether to approve or disapprove the
proposed rule change.8 On May 31,
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 FINRA Rule 6420(f) defines an ‘‘OTC Equity
Security’’ as any equity security that is not an NMS
stock, other than a Restricted Equity Security.
FINRA Rule 6420(k) defines a ‘‘Restricted Equity
Security’’ as any equity security that meets the
definition of ‘‘restricted security’’ as contained in
Rule 144(a)(3) under the Securities Act of 1933.
‘‘NMS stock’’ means any NMS security other than
an option. See 17 CFR 242.600(b)(55).
4 ‘‘NMS securities’’ include any security or class
of securities for which transaction reports are
collected, processed, and made available to an
effective transaction reporting plan, or an effective
national market system plan for reporting
transactions in listed options. See 17 CFR
242.600(b)(54).
5 See Securities Exchange Act Release No. 96415
(November 30, 2022), 87 FR 74672 (‘‘Notice’’).
6 15 U.S.C. 78s(b)(2).
7 See Securities Exchange Act Release No. 96699,
88 FR 4260 (January 24, 2023).
8 See Securities Exchange Act Release No. 97039,
88 FR 14653 (March 9, 2023).
2 17
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]]>Agencies
[Federal Register Volume 88, Number 151 (Tuesday, August 8, 2023)]
[Notices]
[Pages 53555-53560]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16881]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98045; File No. SR-MIAX-2023-19]
Self-Regulatory Organizations; MIAX International Securities
Exchange LLC; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change To Amend MIAX Rule 307,
Position Limits
August 2, 2023.
I. Introduction
On April 21, 2023, Miami International Securities Exchange LLC
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Exchange Rule 307,
Position Limits, to establish a process for adjusting option position
limits following a stock split or reverse stock split in the underlying
security. The proposed rule change was published for comment in the
Federal Register on May 8, 2023.\3\ On June 14, 2023, pursuant to
Section 19(b)(2) of the Act,\4\ the Commission designated a longer
period within which to approve the
[[Page 53556]]
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change.\5\ The Commission has received one comment regarding the
proposal.\6\ This order institutes proceedings pursuant to Section
19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 97421 (May 2, 2023),
88 FR 29725 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 97727 (June 14,
2023), 88 FR 40366 (June 21, 2023). The Commission designated August
6, 2023, as the date by which the Commission shall approve or
disapprove, or institute proceedings to determine whether to approve
or disapprove, the proposed rule change.
\6\ See letter from Ellen Greene, Managing Director, Equities &
Options Market Structure, SIFMA, to Vanessa Countryman, Secretary,
Commission, dated July 5, 2023 (``SIFMA Letter'').
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposal
Currently, Exchange Rule 307(d) establishes option position limits
of 25,000 contracts, 50,000 contracts, 75,000 contracts, 200,000
contracts, or 250,000 contracts on the same side of the market for the
same underlying security or such other number of option contracts as
may be fixed from time to time by the Exchange. The position limit
applicable to an option is based on the trading volume and outstanding
shares of the underlying security.\8\ Exchange Rule 307(e) states that
the Exchange will review the status of underlying securities every six
months to determine which position limit should apply. A higher limit
will be effective on the date set by the Exchange, and any change to a
lower limit will take effect after the last expiration then trading,
unless the requirement for the same or a higher limit is met at the
time of the intervening six month review.\9\ If, subsequent to a six
month review, an increase in volume and/or outstanding shares would
make a stock eligible for a higher position limit prior to the next
review, the Exchange in its discretion may immediately increase such
position limit.\10\
---------------------------------------------------------------------------
\8\ Exchange Rule 307(d) establishes the following position
limits: 25,000 contracts for an option on an underlying security
that does not meet the requirements for a higher option contract
limit; 50,000 contracts for an option on an underlying security that
has either a most recent six month trading volume of at least 20
million shares, or a most recent six month trading volume of at
least 15 million shares and at least 40 million shares outstanding;
75,000 contracts for an option on an underlying security that has
either a most recent six month trading volume of at least 40 million
shares, or a most recent six month trading volume of at least 30
million shares and at least 120 million shares outstanding; 200,000
contracts for an option on an underlying security that has either a
most recent six month trading volume of at least 80 million shares
or a most recent six month trading volume of at least 60 million
shares and at least 240 million shares outstanding; and 250,000
contracts for an option on an underlying security that has either a
most recent six month trading volume of at least 100 million shares,
or a most recent six month trading volume of at least 75 million
shares and at least 300 million shares outstanding. In addition,
Exchange Rule 307, Interpretation and Policy .01 establishes
position limits over 250,000 contracts for options on certain
underlying exchange-traded funds. See Notice, 88 FR at 29726.
\9\ See Exchange Rule 307(e).
\10\ Id.
---------------------------------------------------------------------------
The Exchange proposes to amend Exchange Rule 307 to make permanent
the position limit changes that currently occur when an underlying
security undergoes a corporate stock split.\11\ The Exchange states
that following a stock split, the Options Clearing Corporation
(``OCC'') adjusts the position limit for options on the underlying
security by the factor of the split.\12\ The Exchange states, for
example, that when a stock underlying an option with a position limit
of 250,000 contracts undergoes a four-for-one stock split, the option
will have a new position limit of 1,000,000 contracts.\13\ The Exchange
further states that although the stock split is a permanent corporate
action in the underlying stock, the position limit adjustment is
temporary and lasts only until the time of expiration of the last
option listed at the time of the stock split.\14\
---------------------------------------------------------------------------
\11\ See Notice, 88 FR at 29726-7.
\12\ See Notice, 88 FR at 29727. The Exchange does not believe
that the OCC immediately adjusts position limits for reverse stock
splits. See id. at n.8.
\13\ See Notice, 88 FR at 29727.
\14\ Id.
---------------------------------------------------------------------------
Proposed Exchange Rule 307(g) would apply the split adjustment
factor to the current position limit to establish a new option position
limit following a stock split in the underlying security.\15\
Specifically, proposed Exchange Rule 307(g)(1) states that the position
limit that was in effect at the time of the stock split shall be
adjusted by multiplying the current position limit value in effect for
the underlying by the stock split ratio.\16\ (For example, if the
current position limit is 250,000 contracts and there is a four-for-one
(4:1) stock split in the underlying, the new position limit would be
1,000,000 contracts (4 x 250,000)). Proposed Exchange Rule 3071(g)(2)
further states that the position limit that was in effect at the time
of a reverse stock split shall be adjusted by dividing the current
position limit value in effect for the underlying by the reverse stock
split ratio. For example, if the current position limit is 250,000
contracts and there is a one-for-two (1:2) reverse stock split in the
underlying, the new position limit would be 125,000 contracts (250,000/
2). Further, for reverse stock splits, the new position limit would be
the greater of the adjusted position limit or the lowest position limit
defined in Exchange Rule 307(d).\17\
---------------------------------------------------------------------------
\15\ Id.
\16\ Proposed Exchange Rule 307(g)(3) states that for purposes
of Exchange Rule 307(g), the term ``stock'' shall pertain solely to
equity securities and not be inclusive of exchange-traded funds.
\17\ See proposed Exchange Rule 307(g)(2).
---------------------------------------------------------------------------
The Exchange states that its proposal presents a logical approach
to addressing stock splits in underlying securities because it
maintains the integrity of the position limit to shares outstanding
ratio pre- and post-split, and promotes consistency and stability in
the marketplace.\18\ The Exchange states, by way of example, that a
position limit of 250,000 contracts on an underlying security that has
4,000,000,000 shares outstanding represents control of 25,000,000
shares or 0.625% of the total shares outstanding.\19\ If the underlying
security has a four-for-one stock split, the number of shares
outstanding would increase to 16,000,000,000.\20\ The Exchange states
that to maintain the same position limit to shares outstanding ratio,
the option position limit should increase fourfold to 1,000,000
contracts, where control of 100,000,000 shares would represent control
of 0.625% of the total shares outstanding.\21\
---------------------------------------------------------------------------
\18\ See Notice, 88 FR at 29727.
\19\ Id.
\20\ Id.
\21\ Id.
---------------------------------------------------------------------------
The Exchange states that, today, when the last option listed at the
time of the stock split expires, the position limit is re-evaluated
according to the criteria in Exchange Rule 307(d)(1)-(5), (where the
maximum contract limit is 250,000 contracts), and the position limit is
permanently readjusted in accordance with that criteria.\22\ The
Exchange states that the reversion of the position limit, even to the
maximum limit of 250,000 contracts, unnecessarily restricts trading by
imposing a stricter position limit relative to the number of shares
outstanding post-stock split than existed pre-stock split.\23\ The
Exchange states that its proposal will maintain the position limit to
shares outstanding ratio so that the pre-split ratio and post-split
ratio are identical, and will eliminate any market disruptions that may
occur as a result of the current process for handling stock splits.\24\
---------------------------------------------------------------------------
\22\ Id.
\23\ Id.
\24\ Id.
---------------------------------------------------------------------------
The Exchange also proposes to amend Exchange Rule 307(e) to apply
the split
[[Page 53557]]
factor to the reevaluation process provided in that rule. The Exchange
proposes to amend Exchange Rule 307(e) to provide that for underlying
securities whose position limit has been adjusted pursuant to paragraph
(g), the split factor shall be used for analysis under paragraph (d).
For example, paragraph (d)(5) establishes the position limit based on
either the most recent six-month trading volume of the underlying
security totaling at least 100 million shares, or the most recent six-
month trading volume of the underlying security totaling at least 75
million shares and the underlying security having at least 300 million
share outstanding. Therefore, to be eligible for the 250,000-contract
limit, an underlying stock that underwent a four-for-one stock split
would be required to have either most-recent six-month trading volume
of at least 400 million shares (100,000,000 x 4), or most-recent six-
month trading volume of at least 300 million shares (75,000,000 x 4)
with at least 1,200,000,000 shares outstanding (300,000,000 x 4). For
reverse stock splits, the split factor would be similarly applied and
used as a divisor in the calculations rather than as a multiplier.
The Exchange states that the proposal provides a uniform and
consistent approach for reevaluating position limits for underlying
securities that were subject to a stock split because the split factor
is properly applied (multiplied for share splits and divided for
reverse share splits) to each threshold value under Exchange Rule
307(d) to establish the proper position limit.\25\ The Exchange states
that the current reversion process, in which position limits are
adjusted at the time of the stock split but revert back to the original
position limit when the last listed option at the time of the split
expires, does not benefit investors or the public interest because the
original position limit is no longer meaningfully related to the
current shares outstanding.\26\ The Exchange states that the proposal
maintains the established position limit relative to shares outstanding
pre- and post-stock split and provides a defined calculation in the
Exchange's rule to account for stock splits in underlying
securities.\27\ In addition, the Exchange states that the proposal
provides a corollary method for handling reverse stock splits that
employs similar logic.\28\
---------------------------------------------------------------------------
\25\ Id.
\26\ See Notice, 88 FR at 29728.
\27\ Id.
\28\ Id.
---------------------------------------------------------------------------
The Exchange states that in August 2020 the industry experienced an
issue with a four-for-one stock split in Apple Inc. (``AAPL'') that the
proposal is tangentially designed to address.\29\ The Exchange states
that prior to the stock split, there were approximately 4,000,000,000
shares of AAPL outstanding and the position limit for AAPL was 250,000
contracts (25,000,000 shares).\30\ The Exchange states that on August
28, 2020, the OCC indicated that that effective August 31, 2020, a
contract multiplier of four and a strike divisor of four would be
applied to AAPL contracts and strikes.\31\ The Exchange states that the
OCC also adjusted the position limit for AAPL by the same factor,
setting the position limit to 100,000,000 shares (1,000,000
contracts).\32\ The Exchange states that when the last AAPL option
listed at the time of the stock split in 2020 expired in 2022, the OCC
reverted back to the original position limit for AAPL of 25,000,000
shares (250,000 contracts).\33\ The Exchange states that although this
position limit technically adheres to the Exchange's rules, it is more
restrictive than the original position limit.\34\ The Exchange states
that prior to the stock split, AAPL had approximately 4,000,000,000
shares outstanding and the position limit of 250,000 contracts
represented control of 25,000,000 shares or 0.625% of the outstanding
shares.\35\ The Exchange further states that, after the stock split,
AAPL had approximately 16,000,000,000 shares outstanding.\36\ The
Exchange states that the immediate adjustment of the position limit
from 250,000 contracts to 1,000,000 contracts reflects control of
100,000,000 shares or 0.625% of the shares outstanding, which retains
the pre-stock split ratio.\37\ The Exchange states that readjusting the
position limit back to 25,000,000 shares (250,000 contracts) when there
are 16,000,000,000 shares outstanding reduces the position limit to
0.156% of the shares outstanding, making the post-stock split position
limit more restrictive than the pre-stock split position limit.\38\
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\29\ Id.
\30\ Id.
\31\ See Notice, 88 FR at 29728, citing OCC Memo #47509, Apple
Inc.--4 for 1 Stock Split (August 28, 2020) available on its public
website at https://infomemo.theocc.com/infomemos?number=47509.
\32\ See Notice, 88 FR at 29728. The Exchange states that the
OCC publishes position limits each day on its website.
\33\ Id.
\34\ Id.
\35\ Id.
\36\ Id.
\37\ Id.
\38\ Id.
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The Exchange states that the reversion to the pre-stock split
position limit disrupts the market in a number of ways.\39\ The
Exchange states that the reversion to the pre-split position limit
prevents market participants from effectively pursuing their trading
and investment strategies because the position limit relative to shares
outstanding has become more restrictive.\40\ In addition, the Exchange
states that the reversion to the pre-stock split position limit
introduces an element of risk because market participants must unwind
their post-split positions to remain compliant with position limit
rules.\41\ The Exchange also states that the reversion to the pre-split
position limit may negatively impact trading volumes because market
participants that use option contracts to hedge their risks will not be
able to maintain the same levels of market exposure.\42\
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\39\ Id.
\40\ Id.
\41\ Id.
\42\ Id.
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Using AAPL as an example, the Exchange states that pre-split, a
market participant could have had an options position of 250,000
contracts that represented 0.0625% [sic] of the total shares
outstanding and that, post-split, the market participant could have had
an options position of 1,000,000 contracts, which would still represent
0.0625% [sic] of the total shares outstanding.\43\ The Exchange states
that after the reversion to the pre-split position limit (250,000
contracts), the market participant would be forced to reduce its
trading activity because the maximum position limit would then
represent 0.1563% of the total shares outstanding.\44\ The Exchange
states that this reduction in trading volume also represents a
reduction in available liquidity.\45\ The Exchange further states that
robust liquidity facilitates price discovery and benefits competition
by improving bid/ask spreads, and that tighter bid/ask spreads lead to
better execution prices.\46\ The Exchange states that the reversion to
the pre-split position limit negatively impacts liquidity, trading
volume, and possibly execution prices.\47\
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\43\ Id. The Commission understands the percentage figure
referenced by the Exchange in this example should be 0.625%, not
0.0625%.
\44\ Id.
\45\ Id.
\46\ Id.
\47\ Id.
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The Exchange states that other options exchanges could adopt
similar rules to harmonize position limit adjustments as a result of
stock splits in
[[Page 53558]]
the underlying securities.\48\ The Exchange states that all market
participants are able to determine position limits on a daily basis
because the OCC publishes a Position Limit file and a Position Limit
Change file, which reflects position limit adjustments and provides the
Start Date and Starting Position Limit coupled with the End Date and
Ending Position Limit.\49\
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\48\ Id.
\49\ See Notice, 88 FR at 29728-9.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-MIAX-
2023-19 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \50\ to determine whether the proposed rule
change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposal, as discussed below. Institution of proceedings does
not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comment
on the proposed rule change.
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\50\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\51\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of, and input from commenters with respect to, the consistency
of the proposed rule change with the Act and, in particular, Section
6(b)(5) of the Act,\52\ which requires that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\51\ Id.
\52\ 15 U.S.C. 78f(b)(5).
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Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the [Act]
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \53\ The
description of a proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding,\54\ and any failure of a self-
regulatory organization to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Act and the
applicable rules and regulations.\55\
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\53\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\54\ See id.
\55\ See id.
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As discussed above, the Exchange proposes to adopt new rule
provisions that would automatically adjust an option's position limit
proportional to and following a stock split or reverse stock split in
the underlying security. Specifically, proposed Exchange Rule 307(g)(1)
would provide that, following a stock split, the new position limit for
options on the stock would be a value equal to the option position
limit in effect at the time of the split multiplied by the stock split
ratio. For a reverse stock split, the position limit in effect at the
time of the reverse stock split would be adjusted by dividing the
position limit value by the reverse stock split ratio. In addition, the
Exchange proposes to amend Exchange Rule 307(e) to provide that, for an
option with a position limit that has been adjusted pursuant to
proposed Exchange Rule 307(g), the split factor would be used for the
position limit analysis in Exchange Rule 307(d).
The Exchange states that the current reversion to the pre-stock
split position limit following the expiration of the last option listed
at the time of the split prevents market participants from effectively
pursuing their trading and investment strategies because the option
position limit relative to shares outstanding becomes more
restrictive.\56\ The Exchange also states that the reversion to the
pre-stock split position limit introduces an element of risk because
market participants must unwind their post-split positions prior to the
reversion to the pre-split position limit level to remain compliant
with position limit rules.\57\ Further, the Exchange states that the
reversion to the pre-split position limit may negatively impact trading
volumes because market participants that use option contracts to hedge
their risks would not be able to maintain the same levels of market
exposure.\58\
---------------------------------------------------------------------------
\56\ See Notice, 88 FR at 29728.
\57\ Id.
\58\ Id.
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The Commission has received one comment regarding the proposal.\59\
The commenter expressed broad support for the proposal, reiterating
many of the statements made by the Exchange. According to the
commenter, the reversion to the original position limit when the last
listed option at the time of a split expires renders the limit no
longer meaningfully related to the current shares outstanding, and
unnecessarily restricts trading by imposing a stricter position limit
relative to the number of shares outstanding post-stock split.\60\ The
commenter stated that the proposal would eliminate this disparate
treatment between the underlying stock split and the options position
limit because both adjustments would be permanent.\61\ The commenter
also stated that the proposal maintains the integrity of the position
limit to shares outstanding ratio both pre- and post-split, provides a
consistent and uniform approach for reevaluating position limits on
underlying securities that were subject to a stock split, and creates
stability in the marketplace by preserving the expectations of market
participants who are trading and hedging in the options contracts
subject to the position limit changes.\62\ In addition, the commenter
stated that, besides AAPL, several other companies with significant
market capitalization have undergone recent stock splits, including
Tesla Inc., Alphabet Inc. and Nvidia Corporation (``NVDA'').\63\ The
commenter stated that NVDA shares underwent a four-for-one stock split,
increasing the option position limit from 250,000 contracts to
1,000,000 contracts until the last contract expired in June 2023, at
which point the limit reverted to 250,000 contracts.\64\ The commenter
stated that allowing the position limit to remain at 1,000,000
contracts would allow investors who are trading and hedging in the
options contracts to manage their positions consistent with the new
amount of shares outstanding.\65\
---------------------------------------------------------------------------
\59\ See SIFMA Letter.
\60\ Id. at 1-2.
\61\ Id. at 2.
\62\ Id.
\63\ Id.
\64\ Id.
\65\ Id.
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Position and exercise limits serve as a regulatory tool designed to
address manipulative schemes and adverse market impact surrounding the
use of options.\66\ Currently, the maximum stock option position limits
permitted
[[Page 53559]]
under exchange rules are 250,000 contracts. Although OCC provides a
temporary adjustment to option position limits following a stock split,
exchange rules currently do not provide for the automatic adjustment of
an option's position limit proportional to splits in the underlying
stock. The proposal is novel because it would amend the Exchange's
rules to permit such automatic position limit adjustments, including
adjustments that could result in increases in stock option position
limits to levels that exceed 250,000 contracts. For example, in 2022,
Amazon.com, Inc. (``Amazon'') underwent a 20:1 stock split.\67\ Under
the proposal, the position limit for options on a stock that undergoes
a 20:1 split would increase by a factor of 20--for example, from
250,000 contracts to 5,000,000 contracts--regardless of the most recent
six-month trading volume or number of shares outstanding of the
underlying stock. Even a more modest position limit increase, such as a
fourfold increase for an option on a stock that undergoes a 4:1 stock
split, would be a substantial increase from current levels. The
proposed automatic increase in position limits for options on stocks
that undergo a stock split raises the potential for adverse impacts in
the market for the underlying stocks.
---------------------------------------------------------------------------
\66\ See, e.g., Securities Exchange Act Release No. 68086
(October 23, 2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-
066).
\67\ See Amazon.com, Inc. Current Report (Form 8-K) (March 9,
2022), available at https://www.sec.gov/Archives/edgar/data/1018724/000101872422000009/amzn-20220309.htm.
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As discussed above, the Exchange and the commenter state that
increasing the option position limit by the stock split factor will
allow a market participant to continue to maintain an options position
representing the same percentage of outstanding shares of the
underlying stock following a stock split. However, the trading volume
in the underlying stock--not the ability to establish an options
position representing a consistent percentage of the outstanding shares
pre- and post-split--is one of the relevant metrics for determining the
position limit for options on stocks.\68\ Neither the Exchange nor the
commenter have provided data indicating that trading volume in a stock
generally increases following a stock split, or that any such
increases, to the extent that they exist, generally are sufficient to
support an increase in the option position limit by an amount equal to
the stock split factor. For example, neither the Exchange nor the
commenter present data demonstrating that, in general, the trading
volume in a stock that undergoes a 4:1 stock split increases to such an
extent that the position limit for options on that stock should
increase fourfold over the pre-split option position limit. On the
contrary, the Commission understands that some data suggest that
trading volume in a stock may be unchanged or decrease following a
stock split.\69\
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\68\ See, e.g., Exchange Rule 307(d).
\69\ A Cboe study on the impact of stock splits on trading
activities finds that split-adjusted median executed share volume in
mega-capitalization stocks increased slightly one-week post-split
but, in the two-week to six-month period post-split, the median
executed share volume decreased about 48%, compared to volume a week
pre-split. See Cboe study on the impact of stock split on trading
activities at: https://www.cboe.com/insights/posts/stock-splits-lead-to-split-results-in-trading/. This study also finds that the
median number of options contracts traded in mega-capitalization
stocks decreased approximately 49% one week post-split and remained
down through the six-month period post-split. Further, this study
finds that split-adjusted median executed share volume in large-
capitalization stocks increased slightly two weeks post-split but
then decreased in the one to six-month period post-split, and that
split-adjusted median executed share volume in mid- and small-cap
stocks decreased in the one-week to six-month period post-split. In
addition, the Commission understands that some evidence suggests
that, as a general matter, share trading volume may be unchanged or
decrease after a stock split. See, e.g., Patrick Dennis, Stock
Splits and Liquidity: the Case of the Nasdaq-100 Index Tracking
Stock, the Financial Review, 38, 2003, 415-433; Thomas E. Copeland,
Liquidity Changes Following Stock Splits, the Journal of Finance,
34, 1, 1979, 115-141.
---------------------------------------------------------------------------
Further, the proposal does not explain why it would be appropriate
for a stock option potentially to have a split-factor-adjusted position
limit that is higher than what is allowed by Exchange Rule 307(d) for
corresponding underlying stock-volume-traded measures. For example,
under Exchange Rule 307(d), a most recent six-month trading volume in
the underlying security of at least 20 million shares qualifies the
option for a 50,000-contract position limit, and a most recent six-
month trading volume in the underlying security of at least 40 million
shares qualifies the option for a 75,000-contract position limit. Under
the proposal, if an option at the 50,000-contract limit had a most
recent six-month trading volume in its underlying stock of 20 million
shares and the stock split two-for-one, the option's position limit
would increase to 100,000 contracts and could remain there so long as
the underlying stock's most recent six-month trading volume was at
least 40 million shares. Under Exchange Rule 307(d), however, a most
recent six-month trading volume of 40 million shares in the underlying
security qualifies an option for a 75,000-contract limit, not a
100,000-contract limit. The proposal does not explain why this and
other potential discrepancies with position limits currently allowed by
Exchange Rule 307(d) are appropriate for options with stock-split
adjusted position limits.
In addition, although the Exchange states that the reversion to
pre-split option position limits prevents market participants from
effectively pursuing their trading, hedging, and investment strategies
following a stock split, the proposal provides no details to support
these assertions, such as the number of customers affected or the
trading, hedging, or investment strategies that these customers are
unable to execute because of lower post-split position limits.
Similarly, although the Exchange states that the reversion to pre-split
position limits negatively impacts liquidity, trading volume, and
possibly execution prices,\70\ the proposal provides no data to support
these assertions.
---------------------------------------------------------------------------
\70\ See Notice, 88 FR at 29728.
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The proposal also does not describe how the Exchange would
implement the proposed split-factor adjusted position limit increases
or the proposed review of their appropriateness. The proposal does not
specify, for example, whether the Exchange intends to follow the OCC's
policy of increasing the option position limit immediately after a
stock split and allowing the new limit to remain in effect until the
last option listed at the time of the stock split expires, regardless
of the trading volume or shares outstanding of the underlying stock.
Similarly, the proposal does not specify the timing for the proposed
split-factor adjusted reviews in Exchange Rule 307(e). Exchange Rule
307(e) currently provides for a six-month review of option position
limits. However, the proposal does not specify, for example, whether
the review for purposes of determining the appropriateness of a split-
factor adjusted position limit would occur six months after the stock
split, six months following the expiration of the last option listed at
the time of the stock split, or at some other point in time following
the stock split.
Finally, the Exchange does not propose a corresponding change to
the option exercise limits in Exchange Rule 309. Apart from the
exemptions in Exchange Rule 308, Exchange Rule 309(a)(1) generally
prohibits members from exercising within any five consecutive business
days aggregate long positions in any class of options traded on the
Exchange in excess of 25,000 or 50,000 or 75,000 or 200,000 or 250,000
option contracts or such other number of option contracts as may be
fixed from time to time by the Exchange as the exercise limit for that
class of options. It is not clear whether the
[[Page 53560]]
proposed change to option position limits would accomplish the goals of
the proposal without a corresponding change to Exchange Rule
309(a)(1).\71\
---------------------------------------------------------------------------
\71\ Although Exchange Rule 309(c) states that ``limits shall be
determined in the manner described in Rule 307,'' Exchange Rule
309(a)(1) establishes a maximum exercise limit of 250,000 contracts.
---------------------------------------------------------------------------
Accordingly, the proposal does not provide an adequate basis for
the Commission to conclude that the proposal would be consistent with
Section 6(b)(5) of the Act.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their data, views, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule change
is consistent with Section 6(b)(5), or any other provision of the Act,
or the rules and regulations thereunder. Although there do not appear
to be any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of data, views, and arguments, the
Commission will consider, pursuant to Rule 19b-4 under the Act,\72\ any
request for an opportunity to make an oral presentation.\73\
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\72\ 17 CFR 240.19b-4.
\73\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants to the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Acts Amendments of 1975, Senate Comm.
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposal in
addition to any other comments they may wish to submit about the
proposed rule change. In particular, the Commission seeks comment on
its concerns expressed above regarding the proposal's consistency with
the Act, and seeks commenters' views as to whether the proposal could
have an adverse market impact.
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by August 29, 2023. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
September 12, 2023. 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 No. SR-MIAX-2023-19 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-MIAX-2023-19. 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-MIAX-2023-19 and should be
submitted on or before August 29, 2023. Rebuttal comments should be
submitted September 12, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\74\
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\74\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood.
Assistant Secretary.
[FR Doc. 2023-16881 Filed 8-7-23; 8:45 am]
BILLING CODE 8011-01-P
