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[Federal Register Volume 89, Number 225 (Thursday, November 21, 2024)]
[Notices]
[Pages 92238-92241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27220]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101640; File No. 4-443]

Joint Industry Plan; Notice of Filing of Proposed Amendment To 
Add Paragraph (c) to Section 6 of the Plan for the Purpose of 
Developing and Implementing Procedures Designed To Facilitate the 
Listing and Trading of Standardized Options Authorizing the OLPP 
Sponsors To Act Jointly To Discuss Quote Mitigation Issues and 
Potential Solutions

November 15, 2024.
    Pursuant to Section 11A of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 608 thereunder,\2\ notice is hereby given that 
on October 31, 2024, Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc., 
Cboe EDGX Exchange, Inc., and Cboe Exchange, Inc., on behalf of the 
Sponsors \3\ of the Plan for the Purpose of Developing and Implementing 
Procedures Designed to Facilitate the Listing and Trading of 
Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the 
Securities Exchange Act of 1934 (``Options Listing Procedures Plan,'' 
``Plan,'' or ``OLPP''),\4\ filed with the Securities and Exchange 
Commission (``Commission'') a proposed amendment to the OLPP. The 
amendment proposes to add a provision to the OLPP authorizing the OLPP 
Sponsors to act jointly to discuss both quote mitigation issues and 
potential solutions to address any issues identified, including, but 
not limited to, discussing potential new options strike listing 
methodologies and rules, in order to determine whether the Sponsors 
might propose one or more amendments to the Plan for Commission 
approval or whether the individual Sponsors might seek to amend their 
own rules.
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 242.608.
    \3\ The Sponsors of the OLPP are: BOX Exchange LLC; Cboe BZX 
Exchange, Inc.; Cboe C2 Exchange, Inc.; Cboe EDGX Exchange, Inc.; 
Cboe Exchange, Inc.; MEMX LLC; Miami International Securities 
Exchange LLC; MIAX Emerald, LLC; MIAX Pearl, LLC; MIAX Sapphire LLC; 
Nasdaq BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC; 
Nasdaq PHLX LLC; The Nasdaq Stock Market LLC; NYSE American LLC; 
NYSE Arca, Inc.; and The Options Clearing Corporations.
    \4\ OLPP is a national market system plan approved by the 
Commission pursuant to Section 11A of the Act and Rule 608 
thereunder. See Securities Exchange Act Release No. 44521 (July 6, 
2001), 66 FR 36809 (July 13, 2001). The full text of the OLPP is 
available at https://www.theocc.com/getmedia/198bfc93-5d51-443c-9e5b-fd575a0a7d0f/options_listing_procedures_plan.pdf.
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    The Commission is publishing this notice to solicit comments from 
interested persons on the proposed amendment. Set forth below in 
Section I, which is being published substantially as filed by the 
Sponsors, is the statement of the purpose and summary of the amendment, 
along with information pursuant to Rule 608(a) under the Act.

I. Requirements Pursuant to Rule 608(a)

1. Text of Amendment

    This [a]mendment proposes to add paragraph (c) to Section 6 of the 
OLPP. The text of the proposed amendment is in Exhibit I, which is set 
forth in Section II, below.

2. Purpose of Amendment

    For many years, as the options industry has expanded and become 
more complex, industry participants have raised so-called ``quote 
mitigation''

[[Page 92239]]

concerns, including concerns about proliferation of listed options 
strike prices and the resulting potential negative effects on investors 
and on the market makers that are obligated to quote in all of the 
listed series. Such concerns have been raised at various times in 
discussions involving one or more of the OLPP Sponsors, market maker 
members of the national securities exchanges who are obligated to 
provide quotes in all of the listed option series, the staff of the 
Securities and Exchange Commission, and the members of various industry 
working groups (such as the Listed Options Market Structure Working 
Group).
    For example, industry participants have voiced concerns about how 
to balance the need to provide investors with a sufficient number of 
strikes to meet their investment purposes, while also ensuring that the 
number of listed strikes does not become so large that the market 
makers, who are required to quote continuously in a significant number 
of existing strikes, are not unduly burdened by having to expend 
significant amounts of their finite capital to continuously quote 
strikes in thinly traded and illiquid series. Indeed, although 
investors need to have a choice of appropriately granular strikes to 
satisfy their investment needs, some industry participants also have 
questioned whether the increase in the number of strikes might harm 
investors, particularly in less liquid series, because investors could 
become confused about the properties of the various strikes and might 
be unable to close out positions in illiquid series in an effective 
manner. Finally, industry participants also have questioned whether the 
proliferation of strikes might harm overall market quality and widen 
spreads because market makers are forced to deploy their limited 
capital in a less efficient manner as a result of their obligation to 
continuously quote strikes in thinly traded series.
    Over the years, there have been a number of amendments to both the 
OLPP and to the rules of the OLPP Sponsors that were designed to 
address some of the issues summarized above. For example, in 2009, the 
OLPP Sponsors proposed a ``quote mitigation strategy'' amendment to the 
OLPP, with a goal of reducing the amount of quote traffic that had 
resulted from the Penny Pilot Program. See Joint Industry Plan; Notice 
of Filing of Amendment No. 3 to the Plan for the Purpose of Developing 
and Implementing Procedures Designed To Facilitate the Listing and 
Trading of Standardized Options, Release No. 34-60362, 74 FR 37266 
(July 22, 2009). When proposing that amendment, the Plan Sponsors 
represented that the Penny Pilot Program resulted ``in an explosion of 
quote traffic'' and that the proposed ``uniform listing standards to 
the range of options series exercise (or strike) prices available for 
trading'' was a quote mitigation strategy designed to ``reduce the 
number of options series available for trading, which will in turn 
lessen the rate of increase in quote traffic.'' Id., 74 FR at 37266 and 
n.4.
    When it approved the 2009 amendment to the OLPP, the Commission 
concluded that the amendment ``should reduce the number of options 
series available for trading, and thus should reduce increases in the 
options quote message traffic because market participants will not be 
submitting quotes in those series.'' See Joint Industry Plan, Order 
Approving Amendment No. 3 to the Plan for the Purpose of Developing and 
Implementing Procedures Designed To Facilitate the Listing and Trading 
of Standardized Options, Release No. 34-60531, entered on August 19, 
2009, 74 FR 43173, 43174 (Aug. 26, 2009).
    As another example, in 2020, Nasdaq BX, Inc. (``BX'') proposed a 
rule that sought to limit ``Short Term Options Series'' intervals 
between strikes which are available for quoting and trading on that 
exchange. See Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of 
Filing of Proposed Rule Change To Amend Options 4, Section 5, To Limit 
Short Term Options Series Intervals Between Strikes Which are Available 
for Quoting and Trading on BX, Release No. 34-90384, 85 FR 73113 (Nov. 
9, 2020). In its filing, BX noted that its proposal ``to reduce the 
number of strikes in the furthest weeklies, where there exist wider 
markets and therefore lower market quality'' was an ``initial attempt 
at reducing strikes and [that BX] anticipates filing additional 
proposals to continue reducing strikes.'' Id., 85 FR at 73117 and n.23. 
BX also noted that reducing the number of listed weekly options would 
encourage market makers to deploy their capital more efficiently and 
improve displayed market quality. Id. at 73119. Finally, BX represented 
that (1) its proposal was a reaction to comments that it received from 
industry members ``with respect to the increasing number of strikes 
that are required to be quoted by market makers in the options 
industry'' and (2) reducing the number of strikes would ``allow Lead 
Market Makers and Market Makers to expend their capital in the options 
market in a more efficient manner'' because, as the number of strikes 
listed across options exchanges increases, market makers ``must expend 
[more] capital to ensure that they have the appropriate infrastructure 
to meet their quoting obligations on all options markets in which they 
are assigned in options series.'' Id.
    When approving BX's 2020 rule filing, the Commission noted that it 
had received several comments expressing support for the proposed rule 
change. See Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
Proposed Rule Change, as Modified by Amendment No. 1, To Amend 
Options4, Section 5, To Limit Short Term Options Series Intervals 
Between Strikes That Are Available for Quoting and Trading on BX, 
Release No. 34-91125, entered February 12, 2021, 86 FR 10375, 10376 
(Feb. 19, 2021). The Commission also found that:

    More efficient and better calibrated strike increment rules can 
have a positive impact on options markets, as it can provide 
certainty, minimize confusion, and promote more efficient use of 
resources among market makers that are obligated to continuously 
quote such series, all while still offering customers the choice to 
meet their investment needs.

Id., 86 FR at 10377. Finally, the Commission also noted that the 
approved rule ``may serve as a starting point to a broader initiative 
to revisit, harmonize, and update the panoply of strike listing rules 
more broadly.'' Id.
    Following the Commission's approval of BX's 2020 rule filing, other 
exchanges, including Cboe Exchange, Inc. (``Cboe''), promulgated 
similar amendments to their rules. See, e.g., Self-Regulatory 
Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Amend Rule 4.5 (Series of 
Option Contracts Open for Trading) in Connection With Limiting the 
Number of Strikes Listed for Short Term Option Series Which Are 
Available for Quoting and Trading on the Exchange, Release No. 34-
91456, 86 FR 18090 (April 1, 2021). In its filing, Cboe noted that 
limiting the number of weekly strikes in which market makers are 
required to quote would allow those market makers to expend their 
capital in the options market in a more efficient manner, which could 
improve overall market quality, while still providing market 
participants with access to sufficient strike intervals to meet their 
investment objectives. Id., 86 FR at 18093-94. Cboe also noted that the 
removal of strikes found in clusters whose characteristics closely 
resemble one another would protect the investors and the general public 
by removing unnecessary choices of an options

[[Page 92240]]

series, which could result in improved market quality. Id. at 18094.
    Recently, one of the OLPP Sponsors, Cboe, compiled statistics 
comparing the increase in the average number of multiple listed options 
series listed per day in the months of June 2020 and June 2024. Cboe 
also examined the reduction in the average percentage of series traded 
per day during those two months and the reduction in average percentage 
of series with open interest per day. That analysis suggests that there 
are still significant quote mitigation issues in the options markets.
    Specifically, Cboe's analysis revealed that the average series 
listed per day increased by 27% in June 2024, when compared to June 
2020, with an average of 1,406,632 series listed per day in 2024 and 
1,107,980 series listed per day in June 2020. Cboe's analysis also 
revealed, however, that the average percentage of series that traded 
per day decreased from 18% in June 2020 to 10% in June 2024 and that 
the average percentage of series with open interest per day decreased 
from 53% to 47% during those same comparison months. In other words, as 
the average number of series listed per day continues to increase, more 
series appear to be thinly traded and therefore less liquid--a dynamic 
that the OLPP Sponsors believe may worsen quote quality because market 
makers are required to expend their capital to quote in the expanding 
number of series that are listed.
    As a result of the concerns outlined above, the OLPP Sponsors 
believe that the options industry would benefit from the OLPP being 
amended to explicitly authorize the Sponsors to act jointly to discuss 
quote mitigation issues, including reaching out to other industry 
participants to solicit their views, with a goal of identifying 
specific issues and potential solutions to those issues. Such an 
amendment would be consistent with Rule 608(a)(3)(A) of Regulation 
National Market System, which authorizes self-regulatory organizations 
(like the OLPP Sponsors) to act jointly in preparing and filing any 
amendment to a national market system plan. 17 CFR 242.608(a)(3)(A). In 
addition, if the Sponsors determine that it is appropriate to address a 
quote mitigation issue by proposing a further amendment to the OLPP, 
such an amendment would be submitted to the Commission for approval 
pursuant to Rule 608(b) of Regulation NMS. 17 CFR 608(b). Similarly, if 
the Sponsors determine to address any identified issues with new 
options strike listing methodologies and rules, they may seek to do so 
through submission of rule filings pursuant to Section 19(b) of the 
Exchange Act. 15 U.S.C. 78s(b).

3. Manner of Implementation of Amendment

    The proposed amendment will be added to the OLPP following 
Commission approval of the amendment pursuant to Rule 608(b)(1) and 
(b)(2) of Regulation NMS.

4. Phases of Development and Implementation

    Not applicable.

5. Impact on Competition

    The Sponsors believes that the proposed amendment will impose no 
burdens on competition that are not justified in light of the purposes 
of the Act.

6. Written Understandings or Agreements Among Plan Members

    Not applicable.

7. Approval of Proposed Amendment

    Each Sponsor approved the submission of the [a]mendment and has 
executed a signed copy of the [a]mendment.

8. Exhibits

    I. Proposed amendments to Section 6 of the OLPP.

9. Description of Operation of Facility Contemplated by the Proposed 
Amendment

    Not applicable.

10. Terms and Conditions of Access

    Not applicable.

11. Method of Determination and Imposition, and Amount of, Fees and 
Charges

    Not applicable.

12. Method and Frequency of Processor Evaluation

    Not applicable.

13. Dispute Resolution

    The Plan does not include provisions regarding the method by which 
disputes arising in connection with the operation of the plan will be 
resolved.

II. Text of the Proposed Amendment to the OLPP (Exhibit I)

    Language proposed to be added to Section 6 of the OLPP as new 
Section 6(c):
    (c) The Plan Sponsors are authorized to act jointly to discuss both 
quote mitigation issues and potential solutions to address any issues 
identified, including, but not limited to, discussing potential new 
options strike listing methodologies and rules, in order to determine 
whether the Sponsors might propose one or more amendments to the Plan 
for Commission approval or whether the individual Sponsors might seek 
to amend their own rules.

III. Solicitation of Comments

    The Commission seeks comment on the amendment. Interested persons 
are invited to submit written data, views and arguments concerning the 
foregoing, including whether the proposed amendment is necessary or 
appropriate in the public interest, for the protection of investors and 
the maintenance of fair and orderly markets, to remove impediments to, 
and perfect the mechanisms of, a national market system, or otherwise 
in furtherance of the purposes of 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 4-443 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 submission should refer to file number 4-443. 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 offices of the Sponsors. Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available

[[Page 92241]]

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 4-443 and should be 
submitted on or before December 12, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(85).
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Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024-27220 Filed 11-20-24; 8:45 am]
BILLING CODE 8011-01-P
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