Document ID: SEC-2010-0107-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by the NASDAQ Stock Market LLC To Amend the $1 Strike Program To Allow the Listing of $1 LEAPS
Posted Date: 2010-01-21T05:00Z

[Federal Register: January 21, 2010 (Volume 75, Number 13)]
[Notices]               
[Page 3513-3515]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21ja10-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61347; File No. SR-NASDAQ-2010-003]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the NASDAQ Stock Market LLC 
To Amend the $1 Strike Program To Allow the Listing of $1 LEAPS

January 13, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 11, 2010, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by Nasdaq. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposal for the NASDAQ Options Market 
(``NOM'' or ``Exchange'') to amend its Chapter IV Supplementary 
Material .02 to Section 6 (Series of Options Contracts Open for 
Trading) to expand the Exchange's $1 Strike Price Program (``Program'' 
or ``$1 Strike Program'') \3\ to allow listing long-term option series 
(``LEAPS'') \4\ in $1 strike price intervals up to $5 in up to 200 
option classes in individual stocks.
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    \3\ The $1 Strike Price Program was initially approved as a 
pilot on March 12, 2008. See Securities Exchange Act Release No. 
57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-
2007-004 and SR-NASDAQ-2007-080) (order approving). The program was 
subsequently made permanent and expanded. See Securities Exchange 
Act Release Nos. 58093 (July 3, 2008), 73 FR 39756 (July 10, 
2008)(SR-NASDAQ-2008-057) (notice of filing and immediate 
effectiveness); and 59588 (March 17, 2009), 74 FR 12410 (March 24, 
2009)(SR-NASDAQ-2009-025) (notice of filing and immediate 
effectiveness).
    \4\ Long-Term Equity Anticipation Securities (LEAPS) are long 
term options that expire from twelve to thirty-nine months from the 
time they are listed. Chapter IV Section 8. Long-term index options 
are considered separately in Chapter XIV Section 11. For purposes of 
the Program, long-term options (LEAPS) are considered to be option 
series having greater than nine months until expiration. Chapter IV 
Supplementary Material .02 to Section 6.
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    The Exchange requests that the Commission waive the 30-day 
operative delay period contained in Exchange Act Rule 19b-
4(f)(6)(iii).\5\
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    \5\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change is available from Nasdaq's Web 
site at http://nasdaq.cchwallstreet.com/Filings/, at Nasdaq's principal 
office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This proposed rule change is based on a filing previously submitted 
by Chicago Board Options Exchange, Incorporated (``CBOE'') that was 
recently approved by the Commission.\6\
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    \6\ See Securities Exchange Act Release No. 60978 (November 10, 
2009), 74 FR 59296 (November 17, 2009) (SR-CBOE-2009-068) (order 
approving proposed rule change to allow listing LEAPS in $1 Strike 
Program).
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    The purpose of the proposal is to expand the $1 Strike Program in a 
limited fashion to allow NASDAQ to list new series in $1 strike price 
intervals up to $5 in LEAPS in up to 200 option classes on individual 
stocks.
    Currently, under the $1 Strike Program, the Exchange may not list 
option series having greater than nine months until expiration (LEAPS) 
at $1 strike price intervals for any class selected for the Program. 
The Exchange also is restricted from listing any series that would 
result in strike prices being $0.50 apart, unless the series are part 
of the $.50 Strike Program.\7\
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    \7\ Regarding the $0.50 Strike Program, see Chapter IV 
Supplementary Material .05 to Section 6 and Securities Exchange Act 
Release No. 60952 (November 6, 2009), 74 FR 59277 (November 17, 
2009) (SR-NASDAQ-2009-099) (notice of filing and order approving). 
The $0.50 Strike Program establishes strike price intervals of $0.50 
for options on stocks trading at or below $3.00.
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    NASDAQ believes that its proposal to allow limited listing of 
option series having greater than nine months until expiration (LEAPS) 
in the Program is appropriate and will allow investors to

[[Page 3514]]

establish option positions that are better tailored to meet their 
investment objectives, vis-[agrave]-vis credit risk, using deep out-of-
the-money, long-term put options. These types of options are viewed as 
a viable, liquid alternative to over the counter-traded (``OTC'') 
credit default swaps (``CDS''), because such options do not possess the 
negative characteristics associated with CDS, namely, lack of 
transparency, insufficient collateral requirements, and inefficient 
trade processing.
    The Exchange notes that its proposal is limited in scope, as $1 
strikes in LEAPS may only be listed up to $5 and in only up to 200 
option classes. As is currently the case in the $1 Strike Program, the 
Exchange would not list series with $1.00 intervals within $0.50 of an 
existing $2.50 strike price in the same series.\8\ As a result, the 
Exchange does not believe that this proposal will cause a significant 
increase in quote traffic.
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    \8\ However, strike prices of $2 and $3 are permitted within 
$0.50 of a $2.50 strike price for classes also selected for the 
$0.50 Strike Program. See proposed Chapter IV Supplementary Material 
.02(c) to Section 6, which is similar in this respect to the current 
Chapter IV Supplementary Material .02(b) to Section 6.
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    Moreover, as the Commission is aware, the Exchange has adopted 
various quote mitigation strategies in an effort to lessen the growth 
rate of quotations. When it expanded the $1 Strike Price Program 
several months ago the Exchange included a delisting policy that would 
be applicable with regard to this proposed expansion; the Exchange has 
likewise established a number of other delisting policies.\9\ The 
Exchange and other options exchanges amended the Options Listing 
Procedures Plan (``OLPP'') in 2008 to impose a minimum volume threshold 
of 1,000 contracts national average daily volume (``ADV'') per 
underlying class to qualify for an additional year of LEAP series.\10\ 
Most recently, the Exchange, along with the other options exchanges, 
amended the OLPP to adopt objective, exercise price range limitations 
applicable to equity option classes, options on Exchange Traded Funds 
(``ETFs'') and options on trust issued receipts (``TIRs'')(the ``range 
limitation strategy'').\11\ The Exchange has filed a rule change 
proposal to codify the range limitation strategy in its own rules.\12\ 
The Exchange believes that these price range limitations, in 
conjunction with the delisting policies in place at the Exchange,\13\ 
will have a meaningful quote mitigation impact.
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    \9\ For the $1 Strike Program delisting policy, see Securities 
Exchange Act Release No. 59588 (March 17, 2009), 74 FR 12410 (March 
24, 2009) (SR-NASDAQ-2009-025) (notice of filing and immediate 
effectiveness). The $1 Strike Program delisting policy includes a 
provision stating that the Exchange may grant member requests and 
add strikes and/or maintain strikes in series of options classes 
traded pursuant to the Program that are eligible for delisting. For 
other delisting policies proposed and implemented by the Exchange, 
see Securities Exchange Act Release No. 60248 (July 6, 2009), 74 FR 
33504 (July 13, 2009) (SR-NASDAQ-2009-063) (notice of filing and 
immediate effectiveness regarding Quarterly Options Series program); 
and Chapter IV Section 4(l) (low ADV delisting policy) and 
Securities Exchange Act Release No. 59923 (May 14, 2009), 74 FR 
23902 (May 21, 2009) (SR-NASDAQ-2009-046) (notice of filing and 
immediate effectiveness regarding, among other things, delisting 
securities underlying low ADV options).
    \10\ See Securities Exchange Act Release No. 58630 (September 
24, 2008), 73 FR 57166 (October 1, 2008) (File No. 4-443) (order 
approving Amendment No. 2 to OLPP).
    \11\ See Securities Exchange Act Release No. 60531 (August 19, 
2009), 74 FR 43173 (August 26, 2009) (File No 4-443) (order 
approving Amendment No. 3 to OLPP). NASDAQ's proposal to list $1 
strikes in LEAPs to $5 would not be subject to the exercise price 
range limitations contained in new paragraph (3)(g)(ii) of the OLPP.
    \12\ See Securities Exchange Act Release No. 61203 (December 18, 
2009), 74 FR 68653 (December 28, 2009) (SR-NSDAQ-2009-108).
    \13\ See, for example, Securities Exchange Act Release No. 60248 
(July 6, 2009), 74 FR 33504 (July 13, 2009) (SR-NASDAQ-2009-063) 
(notice of filing and immediate effectiveness regarding Quarterly 
Options Series program); and Chapter IV Section 4(l) (low ADV 
delisting policy) and Securities Exchange Act Release No. 59923 (May 
14, 2009), 74 FR 23902 (May 21, 2009) (SR-NASDAQ-2009-046) (notice 
of filing and immediate effectiveness regarding, among other things, 
delisting securities underlying low ADV options).
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    The margin requirements set forth in Chapter XIII Sections 1 
through 5 and the position and exercise requirements set forth in 
Chapter III Sections 7 and 9, respectively, will continue to apply to 
these new series, and no changes are being proposed to those 
requirements by this rule change.
    With regard to the impact on system capacity, the Exchange has 
analyzed its capacity and represents that it and the Options Price 
Reporting Authority (``OPRA'') have the necessary systems capacity to 
handle the additional traffic that may be associated with the listing 
and trading of LEAPS in the $1 Strike Program as proposed by this 
filing.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \15\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system. The Exchange 
believes that the ability to list and trade LEAPS at $1 strike price 
intervals will benefit investors by giving them more flexibility to 
more closely tailor their investment and hedging decisions.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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; or (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, if consistent with the 
protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 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, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission hereby grants that request.\18\ The 
Commission believes that waiver of the operative delay is consistent 
with the protection of investors and the public interest because it 
recently approved a proposal from CBOE which is nearly identical to the 
current proposal and on which no comments were received.\19\ Therefore, 
the proposal is operative upon filing.
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    \18\ 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).
    \19\ See Securities Exchange Act Release No. 60978 (November 10, 
2009), 74 FR 59296 (November 17, 2009) (approving SR-CBOE-2009-68).

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[[Page 3515]]

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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.

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 (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-NASDAQ-2010-003 on the subject line.

Paper Comments:

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-NASDAQ-2010-003. This file 
number should be included on the subject line if e-mail 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 Web site (http://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 inspection and 
copying 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 such filing also will be available for 
inspection and copying at the principal office of NASDAQ. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File No. SR-NASDAQ-2010-003 and should be 
submitted on or before February 11, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-1018 Filed 1-20-10; 8:45 am]
BILLING CODE 8011-01-P