Document ID: SEC-2017-1687-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ PHLX, LLC
Posted Date: 2017-10-11T04:00Z

[Federal Register Volume 82, Number 195 (Wednesday, October 11, 2017)]
[Notices]
[Pages 47254-47256]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21812]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81814; File No. SR-Phlx-2017-75]

Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change To Amend Rule 1009 To Modify the Criteria for 
Listing an Option on an Underlying Covered Security

October 4, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 27, 2017, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III, below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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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

    The Exchange proposes to amend Commentary .01 to Rule 1009 to 
modify the criteria for listing an option on an underlying covered 
security.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/ com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The purpose of the proposed rule change is to amend Commentary .01 
to Rule 1009 to modify the criteria for listing options on an 
underlying security as defined in Section 18(b)(1)(A) of the Securities 
Act of 1933 (hereinafter ``covered security'' or ``covered 
securities''). In particular, the Exchange proposes to modify Rule 
1009, Commentary .01(4)(i) to permit the listing of an option on an 
underlying covered security that has a market price of at least $3.00 
per share for the previous three consecutive business days preceding 
the date on which the Exchange submits a certificate to the Options 
Clearing Corporation (``OCC'') for listing and trading. The Exchange 
does not intend to amend any other criteria for listing options on an 
underlying security in Rule 1009 and accompanying Commentary.
    Currently the underlying covered security must have a closing 
market price of $3.00 per share for the previous five consecutive 
business days preceding the date on which the Exchange submits a 
listing certificate to OCC. In the proposed amendment, the market price 
will still be measured by the closing price reported in the primary 
market in which the underlying covered security is traded, but the 
measurement will be the price over the prior three consecutive business 
day period preceding the submission of the listing certificate to OCC, 
instead of the prior five business day period.
    The Exchange acknowledges that the Options Listing Procedures Plan 
\3\ requires that the listing certificate be provided to OCC no earlier 
than 12:01 a.m. and no later than 11:00 a.m. (Chicago time) on the 
trading day prior to the day on which trading is to begin.\4\

[[Page 47255]]

The proposed amendment will still comport with that requirement. For 
example, if an initial public offering (``IPO'') occurs at 11 a.m. on 
Monday, the earliest date the Exchange could submit its listing 
certificate to OCC would be on Thursday by 12:01 a.m. (Chicago time), 
with the market price determined by the closing price over the three-
day period from Monday through Wednesday. The option on the IPO would 
then be eligible for trading on the Exchange on Friday. The proposed 
amendment would essentially enable options trading within four business 
days of an IPO becoming available instead of six business days (five 
consecutive days plus the day the listing certificate is submitted to 
OCC).
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    \3\ 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(2)(3)(B) of 
the Securities Exchange Act of 1934 (a/k/a the Options Listing 
Procedures Plan (``OLPP'')) is a national market system plan that, 
among other things, set forth procedures governing the listing of 
new options series. See Securities Exchange Act Release No. 44521 
(July 6, 2001), 66 FR 36809 (July 13, 2001) (Order approving OLPP). 
The sponsors of OLPP include Phlx; OCC; BATS Exchange, Inc.; BOX 
Options Exchange LLC; C2 Options Exchange, Incorporated; Chicago 
Board Options Exchange, Incorporated; EDGX Exchange, Inc; Miami 
International Securities Exchange, LLC; MIAX PEARL LLC; The NASDAQ 
Stock Market LLC; NASDAQ BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, 
LLC; Nasdaq MRX, LLC; NYSE American, LLC; and NYSE Arca, Inc.
    \4\ See OLPP at page 3.
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    At the time the Exchange adopted the ``look back'' period of five 
consecutive business days, it determined that the five-day period was 
sufficient to protect against attempts to manipulate the market price 
of the underlying security and would provide a reliable test for 
stability.\5\ Surveillance technologies and procedures concerning 
manipulation have evolved since then to provide adequate prevention or 
detection of rule or securities law violations within the proposed time 
frame, and the Exchange represents that its existing trading 
surveillances are adequate to monitor the trading in the underlying 
security and subsequent trading of options on the Exchange.\6\
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    \5\ See Securities Exchange Act Release No. 47794 (May 5, 2003), 
68 FR 25076 (May 9, 2003) (SR-Phlx-2003-27).
    \6\ Such surveillance procedures generally focus on detecting 
securities trading subject to opening price manipulation, closing 
price manipulation, layering, spoofing or other unlawful activity 
impacting an underlying security, the option, or both. As it relates 
to IPOs, the Exchange has price movement alerts, unusual market 
activity and order book alerts active for all trading symbols. These 
real-time patterns are active for the new security as soon as the 
IPO begins trading. The Nasdaq MarketWatch group, which provides 
such real-time surveillance on the Exchange and its affiliated 
markets, monitors trading activity in IPOs to see whether the new 
issue moves substantially above or below the public offering price 
in the first day or several days of trading.
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    Furthermore, The NASDAQ Stock Market (``Nasdaq''), the Exchange's 
affiliated listing market, had no cases within the past five years 
where an IPO-related issue for which it had pricing information 
qualified for the $3.00 price requirement during the first three days 
of trading and did not qualify for the $3.00 price requirement during 
the first five days.\7\ In other words, none of these qualifying issues 
fell below the $3.00 threshold within the first three or five days of 
trading. As such, the Exchange believes that its existing surveillance 
technologies and procedures, coupled with its findings related to the 
IPO-related issues on Nasdaq as described herein, adequately address 
potential concerns regarding possible manipulation or price stability 
within the proposed timeframe.
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    \7\ There were over 750 IPO-related issues on Nasdaq within the 
past five years. Out of all of the issues with pricing information, 
there was only one issue that had a price below $3 during the first 
five consecutive business days. The Exchange notes, however, that 
Nasdaq allows for companies to list on the Nasdaq Capital Market at 
$2.00 or $3.00 per share in some instances, which was the case for 
this particular issue. See Nasdaq Rule 5500 Series for initial 
listing standards on the Nasdaq Capital Market.
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    The Exchange also believes that the proposed look back period can 
be implemented in connection with the other initial listing criteria 
for underlying covered securities. In particular, the Exchange 
recognizes that it may be difficult to verify the number of 
shareholders in the days immediately following an IPO due to the fact 
that stock trades generally clear within two business days (T+2) of 
their trade date and therefore the shareholder count will generally not 
be known until T+2.\8\ The Exchange notes that the current T+2 
settlement cycle was recently reduced from T+3 on September 5, 2017 in 
connection with the Commission's amendments to Exchange Rule 15c6-1(a) 
to adopt the shortened settlement cycle,\9\ and the look back period of 
three consecutive business days proposed herein reflects this shortened 
T+2 settlement period. As proposed, stock trades would clear within T+2 
of their trade date (i.e., within three business days) and therefore 
the number of shareholders could be verified within three business 
days, thereby enabling options trading within four business days of an 
IPO (three consecutive business days plus the day the listing 
certificate is submitted to OCC).
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    \8\ The number of shareholders of record can be verified from 
large clearing agencies such as The Depository Trust and Clearing 
Corporation (``DTCC'') upon the settlement date (i.e., T+2).
    \9\ See Securities Exchange Act Release No. 78962 (September 28, 
2016), 81 FR 69240 (October 5, 2016) (Amendment to Securities 
Transaction Settlement Cycle) (File No. S7-22-16).
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    Furthermore, the Exchange notes that it can verify the shareholder 
count with various brokerage firms that have a large retail customer 
clientele. Such firms can confirm the number of individual customers 
who have a position in the new issue. The earliest that these firms can 
provide confirmation is usually the day after the first day of trading 
(T+1) on an unsettled basis, while others can confirm on the third day 
of trading (T+2). The Exchange has confirmed with some of these 
brokerage firms who provide shareholder numbers to the Exchange that 
they are able to provide these numbers within T+2 after an IPO. For the 
foregoing reasons, the Exchange believes that basing the proposed three 
business day look back period on the T+2 settlement cycle would allow 
for sufficient verification of the number of shareholders.
    The proposed rule change will apply to all covered securities that 
meet the criteria of Rule 1009. Pursuant to Rule 1009, the Exchange's 
Board of Directors (the ``Board'') establishes guidelines to be 
considered by the Exchange in evaluating the potential underlying 
securities for Exchange option transactions.\10\ However, the fact that 
a particular security may meet the guidelines established by the Board 
does not necessarily mean that it will be approved as an underlying 
security.\11\ As part of the established criteria, the issuer must be 
in compliance with any applicable requirement of the Securities 
Exchange Act of 1934.\12\ Additionally, in considering the underlying 
security, the Exchange relies on information made publicly available by 
the issuer and/or the markets in which the security is traded.\13\ 
Also, in determining whether to list an option that otherwise meets the 
objective listing criteria, the Chairman of the Board or his designee 
may consider, inter alia, the name recognition of the option or 
underlying security.\14\ Even if the proposed option meets the 
objective criteria, the Chairman of the Board or his designee may 
decide not to list, or place limitations or conditions upon 
listing.\15\ The Exchange believes that these measures, together with 
its existing surveillance procedures, provide adequate safeguards in 
the review of any covered security that may meet the proposed criteria 
for consideration of the option within the timeframe contained in this 
proposal.
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    \10\ See Exchange Rule 1009(b). The Board established specific 
criteria to consider by the Exchange in evaluating potential 
underlying securities for Exchange Option Transactions in its 
Commentary to Exchange Rule 1009.
    \11\ Id.
    \12\ See Exchange Rule 1009, Commentary .01(5).
    \13\ See Exchange Rule 1009, Commentary .02(d).
    \14\ See Exchange Rule 1009, Commentary .02(e).
    \15\ See Exchange Rule 1009, Commentary .02(c).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\17\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and

[[Page 47256]]

perfect the mechanism of a free and open market and a national market 
system, and, in general to protect investors and the public interest.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed changes to its listing 
standards for covered securities would allow the Exchange to more 
quickly list options on a qualifying covered security that has met the 
$3.00 eligibility price without sacrificing investor protection. As 
discussed above, the Exchange believes that its existing trading 
surveillances provide a sufficient measure of protection against 
potential price manipulation within the proposed three consecutive 
business day timeframe. The Exchange also believes that the proposed 
three consecutive business day timeframe would continue to be a 
reliable test for price stability in light of its findings that none of 
the IPO-related issues on Nasdaq within the past five years that 
qualified for the $3.00 per share price standard during the first three 
trading days fell below the $3.00 threshold during the fourth or fifth 
trading day. Furthermore, the established guidelines to be considered 
by the Exchange in evaluating the potential underlying securities for 
Exchange option transactions,\18\ together with existing trading 
surveillances, provide adequate safeguards in the review of any covered 
security that may meet the proposed criteria for consideration of the 
option within the proposed timeframe.
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    \18\ See notes 10-15 above.
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    In addition, the Exchange believes that basing the proposed 
timeframe on the T+2 settlement cycle adequately addresses the 
potential difficulties in confirming the number of shareholders of the 
underlying covered security. Having some of the largest brokerage firms 
that provide these shareholder counts to the Exchange confirm that they 
are able to provide these numbers within T+2 further demonstrates that 
the 2,000 shareholder requirement can be sufficiently verified within 
the proposed timeframe. For the foregoing reasons, the Exchange 
believes that the proposed amendments will remove and perfect the 
mechanism of a free and open market and a national market system by 
providing an avenue for investors to swiftly hedge their investment in 
the stock in a shorter amount of time than what is currently in 
place.\19\
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    \19\ This proposed rule change does not alter any obligations of 
issuers or other investors of an IPO that may be subject to a lock-
up or other restrictions on trading related securities.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change 
reduces the number of days to list options on an underlying security, 
and is intended to bring new options listings to the marketplace 
quicker.

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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2017-75 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2017-75. 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 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; 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 Number SR-Phlx-2017-75, and should be 
submitted on or before November 1, 2017.

    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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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21812 Filed 10-10-17; 8:45 am]
 BILLING CODE 8011-01-P