Document ID: SEC-2011-1588-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-10-17T04:00Z

[Federal Register Volume 76, Number 200 (Monday, October 17, 2011)]
[Notices]
[Pages 64144-64146]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26676]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65529; File No. SR-Phlx-2011-131]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Expand the Short Term Option Program

October 11, 2011.
    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 28, 2011, NASDAQ OMX 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 is filing with the Commission a proposal to amend Rule

[[Page 64145]]

1012 (Series of Options Open for Trading) and Rule 1101A (Terms of 
Option Contracts) to expand the Short Term Option Program (``STO 
Program'' or ``Program'') \3\ so that the Exchange may: Select thirty 
option classes on which Short Term Option Series \4\ may be opened; and 
may open certain Short Term Option Series that are opened by other 
securities exchanges.
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    \3\ See Securities Exchange Act Release No. 62296 (June 15, 
2010), 75 FR 35115 (June 21, 2010) (SR-Phlx-2010-84) (notice of 
filing and immediate effectiveness permanently establishing STO 
Program on the Exchange). Short term options are generally known as 
``STOs'' or ``weeklies.'' The STO Program was last expanded in 2010. 
See Securities Exchange Act Release No. 63875 (February 9, 2011), 76 
FR 8793 (February 15, 2011) (SR-Phlx-2010-183) (order approving 
expansion of STO Program).
    \4\ Short Term Option Series are series in an option class that 
is approved for listing and trading on the Exchange in which the 
series is opened for trading on any Thursday or Friday that is a 
business day and that expires on the Friday of the next business 
week. If a Thursday or Friday is not a business day, the series may 
be opened (or shall expire) on the first business day immediately 
prior to that Thursday or Friday, respectively. Rules 1000(b)(44), 
1000A(b)(16), Commentary .11 to Rule 1012 and Rule 1101A(b)(vi).
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    The Exchange requests that the proposal be approved on an 
accelerated basis.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

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

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

1. Purpose
    The purpose of this proposed rule change is to amend Rule 1012 and 
1101A to expand the STO Program so that the Exchange may select thirty 
option classes on which Short Term Option Series may be opened; and may 
open Short Term Option Series that are opened by other securities 
exchanges (the ``STO Exchanges'') in option classes selected by such 
exchanges under their respective short term option rules.\5\
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    \5\ For the filings of STO Exchanges regarding permanent 
approval of STO programs, see Securities Exchange Act Release Nos. 
59824 (April 27, 2009), 74 FR 20518 (May 4, 2009) (SR-CBOE-2009-018) 
(approval order); 62444 (July 2, 2010), 75 FR 39595 (July 9, 2010) 
(SR-ISE-2010-72) (approval order); 62297 (June 15, 2010), 75 FR 
35111 (June 21, 2010) (SR-NASDAQ-2010-073) (notice of filing and 
immediate effectiveness); 62296 (June 15, 2010), 75 FR 35111 (June 
21, 2010) (SR-Arca-2010-059) (notice of filing and immediate 
effectiveness); 62296 (June 15, 2010), 75 FR 35111 (June 21, 2010) 
(SR-Amex-2010-062) (notice of filing and immediate effectiveness); 
62505(July 15, 2010), 75 FR 42792 (July 22, 2010) (SR-BX-2010-047) 
(approval order); and 62597 (July 29, 2010), 75 FR 47335 (August 5, 
2010) (SR-BATS-2010-020) (notice of filing and immediate 
effectiveness).
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    The STO Program is codified in Commentary .11 to Rule 1012 and Rule 
1101A(b)(vi). These sections state that after an option class has been 
approved for listing and trading on the Exchange, the Exchange may open 
for trading on any Thursday or Friday that is a business day series of 
options on no more than fifteen option classes that expire on the 
Friday of the following business week that is a business day. In 
addition to the fifteen-option class limitation, there is also a 
limitation that no more than twenty series for each expiration date in 
those classes that may be opened for trading.\6\ Furthermore, the 
strike price of each short term option has to be fixed with 
approximately the same number of strike prices being opened above and 
below the value of the underlying security at about the time that the 
short term options are initially opened for trading on the Exchange, 
and with strike prices being within thirty percent (30%) above or below 
the closing price of the underlying security from the preceding day. 
The Exchange does not propose any changes to these additional Program 
limitations. The Exchange proposes only to increase from fifteen to 
thirty the number of option classes that may be opened pursuant to the 
Program and to give the Exchange the ability to open STO Series that 
are opened by STO Exchanges that, like the Exchange, have short term 
option programs.\7\
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    \6\ However, if the Exchange opens less than twenty (20) short 
term options for a Short Term Option Expiration Date, additional 
series may be opened for trading on the Exchange when the Exchange 
deems it necessary to maintain an orderly market, to meet customer 
demand or when the market price of the underlying security moves 
substantially from the exercise price or prices of the series 
already opened. Any additional strike prices listed by the Exchange 
shall be within thirty percent (30%) above or below the current 
price of the underlying security. The Exchange may also open 
additional strike prices of Short Term Option Series that are more 
than 30% above or below the current price of the underlying security 
provided that demonstrated customer interest exists for such series, 
as expressed by institutional, corporate or individual customers or 
their brokers (market-makers trading for their own account shall not 
be considered when determining customer interest under this 
provision). Commentary .11(d) to Rule 1012 and Rule 1101A(b)(vi)(D).
    \7\ See supra note 5. The Exchange notes that the provision 
allowing the Exchange to open weeklies series that are opened by STO 
Exchanges is parallel to the provision that allows the Exchange to 
open weeklies classes that are opened by STO Exchanges.
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    The principal reason for the proposed expansion is market demand 
for additional STO classes and series. There is continuing strong 
customer demand for having the ability to execute hedging and trading 
strategies via STOs,\8\ particularly in the current fast and volatile 
multi-faceted trading and investing environment that extends across 
numerous markets and platforms.\9\ The Exchange has observed increased 
demand for STO classes and/or series, particularly when market moving 
events such as significant market volatility, corporate events, or, 
large market, sector, or individual issue price swings have occurred.
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    \8\ The Exchange noted, in its last STO Program filing, that it 
was requested by a retail investor to reinstate a short term option 
class that the Exchange had to remove from trading because of the 
five-class option limit within the Program. The investor told the 
Exchange that he had used the removed class as a powerful tool for 
hedging a market sector, and that various strategies that the 
investor put into play were disrupted and eliminated when the class 
was removed. See Securities Exchange Act Release No. 63875 (February 
9, 2011), 76 FR 8793 (February 15, 2011) (SR-Phlx-2010-183) (order 
approving).
    \9\ These include, without limitation, options, equities, 
futures, derivatives, indexes, exchange traded funds, exchange 
traded notes, currencies, and over the counter instruments.
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    In order that the Exchange not exceed the fifteen option class and 
twenty option series restriction, the Exchange has had to turn away STO 
customers (traders and investors) because it could not list, or had to 
delist, STOs or could not open adequate STO Series because of 
restrictions in the STO Program. This has negatively impacted investors 
and traders, particularly retail public customers, who have on several 
occasions requested the Exchange not to remove short term option 
classes or add short term option classes, or have requested the 
Exchange to open STO series so that they could execute trading/hedging 
strategies.
    Following is an example of the impact of inadequate STO 
opportunities. An investor or trader executing a hedging or trading 
strategy using STOs may need to close his NFLX 240 strike STOs on the 
Exchange to roll into the 120 strike options. The 120 strike is not 
offered on the Exchange because of STO Program restrictions; however, 
it is offered on another exchange. If the trader wants to

[[Page 64146]]

execute the strategy on the Exchange, he could not do so because the 
120 strike order could not be opened on the Exchange and would be 
rejected. To execute the strategy, the investor would have to close his 
240 strike position on the Exchange and then open a 120 strike position 
on the other exchange that offers the strike. This could ostensibly 
increase the cost and ``leg risk'' of executing the roll strategy, and 
negatively impact the time advantage of executing one complex order to 
roll the position on the Exchange.\10\
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    \10\ Such roll strategies are often executed toward the end of 
the lifecycle of a weekly option, when theta (time value) decay is 
increasingly significant and price movement may be accelerated.
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    Furthermore, the STO option fragmentation may cause confusion for 
retail customers and discourage them from using complex STO orders when 
they could be the most advantageous for effective execution of trading 
and hedging strategies. The Exchange feels that it is essential that 
such negative, potentially costly and time-consuming impacts on retail 
investors are eliminated by modestly expanding the Program to enable 
additional classes and series to be traded. The change proposed by the 
Exchange should greatly minimize the potential fragmented nature of the 
short term options program and allow execution of more trading and 
hedging strategies on the Exchange.\11\
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    \11\ In addition to the noted cost and time-value impact, there 
is also a competitive impact. First, the proposal would enable the 
Exchange to provide market participants with an opportunity to 
execute their strategy wholly on their preferred market, namely the 
Exchange. And second, the proposal would diminish the potential for 
foregone market opportunity on the Exchange caused by being forced 
to delist STO Series in order to list another STO or series to meet 
market demand.
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    With regard to the impact of this proposal 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 potential additional traffic associated with 
trading of an expanded number of classes in the Program.
    The Exchange believes that the STO Program has provided investors 
with greater trading opportunities and flexibility and the ability to 
more closely tailor their investment and risk management strategies and 
decisions. Furthermore, the Exchange has had to eliminate option 
classes and reject trading requests on numerous occasions because of 
the limitations imposed by the Program. For these reasons, the Exchange 
requests an expansion of the current Program and the opportunity to 
provide investors with additional short term option classes and series 
for investment, trading, and risk management purposes.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. The Exchange believes that expanding the current STO Program 
will result in a continuing benefit to investors by giving them more 
flexibility to closely tailor their investment and hedging decisions in 
greater number of securities.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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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.

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-2011-131 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 Number SR-Phlx-2011-131. 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 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 
a.m. and 3 p.m. Copies of such 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 publicly available. All 
submissions should refer to File Number SR-Phlx-2011-131 and should be 
submitted on or before November 7, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).-
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-26676 Filed 10-14-11; 8:45 am]
BILLING CODE 8011-01-P