Document ID: SEC-2023-0593-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX, LLC
Posted Date: 2023-06-06T04:00Z

[Federal Register Volume 88, Number 108 (Tuesday, June 6, 2023)]
[Notices]
[Pages 37107-37110]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-11920]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97624; File No. SR-Phlx-2023-07]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
of Amendment No. 1 and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by 
Amendment No. 1, To Make Permanent Certain P.M.-Settled Pilots

May 31, 2023.

I. Introduction

    On February 23, 2023, Nasdaq PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule

[[Page 37108]]

19b-4 thereunder,\2\ a proposed rule change to make permanent the pilot 
program to permit the listing and trading of options based on 1/100 the 
value of the Nasdaq-100 Index (``XND'') and the Exchange's nonstandard 
expirations pilot program (collectively, the ``Programs''). The 
proposed rule change was published for comment in the Federal Register 
on March 2, 2023.\3\ On April 7, 2023, pursuant to Section 19(b)(2) of 
the Exchange Act,\4\ 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 disapprove the 
proposed rule change.\5\ On May 11, 2023, the Exchange submitted 
Amendment No. 1 to the proposed rule change (``Amendment No. 1'').\6\ 
The Commission has received no comment letters on the proposed rule 
change. The Commission is publishing this notice to solicit comments on 
Amendment No. 1 from interested persons, and is instituting proceedings 
pursuant to Section 19(b)(2)(B) of the Act \7\ to determine whether to 
approve or disapprove the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 96980 (February 24, 
2023), 88 FR 13161 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 97260, 88 FR 22498 
(April 13, 2023). The Commission designated May 31, 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\ In Amendment No. 1, the Exchange inserts two footnotes and 
amends a sentence in order to further clarify parts of the empirical 
analysis performed by the Exchange. Amendment No. 1 is available at: 
https://www.sec.gov/comments/sr-phlx-2023-07/srphlx202307.htm..
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    The Exchange proposes to make permanent two pilot programs: (1) the 
Exchange's nonstandard expirations pilot program (``Nonstandard 
Pilot''), and (2) the Exchange's pilot to permit the listing and 
trading of options based on 1/100 the value of the Nasdaq-100 Index 
(``XND Pilot''). The Nonstandard Pilot permits the Exchange to open 
P.M.-settled options on broad-based indexes that expire (1) on the last 
day of the trading month (``EOM expirations'') and (2) on any Monday, 
Wednesday, or Friday (other than the third Friday-of-the-month or days 
that coincide with an end-of-month (``EOM'') expiration) and, with 
respect to options on the Nasdaq-100 Index (``NDX'') and XND options, 
any Tuesday or Thursday (other than days that coincide with the third 
Friday-of-the-month or an EOM expiration). The XND Pilot permits the 
listing of XND options, which are European-style and cash-settled, and 
have a contract multiplier of 100. The contract specifications for XND 
options mirror those of the NDX options contract listed on the 
Exchange, except that XND options are based on 1/100 of the value of 
the Nasdaq-100 Index, and are P.M.-settled pursuant to Options 4A, 
Section 12(a)(5) of the Phlx Rules.
    In December 2017, the Commission approved the Nonstandard Pilot on 
a pilot basis.\8\ In April 2021, the Commission approved the XND Pilot 
on a pilot basis.\9\ In approving both Programs, the Commission noted 
its concern about the potential impact on the market at expiration for 
the underlying component stocks for a P.M.-settled, cash-settled index 
options.\10\ However, the Commission also recognized the potential 
impact was unclear.\11\ The Commission approved the Programs on a pilot 
basis to allow the Exchange and the Commission to monitor for and 
assess any potential for adverse market effects.\12\ The Nonstandard 
Pilot was extended on multiple occasions, including recently, and is 
set to expire on November 6, 2023.\13\ Similarly, the XND Pilot was 
extended on multiple occasions and is set to expire on November 6, 
2023.\14\
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    \8\ See Securities Exchange Act Release No. 82341 (December 15, 
2017), 82 FR 60651 (December 21, 2017) (SR-Phlx-2017-79) 
(``Nonstandard Approval Order'').
    \9\ See Securities Exchange Act Release No. 91524 (April 9, 
2021), 86 FR 19909 (April 15, 2021) (SR-Phlx-2021-07) (``XND 
Approval Order'').
    \10\ See Nonstandard Approval Order, supra note 8, at 60653 and 
XND Approval Order, supra note 9, at 19911. See also Securities 
Exchange Act Release Nos. 64599 (June 3, 2011), 76 FR 33798, 33801-
02 (June 9, 2011) (order instituting proceedings to determine 
whether to approve or disapprove a proposed rule change to allow the 
listing and trading of SPXPM options); 65256 (September 2, 2011), 76 
FR 55969, 55970-76 (September 9, 2011) (order approving proposed 
rule change to establish a pilot program to list and trade SPXPM 
options); and 68888 (February 8, 2013), 78 FR 10668, 10669 (February 
14, 2013) (order approving the listing and trading of SPXPM on 
CBOE).
    \11\ See XND Approval Order, supra note 9, at 19909.
    \12\ See Nonstandard Approval Order, supra note 8, at 60653, XND 
Approval Order, supra note 9, at 19911.
    \13\ See Securities Exchange Act Release No. 97385 (April 26, 
2023), 88 FR 27549 (May 2, 2023) (SR-Phlx-2023-13) (``Programs 
Extension'').
    \14\ See Programs Extension, supra note 13.
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    In order to facilitate assessment of the Programs, the Exchange 
committed to provide the Commission with data and analysis for each 
pilot.\15\ Among other things, the Exchange committed to provide an 
annual report containing an analysis of volume, open interest and 
trading patterns.\16\ In addition, for series that exceed certain 
minimum open interest parameters, the annual report provides analysis 
of index price volatility and, if needed, share trading activity.\17\ 
The Exchange also provides monthly data to the Commission and makes 
public on its website the data and analysis previously submitted to the 
Commission in connection with the Programs and will continue to make 
public any data or analysis it submits under the Programs while the 
Programs are still in effect.\18\
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    \15\ See XND Approval Order, supra note 12, at 19910-19911 and 
Nonstandard Approval Order, supra note 8, at 60652-60653.
    \16\ See Notice, supra note 3, at 13175.
    \17\ See Notice, supra note 3, at 13175.
    \18\ See Programs Extension, supra note 13, at 27549-27550.
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    As set forth more fully in the Notice, the Exchange concludes that 
P.M.-settled index option expirations are unlikely to cause any 
disruptive effect on the market.\19\ The Exchange further concludes 
there is no evidence that XND options contract that are P.M.-settled 
would result in reduced trading activity or degradation in market 
quality of the A.M.-settled index options.\20\ In order to support its 
overall assessment of the Program, the Exchange provides an empirical 
assessment of the impact of P.M.-settled NDX options on options market 
quality and examines market capacity around the market close.\21\ The 
Exchange also includes an assessment of a study conducted at the 
direction of the staff of the Commission's Division of Economic and 
Risk Analysis.\22\
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    \19\ See Notice, supra note 3, at 13163.
    \20\ See Notice, supra note 3, at 13163.
    \21\ See Notice, supra note 3, at 13162-13169, 13173-13176.
    \22\ See Notice, supra note 3, at 13163.
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    The Exchange's analysis presents data that the introduction of 
P.M.-settlement corresponds to an increase in options trading tied to 
the Nasdaq-100 Index. The Exchange notes within its analysis that it 
seems unlikely that the introduction of XND option contracts had a 
significant impact on the market quality of the full-sized Nasdaq-100 
Index option contracts.\23\ The Exchange observed a consistent decrease 
in relative quoted spread from 2017 to 2022 for NDX options. When the 
Exchange compared the spread trend of NDX monthly contracts to that of 
QQQ monthly contracts, the Exchange states that the results suggest 
that there is gradual decrease in both the NDX

[[Page 37109]]

monthly contracts spread and the QQQ contracts spread during the sample 
period.\24\
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    \23\ The Exchange states that given that the size of the market 
(measured in volume) for XND options volume is small compared to 
that of other P.M.-settled NDX options, the Exchange believes the 
introduction of XND option contracts is unlikely to adversely impact 
the market quality of A.M.-settled NDX options. See Amendment No. 1, 
supra note 6.
    \24\ See Notice, supra note 3 at 13175-13176.
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    The Exchange also considered whether the move from A.M.-settlement 
to P.M.-settlement for Friday NDX weekly expirations led to changes in 
spreads for those contracts.\25\ The Exchange states that it sees no 
evidence of deterioration of spreads associated with the introduction 
of P.M.-settled products.\26\
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    \25\ See Notice, supra note 3 at 13170-13173. The Exchange used 
a regression analysis to test whether the spread of NDX contracts 
changed after the introduction of P.M.-settled index options. See 
id. at 13171. In Amendment No. 1, the Exchange clarifies that the 
Post variable in its regression model is meant to capture the effect 
of the introduction of Friday P.M.-settled NDX options expirations 
(on all but the third-Friday of the month) that occurred in January 
2018. See Amendment No. 1, supra note 6.
    \26\ See Notice, supra note 3 at 13173-13176.
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    The Exchange provides analysis on market capacity around the market 
close, and concludes that the equity closing auctions have grown to be 
substantial liquidity events that are much larger than the opening 
auctions, and would therefore be better suited for handling the excess 
liquidity demand created by index options settlement.\27\ The Exchange 
believes the expiration of P.M.-settled options would not adversely 
affect the options market or the underlying cash equities market.\28\
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    \27\ See id. at 13176.
    \28\ See id.
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    Lastly, the Exchange states that it has sufficient systems capacity 
to handle P.M.-settled options on broad-based indexes with nonstandard 
expirations dates and has not encountered any issues or adverse market 
effects as a result of listing them.\29\
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    \29\ See id.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-Phlx-
2023-07, as Modified by Amendment No. 1, and Grounds for Disapproval 
Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \30\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposed rule 
change. 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 additional comment on the 
proposed rule change to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change.
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    \30\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\31\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
described above, the Exchange has proposed to make permanent: (1) a 
pilot program that permits the listing and trading of P.M.-settled 
Weekly Expirations and EOM expirations and, (2) a pilot program that 
permits the listing and trading of P.M.-settled XND options. The 
Commission is instituting proceedings to allow for additional analysis 
of, and input from commenters with respect to, the proposed rule 
change's consistency with the Act, and in particular, Section 6(b)(5) 
of the Act, which requires, among other things, 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.\32\
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    \31\ Id.
    \32\ 15 U.S.C. 78f(b)(5).
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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, as modified by Amendment No. 1, is consistent with Sections 
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 that would be facilitated by an oral 
presentation of data, views, and arguments, the Commission will 
consider, pursuant to Rule 19b-4 under the Act,\33\ any request for an 
opportunity to make an oral presentation.\34\
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    \33\ 17 CFR 240.19b-4.
    \34\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (Jun. 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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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change, as modified by 
Amendment No. 1, should be approved or disapproved by June 27, 2023. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by July 11, 2023. The Commission 
asks that commenters address the sufficiency 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.
    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 [email protected]. Please include 
File Number SR-Phlx-2023-07 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-2023-07. 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 (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 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 10:00 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. 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

[[Page 37110]]

publication submitted material that is obscene or subject to copyright 
protection. All submissions should refer to File Number SR-Phlx-2023-07 
and should be submitted by June 27, 2023. Rebuttal comments should be 
submitted by July 11, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-11920 Filed 6-5-23; 8:45 am]
BILLING CODE 8011-01-P