Document ID: SEC-2010-0284-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2010-02-25T05:00Z

[Federal Register: February 25, 2010 (Volume 75, Number 37)]
[Notices]               
[Page 8765-8768]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25fe10-138]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61539; File No. SR-Phlx-2010-20]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing of Proposed Rule Change To Expand the Number of Components in 
the PHLX Semiconductor Sector\SM\ Known as SOX\SM\, on Which Options 
Are Listed and Traded

February 18, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on February 2, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``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 expand the 
number of components in the PHLX Semiconductor Sector\SM\ known as 
SOX\SM\, on which options are listed and traded.\3\ No other changes 
are made to the index or options on the index.
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    \3\ PHLX Semiconductor Sector\SM\ may also be known as PHLX 
Semiconductor Index or PHLX Semiconductor Sector\SM\ Index.
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    A copy of the filing 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 the proposal is to expand the number of components 
in the PHLX Semiconductor Sector\SM\ known as SOX\SM\ (``SOX'' or the 
``Index''), on which options are listed and traded.
    SOX options subsequent to this proposal will be identical to SOX 
options that are currently listed and trading except for the number of 
components in the underlying Index, and will trade pursuant to the same 
(unchanged) contract specifications.\4\ The singular post-proposal 
difference in SOX options is that they will overlie an Index with 
thirty components where the current Index has twenty-one components.
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    \4\ The contract specifications for SOX options are available at 
http://www.nasdaqtrader.com/
micro.aspx?id=phlxsectorscontractspecs#SOX.
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Background
    The Exchange currently has initial listing and maintenance listing 
standards for options on indexes in Rule 1009A that are designed to 
allow the Exchange to list options on narrow-based indexes \5\ and 
broad-based indexes \6\ pursuant to generic listing standards (the 
``Index Listing Standards'').\7\ SOX is a narrow-based index and SOX 
options overlying the Index are listed and traded pursuant to Rule 
1009A(b). SOX options were originally listed and began trading in 1994 
pursuant to Exchange approval.\8\
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    \5\ A narrow-based index or industry index is defined as: An 
index designed to be representative of a particular industry or a 
group of related industries. The term ``narrow-based index'' 
includes indices the constituents of which are all headquartered 
within a single country. See Rule 1000A(b)(12).
    \6\ A broad-based index or market index is defined as: An index 
designed to be representative of a stock market as a whole or of a 
range of companies in unrelated industries. See Rule 1000A(b)(11).
    \7\ Rule 1009A establishes generic listing standards for options 
on narrow-based and broad-based indexes pursuant to Rule 19b-4(e) of 
the Act. See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998). The listing standards in 
Rule 1009A are similar to those of other options exchanges such as, 
for example, Chicago Board Options Exchange, Incorporated; 
International Stock Exchange LLC; and The NASDAQ Stock Market LLC.
    \8\ See Securities Exchange Act Release No. 34546 (August 18, 
1994), 59 FR 43881 (August 25, 1994) (SR-Phlx-94-02) (order 
approving proposal to list and trade the SOX index).
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    SOX is a modified market capitalization-weighted index composed of 
twenty-one companies primarily involved in the design, distribution, 
manufacture, and sale of semiconductors, and is one of several narrow-
based sector indexes on which options are listed and traded on the 
Exchange.\9\ SOX provides exposure to the fast-growing (yet extremely 
volatile) semiconductor industry. When investors want information and 
investment opportunities specific to semiconductors, they look most 
often to the SOX index.\10\ Indeed, the popularity of SOX is reflected 
in the trading volumes of options on the Index.\11\ It

[[Page 8766]]

has been observed that a rise or decline in the SOX usually precedes a 
similar move in the broader technology market. As such, SOX has served 
as a leading indicator for technology stocks. Recognizing the market-
leading aspects of the Index, the Exchange is proposing a rule change 
to increase to thirty the number of components in SOX so that this 
narrow-based index may even more effectively represent the dynamic 
semiconductor market.\12\
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    \9\ Other sector indexes on which options are listed and traded 
on the Exchange include: KBW Bank Index\SM\ (BKX\SM\); PHLX Gold/
Silver Sector\SM\ (XAU\SM\); PHLX Housing Sector\SM\ (HGX\SM\); PHLX 
Oil Service Sector\SM\ (OSX\SM\); PHLX Utility Sector\SM\ (UTY\SM\); 
NASDAQ OMX China Index\SM\ (CNZ\SM\); SIG Energy MLP Index\SM\ 
(SVO\TM\); and SIG Oil Exploration & Production Index\TM\ (EPX\SM\).
    \10\ Other currently available investment products that evaluate 
the semiconductor market, albeit differently from SOX, include 
Semiconductor HOLDRs (SMH) and iShares S&P North American 
Technology-Semiconductors Index Fund (IGW).
    \11\ During 2009, SOX has traded an average of 29,127 contracts 
per month and has traded as much as 23,339 contracts in a day (June 
16, 2009). As of December 31, 2009, there were 11,976 contracts of 
open interest in SOX.
    \12\ A listing of the component securities in SOX is available 
at https://indexes.nasdaqomx.com/
weighting.aspx?IndexSymbol=SOX&menuIndex=0.
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    The Exchange submits that in the proposed expanded form SOX would 
continue to meet the generic Index Listing Standards of Rule 1009A. 
Specifically, all the index maintenance requirements in subsection (c) 
of Rule 1009A applicable to options on narrow-based indexes would be 
met with one exception.\13\ The singular exception is the number of 
components. In particular, subsection (c)(2) of Rule 1009 indicates 
that the total number of component securities in the index may not 
increase or decrease by more than 33\1/3\% from the total number of 
securities in the index at the time of its initial listing; adding 
components to equal thirty is outside the (c)(2) parameter, and is the 
reason why the Exchange is making the current filing.
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    \13\ The maintenance provisions in subsection (c) of Rule 1009A 
state, in part, as applicable to SOX:
    (1) The conditions stated in subparagraphs (b)(1), (3), (6), 
(7), (8), (9), (10), (11) and (12) [regarding A.M. settlement; 
market capitalization; component weighting; components being NMS 
stock; non-U.S. components, reporting at least every fifteen 
seconds; and rebalancing], must continue to be satisfied, provided 
that the conditions stated in subparagraph (b)(6) [regarding 
component weighting] must be satisfied only as to the first day of 
January and July in each year; (2) The total number of component 
securities in the index may not increase or decrease by more than 
33\1/3\% from the number of component securities in the index at the 
time of its initial listing, and in no event may be less than nine 
component securities; (3) Trading volume of each component security 
in the index must be at least 500,000 shares for each of the last 
six months, except that for each of the lowest weighted component 
securities in the index that in the aggregate account for no more 
than 10% of the weight of the index, trading volume must be at least 
400,000 shares for each of the last six months; (4) In a 
capitalization-weighted index, the lesser of the five highest 
weighted component securities in the index or the highest weighted 
component securities in the index that in the aggregate represent at 
least 30% of the total number of stocks in the index each have had 
an average monthly trading volume of at least 1,000,000 shares over 
the past six months.
    Moreover, the Index in its current and proposed expanded form 
would substantially meet the initial option listing provisions in 
subsection (b) of Rule 1009A.
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Index Design and Index Composition
    The Index is calculated using a modified market capitalization-
weighted methodology. The value of the Index equals the total 
capitalization of modified shares, divided by the divisor. The divisor 
serves the purpose of scaling aggregate value to a lower order of 
magnitude which is more desirable for Index reporting and trading 
purposes. To maintain continuity for the Index's value, the divisor is 
adjusted periodically to reflect events such as changes in the number 
of shares outstanding for component stocks, company additions or 
deletions, corporate restructurings, or other capitalization changes.
    If trading in an Index security is halted while the market is open, 
the most recent last sale price for that security (``Last Sale Price'') 
\14\ is used for all index computations until trading resumes. If 
trading is halted before the market is open, the most recent Last Sale 
Price is used. Additionally, the Index ordinarily is calculated without 
regard to dividends on component securities. The modified 
capitalization-weighted methodology is expected to retain, in general, 
the economic attributes of capitalization weighting, while providing 
enhanced diversification. To accomplish this, NASDAQ OMX, which 
maintains the Index, rebalances the Index at least twice annually and 
adjusts the weighting of Index components.
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    \14\ For purposes of the Index, Last Sale Price refers to the 
following: For a security listed on NASDAQ, it is the last sale 
price on NASDAQ which normally would be the official closing, known 
as the Nasdaq Official Closing Price (NOCP), when NASDAQ is closed. 
For any NYSE-listed or NYSE AMEX-listed security, it is the last 
regular way trade reported on such security's primary U.S. listing 
market. If a security does not trade on its primary listing market 
on a given day, the most recent last sale price from the primary 
listing market (adjusted for corporate actions, if any) is used.
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    Index eligibility is limited to specific security types only. The 
security types eligible for the Index include foreign or domestic 
common stocks, ordinary shares, American Depository Receipts 
(``ADRs''), shares of beneficial interest or limited partnership 
interests, and tracking stocks. Security types not included in the 
Index are closed-end funds, convertible debentures, exchange traded 
funds, preferred stocks, rights, warrants, units and other derivative 
securities.
    As of December 31, 2009, the following were characteristics of the 
Index:

--The total weighted capitalization of all components of the Index was 
$276.43 billion;
--Regarding component capitalization, (a) the highest weighted 
capitalization of a component was $112.65 billion (Intel Corp.), (b) 
the lowest weighted capitalization of a component was $0.79 billion 
(STMicroelectronics N.V.), (c) the mean capitalization of the 
components was $13.16 billion, and (d) the median capitalization of the 
components was $6.62 billion;
--Regarding component price per share, (a) the highest price per share 
of a component was $56.37 (Cree, Inc.), (b) the lowest price per share 
of a component was $9.27 (STMicroelectronics N.V.), (c) the mean price 
per share of the components was $23.32, and (d) the median price per 
share of the components was $22.63;
--Regarding component weightings, (a) the highest weighting of a 
component was 7.83% (Applied Materials, Inc.), (b) the lowest weighting 
of a component was 1.36% (STMicroelectronics N.V.), (c) the mean 
weighting of the components was 4.76%, (d) the median weighting of the 
components was 4.00%, and (e) the total weighting of the top five 
highest weighted components was 37.37% (Applied Materials, Inc., Taiwan 
Semiconductor Manufacturing Co., Broadcom Corporation, Intel Corp., and 
Texas Instruments, Inc.);
--Regarding component shares, (a) the most available shares of a 
component was 5.52 billion shares (Intel Corp.), (b) the least 
available shares of a component was 0.06 billion shares (Atheros 
Communications, Inc.), (c) the mean available shares of the components 
was 0.67 billion shares, and (d) the median available shares of the 
components was 0.24 billion shares;
--Regarding the six-month average daily volumes (``ADVs'') of the 
components, (a) the highest six-month ADV of a component was 61.35 
million shares (Intel Corp.), (b) the lowest six-month ADV of a 
component was 1.71 million shares (STMicroelectronics N.V.), (c) the 
mean six-month ADV of the components was 11.77 million shares, (d) the 
median six-month ADVs of the components was 7.07 million shares, (e) 
the average of six-month ADVs of the five most heavily traded 
components was 30.21 million shares (Intel Corp., Advanced Micro 
Devices, Inc., Micron Technology, Applied Materials, Inc., and Taiwan 
Semiconductor Manufacturing Co.), and (f) 100% of the components had a 
six-month ADV of at least 200,000; and
--Regarding option eligibility, (a) 100.00% of the components were 
options eligible, as measured by weighting, and (b) 100.00% of the 
components were options eligible, as measured by number.

[[Page 8767]]

Index Calculation and Index Maintenance
    The Index is maintained by NASDAQ OMX and index levels are 
calculated continuously, using the last sale price for each component 
stock in the Index. Index values are publicly disseminated at least 
every fifteen seconds throughout the trading day through a major market 
data vendor, namely NASDAQ OMX's index dissemination service. The 
Exchange expects that such dissemination will continue through one or 
more (NASDAQ OMX-owned or unrelated) major market data vendors.\15\
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    \15\ Rule 1009A(b)(12) states that should an underlying index be 
maintained by a broker-dealer, however, the index must be calculated 
by a third party who is not a broker-dealer, and the broker-dealer 
will have to erect a ``Chinese Wall'' around its personnel who have 
access to information concerning changes in and adjustments to the 
index.
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    Appurtenant to review of the Index for purposes of rebalancing, 
component securities are evaluated by NASDAQ OMX. In the event that an 
Index component security no longer meets the requirements for continued 
security eligibility, it will be replaced with a security that meets 
all of the initial security eligibility criteria and additional 
criteria which follows. Securities eligible for inclusion will be 
ranked descending by market value, current price and greatest 
percentage price change over the previous six months. The security with 
the highest overall ranking will be added to the Index provided that 
the Index then meets the following criteria: No single Index security 
is greater than 30% of the weight of the Index and the top five Index 
securities are not greater than 50% of the weight of the Index; and 
non-U.S. component securities that are not subject to comprehensive 
surveillance agreements do not in the aggregate represent more than 20% 
of the weight of the Index.\16\ In the event that the highest-ranking 
security does not permit the Index to meet the above criteria, the next 
highest-ranking security will be selected and the Index criteria will 
again be applied to determine eligibility. The process will continue 
until a qualifying replacement security is selected.
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    \16\ See Rule 1009A(b).
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    The list of annual additions and deletions to the Index will be 
publicly announced in early June, and changes to the Index will be made 
effective after the close of trading on the third Friday in June. If at 
any time during the year, a component security is determined to become 
ineligible for continued inclusion in the Index based on the continued 
eligibility criteria, that component security will be replaced with a 
component not currently in the Index that met the appropriate 
eligibility criteria.\17\
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    \17\ Moreover, changes in the price of an Index component 
security driven by corporate events such as stock dividends, stock 
splits, certain spin-offs, and rights issuances will be adjusted on 
the ex-date. In the case of a special cash dividend, a determination 
will be made on an individual basis whether to make a change to the 
price of an Index security in accordance with its Index dividend 
policy. If it is determined that a change will be made, it will 
become effective on the ex-date and advance notification will be 
made. Ordinarily, whenever there is a change in the price of an 
Index security due to stock dividends, stock splits, spin-off, 
rights issuances, or special cash dividends, the divisor is adjusted 
to ensure that there is no discontinuity in the value of the Index, 
which might otherwise be caused by any such change.
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    In the event a class of index options listed on the Exchange fails 
to satisfy the maintenance listing standards, the Exchange shall not 
open for trading any additional series of options of that class unless 
such failure is determined by the Exchange not to be significant and 
the Commission concurs in that determination, or unless the continued 
listing of that class of index options has been approved by the 
Commission under Section 19(b)(2) of the Act.\18\
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    \18\ 15 U.S.C. 78s(b)(2).
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    The Exchange represents that, if the Index ceases to be maintained 
or calculated, or if the Index values are not disseminated at least 
every fifteen seconds by a widely available source, the Exchange will 
promptly notify the Division of Trading and Markets of the Commission, 
and the Exchange will not list any additional series for trading and 
will limit all transactions in such options to closing transactions 
only for the purpose of maintaining a fair and orderly market and 
protecting investors.
Contract Specifications
    The contract specifications for the proposed expanded Index options 
are, as previously noted, identical to the current narrow-based Index 
options that are currently listed and traded on the Exchange.\19\ 
Options on the Index are American-style and A.M. cash-settled. The 
Exchange's trading hours for index options (9:30 a.m. to 4 p.m. ET), 
will apply to options on SOX.\20\ Exchange rules that are applicable to 
the trading of options on indexes will continue to apply to the trading 
of options on SOX.\21\
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    \19\ See supra note 5.
    \20\ See Rule 101.
    \21\ For trading rules applicable to trading index options, see 
Rules 1000A et seq. For trading rules applicable to trading options 
generally, see Rules 1000 et seq.
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    The strike price intervals for SOX options contracts will remain 
the same as those currently in use: $2.50 and $1 if the strike price is 
below $200.\22\ The minimum increment size for series trading below $3 
will remain $0.05, and for series trading at or above $3 will remain 
$0.10.\23\ The Exchange's margin rules will be applicable.\24\ The 
Exchange will continue to list options on SOX in up to three months 
from the March, June, September, December cycle plus two additional 
near-term months (that is, as many as five months at all times).\25\ 
The trading of SOX options will continue to be subject to the same 
rules that govern the trading of all of the Exchange's index options, 
including sales practice rules, margin requirements, and trading rules.
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    \22\ See Phlx Rule 1101A(a).
    \23\ See Phlx Rule 1034(a).
    \24\ See Phlx Rule 721 et seq.
    \25\ See Phlx Rule 1101A(b).
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Surveillance and Capacity
    The Exchange represents that it has an adequate surveillance 
program in place for options traded on the Index and intends to apply 
those same program procedures that it applies to the Exchange's current 
SOX options and other index options. Additionally, the Exchange is a 
member of the Intermarket Surveillance Group (``ISG'') under the 
Intermarket Surveillance Group Agreement, dated June 20, 1994.\26\ ISG 
members generally work together to coordinate surveillance and 
investigative information sharing in the stock and options markets. In 
addition, the major futures exchanges are affiliated members of the 
ISG, which allows for the sharing of surveillance information for 
potential intermarket trading abuses.
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    \26\ A list of the current members and affiliate members of ISG 
can be found at http://www.isgportal.com.
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    The Exchange represents that it has the necessary systems capacity 
to continue to support listing and trading SOX options.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \27\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \28\ 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 proposal to

[[Page 8768]]

expand the SOX index will allow the Exchange to seamlessly continue 
listing this premiere index in a manner that even more effectively 
reflects the semiconductor sector.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 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 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

    No written comments were either solicited or received.

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

    Within 35 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 
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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2010-20 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-2010-20. 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 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-2010-20 and should be 
submitted on or before March 18, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-3777 Filed 2-24-10; 8:45 am]
BILLING CODE 8011-01-P