Document ID: SEC-2011-1586-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2011-10-17T04:00Z

[Federal Register Volume 76, Number 200 (Monday, October 17, 2011)]
[Notices]
[Pages 64142-64144]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26675]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65528; File No. SR-NASDAQ-2011-138]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change Regarding Expansion of the 
Short Term Option Series 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, The NASDAQ Stock Market LLC (``NASDAQ'') 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 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 Commission a proposal for the NASDAQ 
Options Market (``NOM'' or ``Exchange'') to expand the Short Term 
Option Series 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. 62297 (June 15, 
2010), 75 FR 35111 (June 21, 2010) (SR-NASDAQ-2010-073) (notice of 
filing and immediate effectiveness permanently establishing Short 
Term Option Series Program on NASDAQ). Short term options are 
generally known as ``STOs'' or ``weeklies.'' The Exchange's STO 
program was last expanded in 2011, following the lead of other 
markets that have STO programs. See Securities Exchange Act Release 
No. 64826 (July 6, 2011), 76 FR 40969 (July 12, 2011) (SR-NASDAQ-
2011-090) (notice of filing and immediate effectiveness regarding 
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. NOM chapter 1, 
Section 1(a)(59) and Chapter XIV, Section 2(n).
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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 from NASDAQ's Web 
site at http://nasdaq.cchwallstreet.com/

[[Page 64143]]

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
    The purpose of this proposed rule change is to amend chapter IV, 
section 6 and chapter XIV, Section 11 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 NOM Chapter IV, Supplementary 
Material .07 to Section 6 and Chapter XIV, Section 11(h). 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). Chapter IV, Supplementary Material .07(c) to Section 6 
and Chapter XIV, Section 11(h)(iii).
    \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 a 
retail investor had recently requested another exchange (Phlx) 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 Phlx 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. 64826 (July 6, 2011), 76 FR 40969 (July 12, 2011) (SR-
NASDAQ-2011-090) (notice of filing and immediate effectiveness).
    \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 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 ``legging risk'' \10\ of executing the roll strategy, and 
negatively impact the time advantage of executing one complex order to 
roll the position on the Exchange.\11\
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    \10\ The risk of not being able to fulfill a particular leg of a 
strategy or spread at the price required.
    \11\ 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

[[Page 64144]]

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.\12\
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    \12\ 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 one STO Series in order to list another or 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 \13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \14\ 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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    \13\ 15 U.S.C. 78f(b).
    \14\ 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

    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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2011-138 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-NASDAQ-2011-138. 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-
NASDAQ-2011-138 and should be submitted on or before November 7, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-26675 Filed 10-14-11; 8:45 am]
BILLING CODE 8011-01-P