Document ID: SEC-2010-0058-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by NASDAQ OMX PHLX, Inc. To Amend the $1 StrikeProgram To Allow Low-Strike LEAPS
Posted Date: 2010-01-11T05:00Z

[Federal Register: January 11, 2010 (Volume 75, Number 6)]
[Notices]               
[Page 1442-1444]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11ja10-102]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61277; File No. SR-Phlx-2009-108]

 
Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by NASDAQ OMX PHLX, Inc. To 
Amend the $1 Strike Program To Allow Low-Strike LEAPS

January 4, 2010.
    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 December 18, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
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 its 
Rule 1012 (Series of Options Open for Trading) to expand the Exchange's 
$1 Strike Price Program (``Program'' or ``$1 Strike Program'') \3\ to 
allow listing long-term option series (``LEAPS'') \4\ in $1 strike 
price intervals up to $5 in up to 200 option classes in individual 
stocks.
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    \3\ The $1 Strike Program was initially approved on June 11, 
2003, and thereafter extended several times until June 5, 2008. See 
Securities Exchange Act Release Nos. 48013 (June 11, 2003), 68 FR 
35933 (June 17, 2003) (SR-Phlx-2002-55) (notice of filing and order 
approving); 49801 (June 3, 2004), 69 FR 32652 (June 10, 2004) (SR-
Phlx-2004-38) (notice of filing and immediate effectiveness); 51768 
(May 31, 2005), 70 FR 33250 (June 7, 2005) (SR-Phlx-2005-35) (notice 
of filing and immediate effectiveness); 53938 (June 5, 2006), 71 FR 
34178 (June 13, 2006) (SR-Phlx-2006-36) (notice of filing and 
immediate effectiveness); and 55666 (April 25, 2007), 72 FR 23879 
(May 1, 2007) (SR-Phlx-2007-29) (notice of filing and immediate 
effectiveness). The program was subsequently made permanent and 
expanded. See Securities Exchange Act Release Nos. 57111 (January 8, 
2008), 73 FR 2297 (January 14, 2008) (SR-Phlx-2008-01) (notice of 
filing and immediate effectiveness); and 59590 (March 17, 2009), 74 
FR 12412 (March 24, 2009) (SR-Phlx-2009-21) (notice of filing and 
immediate effectiveness).
    \4\ Long-Term Equity Anticipation Securities (LEAPS) are long-
term options that generally have up to thirty-nine months from the 
time they are listed until expiration. Commentary .03 to Rule 1012. 
Long-term FLEX options and index options are considered separately 
in Rules 1079(a)(6) and 1101A(b)(iii), respectively.
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    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

[[Page 1443]]

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
    This proposed rule change is based on a filing previously submitted 
by Chicago Board Options Exchange, Incorporated (``CBOE'') that was 
recently approved by the Commission.\5\
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    \5\ See Securities Exchange Act Release No. 60978 (November 10, 
2009), 74 FR 59296 (November 17, 2009) (SR-CBOE-2009-068) (order 
approving proposed rule change to allow listing LEAPS in $1 Strike 
Program).
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    The purpose of the proposal is to expand the $1 Strike Program in a 
limited fashion to allow Phlx to list new series in $1 strike price 
intervals up to $5 in LEAPS in up to 200 option classes on individual 
stocks.
    Currently, under the $1 Strike Program, the Exchange may not list 
LEAPS at $1 strike price intervals for any class selected for the 
Program. The Exchange also is restricted from listing any series that 
would result in strike prices being $0.50 apart, unless the series are 
part of the $.50 Strike Program.\6\
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    \6\ Regarding the $0.50 Strike Program, see Commentary 
.05(a)(ii) to Rule 1012 and Securities Exchange Act Release No. 
60694 (September 18, 2009), 74 FR 49048 (September 25, 2009) (SR-
Phlx-2009-65) (notice of filing and order approving). The $.50 
Strike Program establishes strike price intervals of $0.50 for 
options on stocks trading at or below $3.00.
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    Phlx believes that its proposal to allow limited listing of LEAPS 
in the Program is appropriate and will allow investors to establish 
option positions that are better tailored to meet their investment 
objectives, vis-[agrave]-vis credit risk, using deep out-of-the-money, 
long-term put options. These types of options are viewed as a viable, 
liquid alternative to over the counter-traded (``OTC'') credit default 
swaps (``CDS''), because such options do not possess the negative 
characteristics associated with CDS, namely, lack of transparency, 
insufficient collateral requirements, and inefficient trade processing.
    The Exchange notes that its proposal is limited in scope, as $1 
strikes in LEAPS may only be listed up to $5 and in only up to 200 
option classes. As is currently the case in the $1 Strike Program, the 
Exchange would not list series with $1.00 intervals within $0.50 of an 
existing $2.50 strike price in the same series.\7\ As a result, the 
Exchange does not believe that this proposal will cause a significant 
increase in quote traffic.
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    \7\ However, strike prices of $2 and $3 are permitted within 
$0.50 of a $2.50 strike price for classes also selected for the 
$0.50 Strike Program. See proposed Commentary .05(a)(i)(C) to Rule 
1012, which is similar in this respect to the current Commentary 
.05(a)(i)(B).
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    Moreover, as the Commission is aware, the Exchange has adopted 
various quote mitigation strategies in an effort to lessen the growth 
rate of quotations. When it expanded the $1 Strike Price Program 
several months ago the Exchange included a delisting policy that would 
be applicable with regard to this proposed expansion; the Exchange has 
likewise established a number of other delisting policies.\8\ The 
Exchange and other options exchanges amended the Options Listing 
Procedures Plan (``OLPP'') in 2008 to impose a minimum volume threshold 
of 1,000 contracts national average daily volume (``ADV'') per 
underlying class to qualify for an additional year of LEAP series.\9\ 
Most recently, the Exchange, along with the other options exchanges, 
amended the OLPP to adopt objective, exercise price range limitations 
applicable to equity option classes, options on Exchange Traded Funds 
(``ETFs'') and options on trust issued receipts (``TIRs'') (the ``range 
limitation strategy'').\10\ The Exchange has filed a rule change 
proposal to codify the range limitation strategy in its own rules.\11\ 
The Exchange believes that these price range limitations, in 
conjunction with the delisting policies in place at the Exchange,\12\ 
will have a meaningful quote mitigation impact.
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    \8\ For the $1 Strike Program delisting policy, see Securities 
Exchange Act Release No. 59590 (March 17, 2009), 74 FR 12412 (March 
24, 2009) (SR-Phlx-2009-21) (notice of filing and immediate 
effectiveness). The $1 Strike Program delisting policy includes a 
provision stating that the Exchange may grant member requests and 
add strikes and/or maintain strikes in series of options classes 
traded pursuant to the Program that are eligible for delisting. For 
other delisting policies proposed and implemented by the Exchange, 
see Securities Exchange Act Release Nos. 60249 (July 6, 2009), 74 FR 
33506 (July 13, 2009) (SR-Phlx-2009-50) (notice of filing and 
immediate effectiveness regarding Quarterly Options Series program); 
60156 (June 22, 2009), 74 FR 31077 (June 29, 2009, 2009) (SR-Phlx-
2009-46) (notice of filing and immediate effectiveness regarding 
options on reduced value NASDAQ-100 index); 60840 (October 20, 
2009), 74 FR 55593 (October 28, 2009) (SR-Phlx-2009-77) (order 
approving listing certain options at $1 strike price intervals below 
$200); and Commentary.11 to rule 1010 (low ADV delisting policy) and 
Securities Exchange Act Release No. 56881 (December 3, 2007), 72 FR 
69276 (December 7, 2007) (SR-Phlx-2007-72) (notice of filing and 
immediate effectiveness regarding delisting securities underlying 
low ADV options).
    \9\ See Securities Exchange Act Release No. 58630 (September 24, 
2008), 73 FR 57166 (October 1, 2008) (File No. 4-443) (order 
approving Amendment No. 2 to OLPP).
    \10\ See Securities Exchange Act Release No. 60531 (August 19, 
2009), 74 FR 43173 (August 26, 2009) (File No 4-443) (order 
approving Amendment No. 3 to OLPP). Phlx's proposal to list $1 
strikes in LEAPs to $5 would not be subject to the exercise price 
range limitations contained in new paragraph (3)(g)(ii) of the OLPP.
    \11\ See SR-Phlx-2009-103 (unpublished).
    \12\ See, for example, Securities Exchange Act Release Nos. 
60249 (July 6, 2009), 74 FR 33506 (July 13, 2009) (SR-Phlx-2009-50) 
(notice of filing and immediate effectiveness regarding Quarterly 
Options Series program); 60156 (June 22, 2009), 74 FR 31077 (June 
29, 2009, 2009) (SR-Phlx-2009-46) (notice of filing and immediate 
effectiveness regarding options on reduced value NASDAQ-100 index); 
60840 (October 20, 2009), 74 FR 55593 (October 28, 2009) (SR-Phlx-
2009-77) (order approving listing certain options at $1 strike price 
intervals below $200); and Commentary.11 to rule 1010 (low ADV 
delisting policy) and Securities Exchange Act Release No. 56881 
(December 3, 2007), 72 FR 69276 (December 7, 2007) (SR-Phlx-2007-72) 
(notice of filing and immediate effectiveness regarding delisting 
securities underlying low ADV options).
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    The margin requirements set forth in Rules 721 through 723 and the 
position and exercise requirements set forth in Rules 1001 and 1002, 
respectively, will continue to apply to these new series, and no 
changes are being proposed to those requirements by this rule change.
    With regard to the impact 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 additional traffic that may be associated with the listing 
and trading of LEAPS in the $1 Strike Program as proposed by this 
filing.
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 
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 ability to list and trade LEAPS at $1 strike price 
intervals will benefit investors by giving them more flexibility to 
more closely tailor their investment and hedging decisions.
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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

    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.

[[Page 1444]]

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; or (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, if consistent with the 
protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission hereby grants that request.\17\ The 
Commission believes that waiver of the operative delay is consistent 
with the protection of investors and the public interest because it 
recently approved a proposal from CBOE which is nearly identical to the 
current proposal and on which no comments were received.\18\ Therefore, 
the proposal is operative upon filing.
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    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \18\ See Exchange Act Release No. 60978 (November 10, 2009), 74 
FR 59296 (November 17, 2009) (approving SR-CBOE-2009-68).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 No. SR-Phlx-2009-108 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 No. SR-Phlx-2009-108. 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 inspection and 
copying 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 Phlx. 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 No. SR-Phlx-2009-108 and should be 
submitted on or before February 1, 2010.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-193 Filed 1-8-10; 8:45 am]
BILLING CODE 8011-01-P