Document ID: SEC-2011-0196-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-02-11T05:00Z

[Federal Register Volume 76, Number 29 (Friday, February 11, 2011)]
[Notices]
[Pages 7888-7891]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-3034]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63860; File No. SR-Phlx-2010-176]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of Proposed Rule Change Relating to Listing and 
Trading of Alpha Index Options

February 7, 2011.

I. Introduction

    On December 10, 2010, NASDAQ OMX PHLX LLC (the ``Exchange'' or 
``Phlx'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act''),\1\ a proposed rule change to amend 
certain of its rules to provide for the listing and trading of options 
on NASDAQ OMX (``Nasdaq'') Alpha Indexes\SM\ (the ``Alpha Indexes'') on 
the Exchange's electronic trading platform for options. The proposed 
rule change was published for comment in the Federal Register on 
December 27, 2010.\2\ The Commission received no comment letters on the 
proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ See Securities Exchange Act Release No. 63575 (December 17, 
2010), 75 FR 81320 (``Notice'').
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II. Description

    The Exchange proposes to list and trade cash-settled, European-
style options on Alpha Indexes.

Index Design and Composition

    Alpha Indexes measure relative total returns of one stock and one 
exchange-traded fund share (``ETF'') underlying options which are also 
traded on the Exchange (each such combination of two components is 
referred to as an ``Alpha Pair'').\3\ The first component identified in 
an Alpha Pair (the ``Target Component'') is measured against the second 
component identified in the Alpha Pair (the ``Benchmark Component'').
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    \3\ The total return measures performance (rate of return) of 
price appreciation plus dividends over a given evaluation period.
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    The Exchange proposes to list and trade Alpha Index options only on 
the following Alpha Pairs: AAPL/SPY, AMZN/SPY, CSCO/SPY, F/SPY, GE/SPY, 
GOOG/SPY, HPQ/SPY, IBM/SPY, INTC/SPY, KO/SPY, MRK/SPY, MSFT/SPY, ORCL/
SPY, PFE/SPY, RIMM/SPY, T/SPY, TGT/SPY, VZ/SPY and WMT/SPY. The 
Exchange represents that it will not list Alpha Index options on any 
other Alpha Pairs without filing a

[[Page 7889]]

proposed rule change seeking Commission approval.

Index Calculation

    In order to calculate an Alpha Index, Nasdaq measures the total 
return performance of the Target Component relative to the total return 
performance of the Benchmark Component, based upon prices of 
transactions on the primary listing exchange of each underlying 
component. The Exchange has represented that any Target Component or 
Benchmark Component upon which an Alpha Index is based will meet the 
Exchange's listing standards, and options overlying them will already 
be listed and traded on the Exchange. Further, the value of each Alpha 
Index will initially be set at 100.00.
    To calculate an Alpha Index, Nasdaq first calculates a daily total 
return for both the Target Component and the Benchmark Component of the 
Alpha Pair. To calculate the daily total return today, the previous 
trading day's closing market price for the component would be 
subtracted from today's closing market price for the component to 
determine a price difference (the ``Price Difference''). The Price 
Difference would be added to any declared dividend, if today were an 
``ex-dividend'' date, to yield the Price Plus Dividend Difference for 
the component. The Price Plus Dividend Difference for the component is 
then divided by the previous trading day's closing market price for the 
component, and the result is rounded to four decimal places to yield 
the total daily return.
    The total daily return for each component is then added to the 
whole number one, which permits the ultimate Alpha Index to be 
expressed in percentage terms. This figure for the Target Component is 
then divided by the comparable figure for the Benchmark Component, and 
then multiplied by previous trading day's closing Alpha Index value. 
The resulting level depicts the Target Component's total return 
performance versus that of the previous trading day.
    In the case of a corporate event which eliminates one of the 
underlying components of an Alpha Pair, Nasdaq will cease calculation 
of the Alpha Index for that Alpha Pair and all outstanding option 
positions for that Alpha Pair will be immediately settled at the last 
disseminated price of that Alpha Index. In the case of a corporate 
event such as a spin off that affects the price of one of the 
underlying components, Nasdaq will make an appropriate one-time 
adjustment to the price of the underlying component used in the 
calculation to ensure that the Alpha Index continues to reflect the 
daily total return of the component.
    Alpha Index values will be disseminated every second over the 
NASDAQ OMX Global Index Data Service (``GIDS'').\4\
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    \4\ See http://www.nasdaqtrader.com/Trader.aspx?id=globalindexDS 
for a description of the NASDAQ OMX Global Index Data Service.
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Contract Specifications

    The Exchange represents that Alpha Indexes are not broad-based or 
narrow-based indexes. Rather, they are strategy-based indexes that 
measure the relative total return of one stock and one ETF. Options on 
Alpha Indexes are European-style and A.M. cash-settled. The trading 
hours for options on the Alpha Indexes will be from 9:30 a.m. to 4:15 
p.m. (Philadelphia Time).
    There will be at least two expiration months from the March, June, 
September, December cycle plus two additional near-term months so that 
the three nearest term months will always be available. Minimum strike 
price intervals for Alpha Index options would be at 1 point intervals. 
In addition, the minimum tick size for series of Alpha Index options 
trading below $3 shall be $0.05, and for series trading at or above $3 
shall be $0.10.

Listing Requirements

    Alpha Index options will be listed only on Alpha Indexes comprised 
of Alpha Pairs that are actively traded. Rule 1009A, Designation of the 
Index, is being amended to provide that at the time of the listing of 
an Alpha Index option, options on each underlying component must also 
be listed and traded on the Exchange and must meet the requirements of 
Rule 1009, Criteria for Underlying Securities. Additionally, Rule 1009A 
is being amended to provide that each underlying component's trading 
volume (in all markets in which the underlying security is traded) must 
have averaged at least 2,250,000 shares per day in the preceding twelve 
months. Further, following the listing of an Alpha Index option, 
options on each of the component securities of the Alpha Index must 
continue to meet the continued listing standards set forth by Exchange 
Rule 1010, Withdrawal of Approval of Underlying Securities or Options. 
Also, each underlying component's trading volume (in all markets in 
which the underlying security is traded) must have averaged at least 
2,000,000 shares per day in the preceding twelve months.
    Finally, Rule 1009A is being amended to provide that no Alpha Index 
option will be listed unless and until options overlying each of the 
Alpha Index component securities have been listed and traded on a 
national securities exchange with an average daily options trading 
volume during the three previous months of at least 10,000 contracts. 
Following the listing of an Alpha Index option, options on each of the 
component securities of the Alpha Index must continue to meet this 
options average daily volume standard.

Index Option Trading

    The Exchange proposes to list series of Alpha Index options at $1 
or greater strike price intervals, and to list at least two strike 
prices above and two strike prices below the current value of each 
Alpha Index option at about the time a series is opened for trading on 
the Exchange.\5\ The Exchange may also list additional strike prices at 
any price point, with a minimum of a $1.00 interval between strike 
prices, as required to meet the needs of customers.\6\
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    \5\ See Exchange Rule 1101A, Terms of Option Contracts, as 
proposed to be amended.
    \6\ See id.
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    Under Exchange Rule 1033A, Meaning of Premium Bids and Offers, bids 
and offers in index options are to be expressed in terms of dollars and 
decimal equivalents of dollars per unit of the index. As proposed by 
the Exchange, the minimum tick size for series of Alpha Index options 
trading below $3 will be $0.05 and for series trading at or above $3 
will be $0.10; provided, however, that if options on either component 
of an Alpha Pair have a minimum tick size of $0.01, options on the 
Alpha Index will also have a minimum tick size of $0.01.\7\
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    \7\ See Exchange Rule 1034, Minimum Increments, as proposed to 
be amended.
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    Pursuant to Exchange Rule 1047A(c), trading in Alpha Index options 
may be halted with the approval of an Options Exchange Official, 
whenever trading on the primary market of one of the Alpha Pair 
components is halted or suspended. Additionally, Exchange Rule 1047A(c) 
provides that trading shall be halted whenever an Options Exchange 
Official deems such action appropriate in the interests of a fair and 
orderly market and to protect investors. Rule 1047A(c) is being amended 
to provide that the Exchange will also halt trading in any Alpha Index 
option whenever trading is halted in an option overlying one or both of 
the components of the Alpha

[[Page 7890]]

Pair.\8\ Finally, the Exchange represents that if Nasdaq should cease 
calculation of the Alpha Index due to a corporate event (such as a 
merger) affecting one or more components of the Alpha Pair, the 
Exchange will halt trading in the option and all open contracts will be 
immediately settled at the last Alpha Index price to be disseminated. 
Re-openings are conducted pursuant to Rule 1047A(d), which is being 
amended so that it clearly applies to Alpha Indexes in addition to 
stock indexes.
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    \8\ See Exchange Rule 1047A, Trading Rotations, Halts or 
Reopenings, as proposed to be amended.
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    Rule 1092, Obvious Errors and Catastrophic Errors, is being amended 
to provide that trades of Alpha Index options on the Exchange will be 
nullified pursuant to subsection (c)(iv)(C) of that rule if the trade 
occurred during a trading halt on the primary market of either 
component security of the Alpha Pair. The word ``percent'' is being 
added to the previous clause applicable to stock index options to 
correct an inadvertent omission in the existing rule text.
    The Exchange will trade consecutive and cycle month series pursuant 
to Exchange Rule 1101A. Specifically, the Exchange represents that 
there will be at least two expiration months from the March, June, 
September, December cycle plus two additional near-term months so that 
the three nearest term months will always be available. The trading 
hours for options on Alpha Indexes will be from 9:30 a.m. to 4:15 p.m. 
(Philadelphia Time).\9\ Alpha Index options are index options that are 
available for FLEX trading.\10\
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    \9\ See Exchange Rules 1101A, Terms of Option Contracts, 
Commentary .01, and 101, Hours of Business.
    \10\ See Exchange Rule 1079, FLEX Index, Equity and Currency 
Options, as proposed to be amended. The Exchange also proposes that 
separate position limits apply to FLEX Alpha Index options, which 
are the same as the position limits applicable to non-FLEX Alpha 
Index options.
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Exercise and Settlement

    Options on any Alpha Index will expire on the Saturday following 
the third Friday of the expiration month. Trading in the expiring 
contract month will normally cease at 4:15 p.m. (Philadelphia Time) on 
the last day of trading. Exercise will result in delivery of cash on 
the business day following expiration. Additionally, Alpha Index 
options will be A.M.-settled.\11\ The exercise settlement value will be 
based upon the opening price of the individual stock or ETF from its 
primary listing market on the last trading day prior to expiration 
(usually a Friday).\12\
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    \11\ See Exchange Rule 1009A, Designation of the Index, as 
proposed to be amended.
    \12\ See id.
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    The exercise settlement amount of an Alpha Index option will be 
equal to the difference between the exercise settlement value and the 
exercise price of the option, multiplied by $100. When the last trading 
day is moved because of Exchange holidays, the last trading day for 
expiring options will be the day immediately preceding the last 
regularly-scheduled trading day.

Position Limits

    The Exchange proposes that the position limit for an option on an 
Alpha Index shall be 60,000 contracts on the same side of the 
market.\13\ For purposes of determining compliance with position 
limits, positions in Alpha Index options will be aggregated with 
positions in equity options on the underlying securities.\14\ All 
position limit hedge exemptions will apply. Section (a) of Commentary 
.01 to Rule 1001A is being amended by adding clause (iii), which 
provides that each Alpha Index option position to be exempted under the 
index hedge exemption must be hedged by a position in each of the 
component securities underlying the Alpha Index.
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    \13\ See Exchange Rule 1001A, Position Limits, as proposed to be 
amended.
    \14\ See id.
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Margin

    The Exchange will set customer margin levels for Alpha Index 
options at the level of the higher of the margin required for options 
on the Target Component or the margin required for options on the 
Benchmark Component.\15\
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    \15\ See Exchange Rule 721, Proper and Adequate Margin, as 
proposed to be amended.
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Exchange Rules Applicable

    The Exchange represents that, except as modified in the proposed 
rule change, Exchange Rules 1000A-1107A, Rules Applicable to Trading of 
Options on Indices, will be applicable to Alpha Index options. The 
Exchange proposes minor amendments to reflect the trading of Alpha 
Index options, which are not the narrow-based or broad-based stock 
index options that the Exchange currently trades, but rather are 
strategy-based securities index options based upon an index whose 
construction and calculation differ from those of stock index options.

Systems Capacity

    The Exchange affirms that it possesses the necessary systems 
capacity to support any new series that would result from the 
introduction of options on Alpha Indexes. The Exchange also represents 
that it has been informed that the Options Price Reporting Authority 
(``OPRA'') has the capacity to support such new series.

Clearing

    Alpha Index options are ``Strategy Based Options'' that will be 
cleared by the Options Clearing Corporation.

Surveillance

    The Exchange represents that the surveillance for opening price 
manipulation will be in place for the launch of options on Alpha 
Indexes, and other existing surveillance patterns will be utilized to 
monitor trading in options on each Alpha Index. The Exchange further 
represents that these surveillance procedures are adequate to monitor 
the trading of options on Alpha Indexes. For surveillance purposes, the 
Exchange represents that it will have complete access to information 
regarding trading activity in the pertinent underlying securities and 
options thereon.

Customer Protection

    The Exchange represents that Exchange rules designed to protect 
public customers who trade in options would apply to Alpha Index 
options. Exchange Rule 1026 is designed to ensure that options, 
including Alpha Index options, are sold only to customers capable of 
evaluating and bearing the risks associated with trading in the 
instruments. Exchange Rule 1024, applicable to the conduct of accounts, 
Exchange Rule 1025 relating to the supervision of accounts, Exchange 
Rule 1028 relating to confirmations, and Exchange Rule 1029 relating to 
delivery of options disclosure documents also would apply to trading in 
Alpha Index options.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\16\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\17\ 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

[[Page 7891]]

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.
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    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation.
    \17\ 15 U.S.C. 78f(b)(5).
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    As a national securities exchange, the Phlx is required, under 
Section 6(b)(1) of the Act,\18\ to enforce compliance by its members, 
and persons associated with its members, with the provisions of the 
Act, Commission rules and regulations thereunder, and its own rules. In 
addition, brokers that trade Alpha Index options will also be subject 
to best execution obligations and FINRA rules.\19\ Applicable Exchange 
rules also require that customers receive appropriate disclosure before 
trading Alpha Index options.\20\ Furthermore, brokers opening accounts 
and recommending options transactions must comply with relevant 
customer suitability standards.\21\
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    \18\ 15 U.S.C. 78f(b)(1).
    \19\ See NASD Rule 2320.
    \20\ See Exchange Rule 1029.
    \21\ See Exchange Rule 1026. See also Exchange Rules 1024 and 
1025.
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    The trading of options on Alpha Indexes will be governed by 
Exchange Rules 1000A-1107A, the Exchange's trading rules for options on 
indices. The Commission believes that the listing rules proposed by the 
Exchange are consistent with the Act. The Commission also notes that 
Alpha Index options will be listed only on specified Alpha Indexes.\22\ 
In addition, proposed changes to Rule 1009A requires that each 
underlying component's trading volume (in all markets in which the 
underlying security is traded) must have averaged at least 2,250,000 
shares per day in the preceding twelve months and on a continuing basis 
must have averaged at least 2,000,000 shares per day in the preceding 
twelve months. The Commission believes that these requirements help to 
ensure that only highly liquid securities would underlie Alpha Indexes.
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    \22\ AAPL/SPY, AMZN/SPY, CSCO/SPY, F/SPY, GE/SPY, GOOG/SPY, HPQ/
SPY, IBM/SPY, INTC/SPY, KO/SPY, MRK/SPY, MSFT/SPY, ORCL/SPY, PFE/
SPY, RIMM/SPY, T/SPY, TGT/SPY, VZ/SPY and WMT/SPY.
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    The Commission notes that the Exchange has represented that it will 
have appropriate surveillance procedures in place for trading in Alpha 
Index options. Opening price manipulation surveillance will be in place 
for the launch of options on Alpha Indexes and other existing 
surveillance patterns will be utilized to monitor trading in options on 
each Alpha Index. In addition, for surveillance purposes, the Exchange 
will have complete access to information regarding trading activity in 
the pertinent underlying securities and options thereon. Further, the 
Commission believes that the Exchange's proposed position and exercise 
limits for the Alpha Index options are appropriate and consistent with 
the Act.
    The Exchange has affirmed that it possesses the necessary systems 
capacity to support any new series that would result from the 
introduction of options on Alpha Indexes.\23\ In addition, one point 
strike price intervals for Alpha Index options should provide investors 
with flexibility in the trading of Alpha Index options and further the 
public interest by allowing investors to establish positions that are 
better tailored to meet their investment objectives.
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    \23\ The Commission notes that Alpha Index values will be 
disseminated every second over the NASDAQ OMX Global Index Data 
Service.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-Phlx-2010-176) be, and 
hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets, pursuant 
to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-3034 Filed 2-10-11; 8:45 am]
BILLING CODE 8011-01-P