Document ID: SEC-2011-0606-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-05-03T04:00Z

[Federal Register Volume 76, Number 85 (Tuesday, May 3, 2011)]
[Notices]
[Pages 24951-24954]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10653]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64348; File No. SR-Phlx-2011-58]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change To Increase the Position Limit for 
Options on the Standard and Poor's[supreg] Depositary Receipts 
(SPDRs[supreg])

April 27, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on April 18, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
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 the self-regulatory organization. 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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[[Page 24952]]

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 Phlx 
Rule 1001 (Position Limits) to increase the position limit for options 
on the Standard and Poor's Depositary Receipts (``SPDRs[supreg]'').\3\
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    \3\ ``SPDRs[supreg]'', ``Standard & Poor's[supreg]'', 
``S&P[supreg]'', ``S&P 500[supreg]'', ``Standard & Poor's 500'', and 
``500'' are trademarks of The McGraw-Hill Companies, Inc. 
SPDRs[supreg], also sometimes referred to colloquially as 
``spiders'', are exchange traded funds (``ETFs'') based on the S&P 
500[supreg] Index. Each share of the traditional SPDRs[supreg] ETF 
(SPDRs[supreg] Trust Series 1) holds a stake in the 500 stocks 
represented by the S&P 500[supreg], SPDRs[supreg], and options 
thereon, are generally used by large institutions and traders as 
bets on the overall direction of the market. They are also used by 
individual retail investors who believe in passive management (index 
investing).
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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 self-regulatory organization 
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 amend Rule 1001 to increase the 
position limit applicable to options on SPDRs[supreg], which are 
trading under the symbol SPY, from 300,000 to 900,000 contracts on the 
same side of the market.\4\
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    \4\ By virtue of Rule 1002, which is not amended by this filing, 
exercise limits on options on SPDRs[supreg] would be similar to 
position limits established in Rule 1001.
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    The Exchange began trading options on SPDRs[supreg] on the 
Exchange's electronic trading platform for options, Phlx XL, on January 
10, 2005. That year, the position limit for these options was increased 
to the current limit of 300,000 contracts on the same size of the 
market, and has remained unchanged.\5\ However, institutional and 
retail traders have greatly increased their demand for options on 
SPDRs[supreg] for hedging and trading purposes, such that these options 
have experienced an explosive gain in popularity and have been the most 
actively traded options for the last two years. For example, options on 
SPDRs[supreg] (SPY), the most actively traded options in the U.S. in 
terms of volume, traded a total of 33,341,698 contracts across all 
exchanges from March 1, 2011 through March 16, 2011. In contrast, over 
the same time period options on the Nasdaq-100 Index[supreg] Tracking 
Stock (``QQQ \SM\''),\6\ the third most actively traded options, traded 
a total of 8,730,718 contracts (less than 26.2% of the volume of 
options on SPDRs[supreg]).
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    \5\ See Securities Exchange Act Release No. 51071 (January 21, 
2005), 70 FR 4911 (January 31, 2005) (SR-Phlx-2005-05) (approval 
order increasing position and exercise limits for options on 
SPDRs[supreg] from 75,000 to 300,000 contracts on the same side of 
the market) (the ``last position increase order''). See also 
Securities Exchange Act Release Nos. 51043 (January 14, 2005), 70 FR 
3402 (January 24, 2005) (SR-Amex-2005-06) (approval order); 51041 
(January 14, 2005), 70 FR 3408 (January 24, 2005) (SR-CBOE-2005-06) 
(approval order); and 51042 (January 14, 2005), 70 FR 3412 (January 
24, 2005) (SR-ISE-2005-05) (approval order).
    \6\ QQQ \SM\ options were formerly traded under the ticker 
symbol QQQQ \SM\. QQQ \SM\, Nasdaq-100[supreg], Nasdaq-100 
Index[supreg], Nasdaq[supreg], Nasdaq-100 Index Tracking Stock \SM\, 
and are trademarks or service marks of The Nasdaq Stock Market, Inc. 
(``Nasdaq'').
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    Currently, SPY options have a position limit of only 300,000 
contracts on the same side on the market while the significantly 
lesser-volume QQQSM options, which are comparable to SPY 
options, have a position limit of 900,000 contracts on the same side of 
the market. The Exchange believes that SPY options should, like options 
on QQQSM, have a position limit of 900,000 contacts. Given 
the increase in volume and continuous unprecedented demand for trading 
options on SPDRs[supreg], the Exchange believes that the current 
position limit of 300,000 contracts \7\ is entirely too low and 
inadequate and is a deterrent to the optimal use of the product for 
hedging and trading purposes. There are multiple reasons to increase 
the position limit for SPY options.
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    \7\ Rule 1001.
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    First, traders have informed the Exchange that the current SPY 
option position limit of 300,000 contracts, which has remained flat for 
more than five years despite the tremendous trading volume increase, is 
no longer sufficient for optimal trading and hedging purposes. SPY 
options are, as noted, used by large institutions and traders as a 
means to invest in or hedge the overall direction of the market. 
Second, options on SPDRs[supreg] are 1/10th the size of options on the 
S&P 500[supreg] Index, traded under the symbol SPX. Thus, a position 
limit of 300,000 contracts in options on SPDRs[supreg] is equivalent to 
a 30,000 contract position limit in options on SPX.\8\ Traders who 
trade options on SPDRs[supreg] to hedge positions in SPX options (and 
the SPDRs[supreg] ETF based on SPX, SPDRs[supreg] Trust Series 1) have 
indicated on several occasions that the current position limit for 
options on SPDRs[supreg] is simply too restrictive,\9\ which may 
adversely affect their (and the Exchange's) ability to provide 
liquidity in this product. And third, the products that are perhaps 
most comparable to options on SPDRs[supreg], namely options on 
QQQSM, are subject to a 900,000 contract position limit on 
the same side of the market.\10\ This has, in light of the huge run-up 
in SPY option trading making them the number one nationally-ranked 
option in terms of volume, resulted in a skewed and unacceptable SPY 
option position limit. Specifically, the position limit for options on 
SPDRs[supreg] at 300,000 contracts is but 33% of the position limit for 
the less active options on QQQSM at 900,000 contracts.\11\ 
The Exchange proposes that options on SPDRs[supreg] similarly be 
subject to a position limit of 900,000 contracts.\12\
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    \8\ Chicago Board Options Exchange, which lists and trades SPX 
options, has established that there is no position limit on SPX 
options. See CBOE Rule 24.4 and Securities Exchange Act Release No. 
44994 (October 26, 2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-
2001-22) (order approving permanent elimination of SPX options 
position limit).
    \9\ See supra note 3.
    \10\ See Rule 1001 and Securities Exchange Act Release No. 51322 
(March 4, 2005), 70 FR 12260 (March 11, 2005) (SR-Phlx-2005-17) 
(notice of filing and immediate effectiveness).
    \11\ Similarly to options on SPDRs[supreg] (SPY) being 1/10th 
the size of options on the related index S&P 500[supreg]Index (SPX), 
so options on the Nasdaq-100 Index[supreg] Tracking Stock 
(QQQSM) are 1/10th the size of options on the related 
index NASDAQ-100 Index (NDX). The position limit for 
QQQSM options and its related index NDX have a comparable 
relationship to that of SPY options and SPX. That is, the position 
limit for options on QQQSM is 900,000 contracts and there 
is no positions limit for NDX options. See supra note 9 and 
Securities Exchange Act Release No. 52650 (October 21, 2005), 70 FR 
62147 (October 28, 2005) (SR-CBOE-2001-41) (order approving 
elimination of NDX options position limit).
    \12\ The position limit for IWM options on yet another large ETF 
entitled iShares Russell 2000 Index Fund, (which options have 
significantly less trading volume than the number one ranked SPY 
options, as also the QQQSM options) are set at 500,000 
contracts.
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    The volume and notional value of options on SPDRs[supreg] and 
QQQSM, as well as the volume and market capitalizations of 
their underlying ETFs, are set forth below:

[[Page 24953]]

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                                                                               Option notional   Current options
 Option nat'l rank    Option  symbol         Name of        Option ADV 2010   value * December   position limit
       2010                               underlying ETF                          31, 2010       position limit
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1.................  SPY...............  SPDR Trust Series  3,625,904          $177,823,76       300,000
                                         1.                 contracts.         million.          contracts.
4.................  QQQ...............  Powershares QQQ    963,502 contracts  $27,141,91        900,000
                                         Trust.                                million.          contracts.
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* Notional value is calculated as follows: OI x Close x 100; where OI = underlying security's open interest (in
  contracts), Close = closing price of underlying security on 12/31/2010.

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                                                                           ETF market
  ETF nat'l rank 2010        Name of ETF            ETF ADV 2010         capitalization        ETF avg dollar
                                                                        December 31, 2010          volume
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1.....................  .....................  SPDR Trust Series 1..  210,232,241 shares..  $90,280.71 million.
3.....................  Powershares QQQ Trust  85,602,200 shares....  $23,564.8 million...  $3,593 million .
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    The options reporting requirement would continue unabated. Thus, 
the Exchange would require that, just like for options on 
QQQSM, each member or member organization that maintains a 
position in SPDRs[supreg] options on the same side of the market, for 
its own account or for the account of a customer, must report certain 
information. This information would include, but would not be limited 
to, the option position, whether such position is hedged and if so, a 
description of the hedge and if applicable, the collateral used to 
carry the position. Exchange specialists and Registered Options Traders 
(``ROTs'') \13\ would continue to be exempt from this reporting 
requirement as specialist and ROT information can be accessed through 
the Exchange's market surveillance systems. In addition, the general 
reporting requirement for customer accounts that maintain an aggregate 
position of 200 or more option contracts (``large positions'') would 
remain at this level for options on SPDRs[supreg].\14\
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    \13\ For discussion regarding specialists and ROTs, see Rules 
1020 and 1014(b)(ii), respectively.
    \14\ For reporting requirements, see Rule 1003.
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    The Exchange believes that position and exercise limits, at their 
current levels, no longer serve their stated purpose. There has been a 
steadfast and significant increase over the last decade in the overall 
volume of exchange-traded options; position limits, however, have not 
kept up with the volume. Part of this volume is attributable to a 
corresponding increase in the number of overall market participants, 
which has, in turn, brought about additional depth and increased 
liquidity in exchange-traded options.\15\
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    \15\ The Commission has previously observed that: Since the 
inception of standardized options trading, the options exchanges 
have had rules imposing limits on the aggregate number of options 
contracts that a member or customer could hold or exercise. These 
rules are intended to prevent the establishment of options positions 
that can be used or might create incentives to manipulate or disrupt 
the underlying market so as to benefit the options position. In 
particular, position and exercise limits are designed to minimize 
the potential for mini-manipulations and for corners or squeezes of 
the underlying market. In addition such limits serve to reduce the 
possibility for disruption of the options market itself, especially 
in illiquid options classes. See Securities Exchange Act Release No. 
39489 (December 24, 1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-
11) (order approving).
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    As the anniversary of listed options trading approaches its 
fortieth year, the Exchange believes that the existing surveillance 
procedures and reporting requirements at Phlx, other options exchanges, 
and at the several clearing firms are capable of properly identifying 
unusual and/or illegal trading activity. In addition, routine oversight 
inspections of the Exchange's regulatory programs by the Commission 
have not uncovered any material inconsistencies or shortcomings in the 
manner in which the Exchange's market surveillance is conducted. These 
procedures utilize daily monitoring of market movements via automated 
surveillance techniques to identify unusual activity in both options 
and underlying stocks.\16\
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    \16\ These procedures have been effective for the surveillance 
of SPY options trading and will continue to be employed.
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    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\17\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
Moreover, the previously noted Rule 1003 requirement that members file 
reports with the Exchange for any customer who held aggregate large 
long or short positions of any single class for the previous day will 
continue to serve as an important part of the Exchange's surveillance 
efforts.
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    \17\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns that a member or its customer may try to maintain an 
inordinately large unhedged position in an option, particularly on 
SPDRs[supreg]. Current margin and risk-based haircut methodologies 
serve to limit the size of positions maintained by any one account by 
increasing the margin and/or capital that a member must maintain for a 
large position held by itself or by its customer. It should also be 
noted that the Exchange has the authority under Exchange Rule 722(c)(3) 
to impose a higher margin requirement upon a member or member 
organization when the Exchange determines a higher requirement is 
warranted. In addition, the Commission's net capital rule, Rule 15c3-1 
under the Act,\18\ imposes a capital charge on members to the extent of 
any margin deficiency resulting from the higher margin requirement.
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    \18\ 17 CFR 240.15c3-1.
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    Finally, the Exchange believes that while position limit on options 
on QQQsSM, which as noted are similar to options on 
SPDRs[supreg], has been gradually expanded from 75,000 contracts to the 
current level of 900,000 contracts in 2005, there have been no adverse 
affects on the market as a result of this position limit increase. 
Likewise, there have been no adverse affects on the market from 
expanding the position limit for options on SPDRs[supreg] from 75,000 
contracts to the current level of 300,000 contracts in 2005.
    The Exchange believes that restrictive option position limits 
prevent large customers, such as mutual funds and pension funds, from 
using options to gain meaningful exposure to and hedging protection 
through the use of options on SPDRs[supreg]. This can result in lost 
liquidity in both the options market and the equity market. The 
proposed position limit increase will remedy this situation to the 
benefit of large as well as retail traders, investors, and public 
customers. The Exchange believes that increasing position and exercise 
limits for options on would lead to a more liquid and competitive 
market environment for options on SPDRs[supreg] that would benefit 
customers interested in this product.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b)

[[Page 24954]]

of the Act \19\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \20\ 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 is 
proposing to expand the position limit on options on SPDRs[supreg]. The 
Exchange believes that this proposal will be beneficial to large market 
makers (which generally have the greatest potential and actual ability 
to provide liquidity and depth in the product), as well as retail 
traders, investors, and public customers.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 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.

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 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 self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 No. SR-Phlx-2011-58 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-Phlx-2011-58. 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 
available publicly. All submissions should refer to File Number SR-
Phlx-2011-58 and should be submitted on or before May 24, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10653 Filed 5-2-11; 8:45 am]
BILLING CODE 8011-01-P