Document ID: SEC-2011-0720-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-05-18T04:00Z

[Federal Register Volume 76, Number 96 (Wednesday, May 18, 2011)]
[Notices]
[Pages 28836-28838]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12192]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64480; File No. SR-Phlx-2011-65]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASDAQ OMX PHLX LLC Regarding Opening Index Option Months and 
Series

May 12, 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 May 6, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 clarify 
that the Exchange will open at least one expiration month and one 
series for each class of index options open for trading on the 
Exchange; and that the Exchange may open additional series of index 
options under certain circumstances. The proposed change is based 
directly on the recently approved rule of another options exchange, 
namely Chapter IV, Section 6 of the NASDAQ Options Market, as well as 
on Rule 1012 (Series of Options Open for Trading) of the Exchange.
    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, on the Commission's 
Web site at http://www.sec.gov, 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 this proposed rule change is to amend Exchange Rule 
1101A to indicate that the Exchange will open at least one expiration 
month and one series for each class of index options open for trading 
on the Exchange; and that the Exchange may open additional series of 
index options under certain circumstances. The proposed change is based 
directly on the recently approved rules of another options exchange, 
namely Chapter IV, Sections 6 and 8 of the NASDAQ Options Market 
(``NOM''), as well as on Rule 1012 of the Exchange.\3\
---------------------------------------------------------------------------

    \3\ NOM and the Exchange are each self-regulatory organizations 
(``SROs'') that operate as independent options exchanges within the 
NASDAQ OMX Group.
---------------------------------------------------------------------------

    In 2008, the Commission approved the establishment of NOM and rules 
pertaining thereto \4\ that, among others, included NOM Chapter IV, 
Section 6 regarding series of options contracts open for trading \5\ 
and Section 8 regarding long-term options contracts. NOM Sections 6 and 
8 generally apply to options that overlay single-stocks or Exchange-
Traded Funds and similar products.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and NASDAQ-
2007-080) (order approving rules for trading of options on the 
NASDAQ Options Market, including Chapter IV, Sections 6 and 8).
    \5\ NOM Chapter IV, Sec 6 states, in relevant part: (b) At the 
commencement of trading on NOM of a particular class of options, NOM 
will open a minimum of one (1) series of options in that class. The 
exercise price of the series will be fixed at a price per share, 
relative to the underlying stock price in the primary market at 
about the time that class of options is first opened for trading on 
NOM.
    (c) Additional series of options of the same class may be opened 
for trading on NOM when Nasdaq deems it necessary to maintain an 
orderly market, to meet Customer demand or when the market price of 
the underlying stock moves more than five strike prices from the 
initial exercise price or prices. The opening of a new series of 
options shall not affect the series of options of the same class 
previously opened. New series of options on an individual stock may 
be added until the beginning of the month in which the options 
contract will expire. Due to unusual market conditions, Nasdaq, in 
its discretion, may add a new series of options on an individual 
stock until five (5) business days prior to expiration.
---------------------------------------------------------------------------

    In 2011, the Exchange filed an immediately effective proposal at 
SR-Phlx-2011-04 to conform its rule 1012 regarding the listing of 
months and series of options on stock or Exchange Traded Fund Shares 
(``ETFs'') that are approved for listing and trading on the Exchange to 
the equivalent NOM rules at Chapter IV, Section 6 and Section 8.\6\ By 
SR-Phlx-2011-04, the Exchange harmonized its Rule 1012 regarding 
opening a minimum of one option expiration month and series for trading 
and adding new series with similar NOM procedures.\7\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 63700 (January 11, 
2011), 76 FR 2931 (January 18, 2011) (SR-Phlx-2011-04) (notice of 
filing and immediate effectiveness conforming Phlx Rule 1012 and NOM 
Chapter IV, Sections 6 and 8).
    \7\ Rule 1012 states, in relevant part: (A) At the commencement 
of trading on the Exchange of a particular class of stock or 
Exchange-Traded Fund Share options, the Exchange shall open a 
minimum of one expiration month and series for each class of options 
open for trading on the Exchange.
    (B) Additional series of stock or Exchange-Traded Fund Share 
options of the same class 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 
stock moves more than five strike prices from the initial exercise 
price or prices. The opening of a new series of options shall not 
affect the series of options of the same class previously opened. 
New series of options on an individual stock may be added until the 
beginning of the month in which the options contract will expire. 
Due to unusual market conditions, the Exchange, in its discretion, 
may add a new series of options on an individual stock until five 
(5) business days prior to expiration.
---------------------------------------------------------------------------

    The Exchange now proposes to similarly revise its Rule 1101A

[[Page 28837]]

regarding the listing of months and series of options on index 
products. The rule changes proposed by the Exchange to Phlx Rule 
1101A(b) are, to the extent practicable, identical to specified rule 
provisions in Phlx Rule 1012(a) and NOM Chapter IV, Section 6. The 
Exchange believes that its proposal is proper, and indeed desirable, in 
light of its objective to continue to harmonize the listing rules for 
options products offered for trading on the Exchange, particularly in 
light of the symbiotic hedging and trading relationship between stock 
index options and other option classes such as stock and ETF options.
    Rule 1101A has developed in the latter portion of the last century 
to discuss, among other things, price intervals for index options, 
quarterly options and short term options, and when the Exchange may 
open months and series (including long-term series) in classes of index 
options that have been approved for listing and trading on the 
Exchange. Rule 1101A(b) currently indicates how the Exchange initially 
fixes expiration months and series in these options.\8\ The Exchange 
now conforms portions of its older Rule 1101A(b) to its recently-
updated Rule 1012 as based on NOM Chapter IV, Section 6.
---------------------------------------------------------------------------

    \8\ Rule 1101A(b) states, in relevant part: (b) After a 
particular class of stock index options has been approved for 
listing and trading on the Exchange, the Exchange shall from time to 
time open for trading series of options therein. Within each 
approved class of stock index options, the Exchange may open for 
trading series of options expiring in consecutive calendar months 
(``consecutive month series''), as provided in subparagraph (i) of 
this paragraph (b), series of options expiring at three-month 
intervals (``cycle month series''), as provided in subparagraph (ii) 
of this paragraph (b) and/or series of options having up to thirty-
six months to expiration (``long-term options series'') of this 
paragraph (b). Prior to the opening of trading in any series of 
stock index options, the Exchange shall fix the expiration month and 
exercise price of option contracts included in each such series.
    Subsections (b)(i) and (ii) discuss consecutive month series and 
cycle month series, respectively. Subsection (b)(iii) discusses 
long-term option series.
---------------------------------------------------------------------------

    First, the Exchange proposes to state in Rule 1101A(b) that at the 
commencement of trading on the Exchange of a particular class of stock 
index options, the Exchange will open at least one expiration month and 
series for each class of options open for trading on the Exchange, 
thereby replacing the current language in subsection (b) about opening 
index options. The language change proposed by the Exchange in Rule 
1101A(b) regarding one expiration month and series is taken directly 
(and is practically verbatim) from Exchange Rule 1012(a)(i)(A), as also 
from NOM Chapter IV, Section 6(b) and (e). The Exchange notes that the 
proposed change affords additional flexibility so that multiple option 
classes and series are not mandated if they are not needed, thereby 
potentially reducing the proliferation of classes and series.
    Second, in light of the proposed language in Rule 1101A(b) 
regarding opening one month and series, the Exchange is deleting all 
inapposite language in Rule 1101A. As such, reference to consecutive 
month series in subsection (b)(i) and to cycle month series in 
subsection (b)(ii) is eliminated. Similarly, reference to consecutive 
and cycle month series is eliminated from subsection (b)(iii). This is 
analogous to what the Exchange did when it conformed its Rule 1012 and 
NOM Chapter IV, Section 6.\9\
---------------------------------------------------------------------------

    \9\ In the filing that conformed Rule 1012 with NOM Chapter IV, 
Section 6, for example, the Exchange deleted reference to the cycle 
month concept. See supra note 6.
---------------------------------------------------------------------------

    Third, the Exchange proposes to add new language in Rule 
1101A(b)(i) to state that it may open additional option series when the 
Exchange deems it necessary to maintain an orderly market, to meet 
customer demand or when the market price of the underlying stock moves 
more than five strike prices from the initial exercise price or prices. 
New series of options may be added until the beginning of the month in 
which the options contract will expire. Additionally, due to unusual 
market conditions, the Exchange, in its discretion, may add a new 
series of options on an individual stock until five (5) business days 
prior to expiration. The language for this proposed rule change is 
likewise taken directly Exchange Rule 1012(a)(i)(B), as also from NOM 
Chapter IV, Section 6(c).
    Fourth, the Exchange proposes to add new language into Rule 
1101A(b)(i) stating that the opening of a new series of options shall 
not affect the series of options of the same class previously opened. 
The language of this proposal is taken directly from Exchange Rule 
1012(a)(i)(B) (and is similar to language present in NOM Chapter IV, 
Section 6(c)). Moreover, the Exchange notes that similar language is 
present in subsections of Rule 1101A that were added more recently, 
such as subsection (b)(v)(D) regarding the Quarterly Options Series 
Program and subsection (b)(vi)(D) regarding the Short Term Options.\10\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release Nos. 62296 (June 15, 
2010), 75 FR 35115 (June 21, 2010) (SR-Phlx-2010-84) (notice of 
filing and immediate effectiveness regarding Short Term Options); 
and 55301 (February 15, 2007), 72 FR 8238 (February 23, 2007) (SR-
Phlx-2007-08) (notice of filing and immediate effectiveness 
regarding Quarterly Option Series).
---------------------------------------------------------------------------

    The Exchange notes that all of the language proposed in this filing 
is similar to language in current Phlx Rule 1012 and NOM Chapter IV, 
Section 6, and to the extent practicable is taken verbatim 
therefrom.\11\ Moreover, the proposed language has been in continual 
use on the Exchange since the beginning of 2011 and on NOM for over 
three years.\12\ Finally, the proposed language is fundamental to 
achieving harmonization of Exchange rules across option categories used 
by market participants for trading and hedging on the Exchange.
---------------------------------------------------------------------------

    \11\ Moreover, because certain proposed language, such as that 
regarding additional series of options, is not currently elucidated 
in Rule 1101A, the rule is supplemented to set forth addition of new 
series to an existing option class up to five business days prior to 
expiration. The Exchange has been following the practice of not 
adding new series of options on individual stocks within five days 
of expiration.
    \12\ See supra notes 4 and 6.
---------------------------------------------------------------------------

    For example, a retail (e.g., individual) investor long Apple (APPL) 
call options expiring in October 2011 may wish to hedge his APPL 
position with a corresponding position in October put options of the 
Alpha Index \13\ AAPL/SPY (AVSPY) that quantifies the return of AAPL 
stock vs. the ETF SPY. Or, a market participant with a position in 
options on Hovnanian Enterprises, Inc. (HOV) may wish to hedge his 
position with options on a proprietary index traded on the Exchange 
such as the PHLX Housing Sector\SM\ (HGX). Clearly, Exchange market 
participants engage in hedging and trading opportunities across various 
option classes listed on the Exchange, and seek the most efficient 
strategies. These strategies require the ability to closely coordinate 
the expiration dates of the options months and series involved. Because 
Exchange listing rules regarding months and series of options on 
indexes such as AVSPY and HGX currently are not the same as equivalent 
listing rules for single-stock options such as AAPL and HOV, however, 
the above-described hedges likely could not be done at all, let alone 
efficiently. The Exchange's proposal would remedy this situation.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 63860 (February 7, 
2011), 76 FR 7888 (February 11, 2011)(SR-Phlx-2010-176)(order 
approving NASDAQ OMX Alpha Indexes).
---------------------------------------------------------------------------

    The Exchange believes that harmonization of Exchange rules and the 
rules of the options exchanges under the NASDAQ OMX umbrella would 
allow more precise tailoring of hedging and trading opportunities and 
would thereby be beneficial to the Exchange and its traders, market 
participants, and public investors in general.

[[Page 28838]]

    In terms of housekeeping changes, the Exchange proposes to make a 
non-substantive change that amends subsection (b) of Rule 1101A to 
``60'' months. This is done to conform subsection (b) with subsection 
(b)(3), which discusses long-term options series having up to 60 months 
to expiration.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \14\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \15\ 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 
proposes to clarify that it will open at least one expiration month and 
one series for each class of index options open for trading on the 
Exchange, and under what circumstances it may open additional series of 
index options, and thereby harmonize its rules and the rules of Phlx 
and NOM. The Exchange believes that this would allow better hedging and 
trading opportunities and efficiency, and would be beneficial to the 
Exchange and its traders, market participants, and public investors in 
general.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 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-Phlx-2011-65 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-2011-65. 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-Phlx-2011-65 and should be 
submitted on or before June 8, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-12192 Filed 5-17-11; 8:45 am]
BILLING CODE 8011-01-P