Document ID: SEC-2012-1805-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2012-11-07T05:00Z

[Federal Register Volume 77, Number 216 (Wednesday, November 7, 2012)]
[Notices]
[Pages 66904-66907]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27131]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68132; File No. SR-Phlx-2012-126]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To List and 
Trade Option Contracts Overlying 10 Shares of Certain Securities

November 1, 2012.
    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 October 19, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``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 proposes to list and trade option contracts overlying 
10 shares of a security (``Mini Options'').
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
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 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 proposed rule change is to amend Rule 1001 
(Position Limits), Rule 1012 (Series of Options Open for Trading) and 
1033 (Bids and Offers--Premium) to list and trade Mini Options 
overlying five (5) high-priced securities for which the standard 
contract overlying the same security exhibits significant liquidity. 
Specifically, the Exchange proposes to list Mini Options on SPDR S&P 
500 (``SPY''), Apple, Inc. (``AAPL''), SPDR Gold Trust (``GLD''), 
Google Inc. (``GOOG'') and Amazon.com Inc. (``AMZN'').\3\ The Exchange 
believes that this proposal would allow investors to select among 
options on various high-priced and actively traded securities, each 
with a unit of trading ten times lower than those of the regular-sized 
options contracts, or 10 shares.
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    \3\ These issues were selected because they are priced greater 
than $100 and are among the most actively traded issues, in that the 
standard contract exhibits average daily volume (``ADV'') over the 
previous three calendar months of at least 45,000 contracts, 
excluding LEAPS and FLEX series. The Exchange notes that any 
expansion of the program would require that a subsequent proposed 
rule change be submitted to the Commission.
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    For example, with Apple Inc. (``AAPL'') trading at $605.85 on March 
21, 2012, ($60,585 for 100 shares underlying a standard contract), the 
605 level call expiring on March 23 was trading at $7.65. The cost of 
the standard contract overlying 100 shares would be $765, which is 
substantially higher in notional terms than the average equity option 
price of $250.89.\4\ Proportionately equivalent mini-options contracts 
on AAPL would provide investors with the ability to manage and hedge 
their portfolio risk on their underlying investment, at a price of 
$76.50 per contract. In addition, investors who hold a position in AAPL 
at less than the round lot size would still be able to avail themselves 
of

[[Page 66905]]

options to manage their portfolio risk. For example, the holder of 50 
shares of AAPL could write covered calls for five mini-options 
contracts. The table below demonstrates the proposed differences 
between a mini-options contract and a standard contract with a strike 
price of $125 per share and a bid or offer of $3.20 per share:
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    \4\ A high priced underlying security may have relatively 
expensive options, because a low percentage move in the share price 
may mean a large movement in the options in terms of absolute 
dollars. Average non-FLEX equity option premium per contract January 
1-December 31, 2011. See http://www.theocc.com/webapps/monthly-volume-reports?reportClass=equity.

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                                        Standard              Mini
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Share Deliverable Upon Exercise..  100 shares........  10 shares
Strike Price.....................  125...............  125
Bid/Offer........................  3.20..............  3.20
Premium Multiplier...............  $100..............  $10
Total Value of Deliverable.......  $12,500...........  $1,250
Total Value of Contract..........  $320..............  $32
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    The Exchange currently lists and trades standardized option 
contracts on a number of equities and Exchange-Traded Funds (``ETFs'') 
each with a unit of trading of 100 shares. Except for the difference in 
the number of deliverable shares, the proposed Mini Options would have 
the same terms and contract characteristics as regular-sized equity and 
ETF options, including exercise style. All existing Exchange rules 
applicable to options on equities and ETFs would apply to Mini Options, 
except with respect to position and exercise limits and hedge 
exemptions to those position limits, which would be tailored for the 
smaller size. Pursuant to proposed amendments to Rule 1001, position 
limits applicable to a regular-sized option contract would also apply 
to the Mini Options on the same underlying security, with 10 Mini 
Option contracts counting as one regular-sized contract. Positions in 
both the regular-sized option contract and Mini Options on the same 
security will be combined for purposes of calculating positions. 
Further, hedge exemptions will apply pursuant to Rule 1001, Commentary 
.07, which the Exchange proposes to revise to provide that 10 (as 
opposed to 100) shares of the underlying security is the appropriate 
hedge for Mini Options and to make clear that the hedge exemptions 
apply to the position limits set forth in Rule 1001(a) and Rule 1001, 
Commentary .02(i).\5\
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    \5\ Phlx Rule 1002, Exercise Limits, refers to exercise limits 
that correspond to aggregate long positions as described in Phlx 
Rule 1001. Today, the position limits established in a given option 
under Rule 1001 is also the exercise limit for such option. Thus, 
although the proposed rule change would not amend the text of Rule 
1002 (Exercise Limits) itself, the proposed amendment to Rule 1001 
(Position Limits) would have a corresponding effect on the exercise 
limits.
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    Also, of note, NYSE Arca, Inc. (``NYSE Arca'') lists and trades 
option contracts overlying a number of shares other than 100.\6\ 
Moreover, the concept of listing and trading parallel options products 
of reduced values and sizes on the same underlying security is not 
novel. For example, parallel product pairs on a full-value and reduced-
value basis are currently listed on the S&P 500 Index (``SPX'' and 
``XSP,'' respectively), the Nasdaq 100 Index (``NDX'' and ``MNX,'' 
respectively) and the Russell 2000 Index (``RUT'' and ``RMN,'' 
respectively).
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    \6\ See Securities Exchange Act Release No. 44025 (February 28, 
2001), 66 FR 13986 (March 8, 2001) (approving SR-PCX-01-12).
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    The Exchange believes that the proposal to list Mini Options will 
not lead to investor confusion. There are two important distinctions 
between Mini Options and regular-sized options that are designed to 
ease the likelihood of any investor confusion. First, the premium 
multiplier for the proposed Mini Options will be 10, rather than 100, 
to reflect the smaller unit of trading. To reflect this change, the 
Exchange proposes to add Rule 1033(b)(iii) which notes that bids and 
offers for an option contract overlying 10 shares would be expressed in 
terms of dollars per 1/10th part of the total value of the contract. 
Thus, an offer of ``.50'' shall represent an offer of $5.00 on an 
option contract having a unit of trading consisting of 10 shares. 
Second, the Exchange intends to designate Mini Options with different 
trading symbols than those designated for the regular-sized contracts. 
For example, while the trading symbol for regular option contracts for 
Apple, Inc. is AAPL, the Exchange proposes to adopt AAPL7 as the 
trading symbol for Mini Options on that same security.
    The Exchange proposes to add a Commentary .13 to Rule 1012 to 
reflect that strike prices for Mini Options shall be set at the same 
level as for regular options. For example, a call series strike price 
to deliver 10 shares of stock at $125 per share has a total deliverable 
value of $1,250, and the strike price will be set at 125. Further, 
pursuant to proposed new Commentary .13 to Rule 1012, the Exchange 
proposes to not permit the listing of additional series of Mini Options 
if the underlying is trading at $90 or less to limit the number of 
strikes once the underlying is no longer a high priced security. The 
Exchange proposes a $90.01 minimum for continued qualification so that 
additional series of Mini Options that correspond to standard strikes 
may be added even though the underlying has fallen slightly below the 
initial qualification standard. In addition, the underlying security 
must be trading above $90 for five consecutive days before the listing 
of Mini Option contracts in a new expiration month. This restriction 
will allow the Exchange to list strikes in Mini Options without 
disruption when a new expiration month is added even if the underlying 
has had a minor decline in price. The same trading rules applicable to 
existing equity and ETF options would apply, including Market Maker 
obligations, to Mini Options.\7\
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    \7\ See Rule 1014.
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    The Exchange notes that by listing the same strike price for Mini 
Options as for regular options, the Exchange seeks to keep intact the 
long-standing relationship between the underlying security and an 
option strike price thus allowing investors to intuitively grasp the 
option's value, i.e., option is in the money, at the money or out of 
the money. The Exchange believes that by not changing anything but the 
multiplier and the option symbol, as discussed above, retail investors 
will be able to grasp the distinction between regular option contracts 
and Mini Options. The Exchange notes that The Options Clearing 
Corporation (``the OCC'') Symbology is structured for contracts that 
have a deliverable of other than 100 shares to be designated with a 
numeric added to the standard trading symbol. Further, the Exchange 
believes that the contract characteristics of Mini Options are 
consistent with the terms of the Options Disclosure Document.
    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 the 
listing and trading

[[Page 66906]]

of Mini Options. The Exchange has further discussed the proposed 
listing and trading of Mini Options with the OCC, which has represented 
that it is able to accommodate the proposal. In addition, the Exchange 
would file a proposed rule change to adopt transaction fees specific to 
Mini Options. The Exchange notes that the current Pricing Schedule will 
not apply to the trading of mini-options contracts. The Exchange will 
not commence trading of mini-option contracts until specific fees for 
mini-options contracts trading have been filed with the Commission.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Securities and Exchange Act of 
1934 (``Exchange Act''),\8\ in general, and with Section 6(b)(5) of the 
Exchange Act,\9\ in particular, in that the proposal is designed to 
prevent fraudulent and manipulative acts and practices, 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.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that investors would benefit from the 
introduction and availability of Mini Options by making options on high 
priced securities more readily available as an investing tool at more 
affordable prices, particularly for average retail investors, who 
otherwise may not be able to participate in trading options on high 
priced securities. The Exchange intends to adopt a different trading 
symbol to distinguish Mini Options from its currently listed option 
contracts and therefore, eliminate investor confusion with respect to 
product distinction. Moreover, the proposed rule change is designed to 
protect investors and the public interest by providing investors with 
an enhanced tool to reduce risk in high priced securities. In 
particular, Mini Options would provide retail customers who invest in 
SPY, AAPL, GLD, GOOG and AMZN in lots of less than 100 shares with a 
means of protecting their investments that is currently only available 
to those who have positions of 100 shares or more. Further, the 
proposed rule change is limited to just five high priced securities to 
ensure that only securities that have significant options liquidity and 
therefore, customer demand, are selected to have Mini Options listed on 
them.

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. To the contrary, the Exchange 
believes that offering these products on Phlx similar to other 
exchanges will provide investors with various venues in which to trade 
Mini Options.

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: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) 
thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with 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 fulfilled this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange requests that the Commission waive 
the 30-day operative delay so that it can list and trade the proposed 
mini options as soon as it is able.\12\ The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest.\13\ The Commission notes the 
proposal is substantively identical to a proposal that was recently 
approved by the Commission, and does not raise any new regulatory 
issues.\14\ For these reasons, the Commission designates the proposed 
rule change as operative upon filing.
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    \12\ The Commission notes that the Exchange's current Pricing 
Schedule will not apply to the trading of mini-options contracts, 
and the Exchange will not commence trading of mini-option contracts 
until specific fees for mini-options contracts trading have been 
filed with the Commission.
    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \14\ See Securities Exchange Act Release No. 67948 (September 
28, 2012), 77 FR 60735 (October 4, 2012) (SR-NYSEArca-2012-64 and 
SR-ISE-2012-58).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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 email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2012-126 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-2012-126. This file 
number should be included on the subject line if email 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

[[Page 66907]]

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 10:00 a.m. and 3:00 p.m. Copies of 
the 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-2012-126 and should be submitted on or before 
November 28, 2012.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27131 Filed 11-6-12; 8:45 am]
BILLING CODE 8011-01-P