Document ID: SEC-2010-1996-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2010-12-27T05:00Z

[Federal Register Volume 75, Number 247 (Monday, December 27, 2010)]
[Notices]
[Pages 81320-81323]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32382]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63575; File No. SR-Phlx-2010-176]

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

December 17, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on December 10, 2010, NASDAQ OMX PHLX LLC (``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, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend certain of its rules to provide 
for the listing and trading of options on NASDAQ OMX Alpha Indexes \SM\ 
(the ``Alpha Indexes'') on the Exchange's electronic trading platform 
for options, Phlx XL.\5\
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ This proposal refers to ``PHLX XL'' as the Exchange's 
automated options trading system. In May 2009 the Exchange enhanced 
the system and adopted corresponding rules referring to the system 
as ``Phlx XL II.'' See Securities Exchange Act Release No. 59995 
(May 28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
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    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 permit the Exchange 
to list and trade cash-settled, European-style options on Alpha 
Indexes, a family of indexes developed by NASDAQ OMX Group, Inc. 
(``Nasdaq''). Alpha Indexes measure relative total returns of one 
underlying 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'').\6\ 
Thus, an Alpha Index measures the relative total return of one stock 
and one ETF. 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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    \6\ Total return measures performance (rate of return) of price 
appreciation plus dividends over a given evaluation period.
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    At this time the Exchange is requesting Commission approval 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 will not list Alpha 
Index options on other Alpha Pairs without filing a proposed rule 
change seeking Commission approval for the listing and trading of any 
such additional Alpha Pairs.
Index Design and 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. 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. Each Alpha Index will initially be set at 100.00.
    In order 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. For example, to calculate the daily total 
return today, the previous 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, using simple rounding, 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 (e.g., 0.0156 plus 1 equals 1.0156) 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.
    The following example illustrates the Alpha Index calculation for 
ABC stock as against SPY.\7\
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    \7\ Daily total return values and Alpha Index values will be 
updated based upon prices of each reported transaction in the 
primary listing market. In the example below, closing prices are 
used simply for purposes of illustration.
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    Step 1.) For both ABC and SPY, the previous trading day's closing 
market price is subtracted from today's closing market price with the 
result added to any dividend declared today as the ``ex-dividend'' 
date. For example, today's closing price for ABC (214.01) minus the 
previous day's closing price (210.73) equals 3.28. Today is not an ex-
dividend date for ABC; therefore, nothing is added to 3.28. Similarly, 
today's closing price for SPY (113.33) minus the previous trading day's 
closing price (111.44) equals 1.89. Today is not an ex-dividend date 
for SPY; therefore, nothing is added to 1.89.
    Step 2.) The step one result is divided by the previous trading 
day's closing market price and the new result is rounded, using simple 
rounding, to four decimal places to yield the daily total return. For 
ABC, 3.28 would be divided

[[Page 81321]]

by 210.73 to yield a daily total return of 0.0156. Similarly, for SPY, 
1.89 would be divided by 111.44 and yield a daily total return of 
0.0170.
    Step 3.) The step two results above are added to the whole number 
one. For ABC, the daily total return of 0.0156 would be added to 1 for 
a result of 1.0156. For SPY the daily total return of 0.0170 would be 
added to 1 for a result of 1.0170.
    Step 4.) In order to calculate the Alpha Index, the 1.0156 ABC 
figure is divided by the 1.0170 SPY figure and then multiplied by the 
previous trading day's closing Alpha Index value. Thus, assuming in the 
example that the previous trading day's closing Alpha Index value was 
100.00, today's closing Alpha Index value would be 99.86 (1.0156/1.0170 
x 100.00 = 99.86). The 99.86 index level reflects that ABC's total 
return performance today versus yesterday was -.14% relative to SPY.
    In the event 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 will be immediately settled at the last disseminated price of 
that Alpha Index. In the event 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), which also disseminates 
the NASDAQ-100 index, the spot values for the PHLX currency options and 
the PHLX sector indexes.\8\
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    \8\ See http://www.nasdaqtrader.com/Trader.aspx?id=globalindexDS.
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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 listing an Alpha 
Index option, options on each underlying component will also be listed 
and traded on the Exchange and will meet the requirements of Rule 1009, 
Criteria for Underlying Securities. Additionally, 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. 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. Additionally, 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, 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
    Strike prices will be set to bracket Alpha Indexes in 1 point 
increments; thus, the interval between strike prices will be no less 
than $1.00.\9\ Phlx anticipates less volatility in Alpha Index options 
than in existing stock options. Additionally, options on components of 
an Alpha Pair may also have strikes with $1.00 strikes. The Exchange 
therefore believes that $1.00 strike intervals are appropriate for this 
product. The Exchange proposes to list series at $1 or greater strike 
price intervals for each Alpha Index option, 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. The Exchange would 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.
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    \9\ See Exchange Rule 1101A, Terms of Option Contracts, as 
proposed to be amended.
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    Under Phlx 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 (e.g., a bid of 
5.50 would represent a bid of $5.50 per unit). The minimum tick size 
for series trading below $3 will be 0.05 and for series trading at or 
above $3 the minimum tick 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.\10\
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    \10\ See Exchange Rule 1034, Minimum Increments, as proposed to 
be amended.
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    Pursuant to 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 in one of the Alpha Pair components is 
halted or suspended. Additionally, 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 
1047(c) is being amended to provide that the Exchange will also halt 
trading in the Alpha Index option whenever trading is halted in an 
option overlying one or both of the components of the Alpha Pair.\11\ 
Finally, 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 
1047(d), which is being amended so that it clearly applies to Alpha 
Indexes in addition to stock indexes.
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    \11\ See Exchange Rule 1047A, Trading Rotations, Halts or 
Reopenings.
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    Rule 1092, Obvious Errors and Catastrophic Errors, is being amended 
to provide that Alpha Index option trades on the Exchange will be 
nullified pursuant to Section (c)(iv)(C) of that rule if the trade 
occurred during a trading halt on the primary market in either 
component security of the Alpha Index. The word ``percent'' is added to 
the previous clause applicable to stock index options to correct an 
inadvertent omission in the existing rule text.
    The Phlx will trade consecutive and cycle month series pursuant to 
Phlx Rule 1101A. Specifically, 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 the Alpha Indexes 
will be from 9:30 AM to 4:15 PM (Philadelphia Time).\12\ Alpha Index 
options are index options that are available for FLEX trading.\13\
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    \12\ See Exchange Rules 1101A, Terms of Option Contracts, 
Commentary .01, and 101, Hours of Business.
    \13\ See Exchange Rule 1079, FLEX Index, Equity and Currency 
Options, as proposed to be amended. The Exchange is proposing that 
separate position limits apply to FLEX Alpha Index options at the 
same levels applicable to non-FLEX Alpha Index options.

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[[Page 81322]]

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 PM (Philadelphia Time) on 
the last day of trading. Exercise will result in delivery of cash on 
the business day following expiration. Alpha Index options will be 
A.M.-settled. The exercise settlement value will be based upon the 
opening prices of the individual stock or ETF from the primary listed 
market on the last trading day prior to expiration (usually a Friday).
    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.
Clearing
    Alpha Index options are ``Strategy Based Options'' that will be 
cleared by the Options Clearing Corporation.
Surveillance
    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 represents that these surveillance 
procedures are adequate to monitor the trading of options on Alpha 
Indexes. For surveillance purposes, the Exchange will have complete 
access to information regarding trading activity in the pertinent 
underlying securities and options thereon.
Position Limits
    The Exchange is proposing that the position limit for an option on 
an Alpha Index shall be 60,000 contracts on the same side of the 
market. 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, Position Limits, is being amended by the addition of clause 
(iii) providing 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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    \14\ See Exchange Rule 1001A, Position Limits, as proposed to be 
amended.
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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 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
    Except as modified herein, the Exchange Rules 1000A-1107A, Rules 
Applicable to Trading of Options on Indices, will be applicable to 
Alpha Index options. The Exchange is proposing minor amendments to 
reflect trading of Alpha Index options which are not narrow-based or 
broad-based stock index options, which the Exchange currently trades, 
but rather strategy-based securities index options based upon an index 
whose construction and calculation differs from that of stock index 
options.
Systems Capacity
    Additionally, the Exchange affirms that it possesses the necessary 
systems capacity to support new series that would result from the 
introduction of options on Alpha Indexes. The Exchange also has been 
informed that OPRA has the capacity to support such new series.
Customer Protection
    Exchange rules designed to protect public customers trading in 
options would apply to Alpha Index options. Phlx 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. Phlx Rule 1024, applicable to the conduct 
of accounts, Phlx Rule 1025 relating to the supervision of accounts, 
Phlx Rule 1028 relating to confirmations, and Phlx Rule 1029 relating 
to delivery of options disclosure documents also would apply to trading 
in Alpha Index options.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \17\ in particular, in that it is designed 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, in that it will permit trading in options based on Alpha 
Indexes pursuant to rules designed to prevent fraudulent and 
manipulative acts and practices and to promote just and equitable 
principles of trade, and thereby will provide investors with the 
ability to invest in options based on an additional index.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 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 up to 90 days (i) as the 
Commission may designate 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 Number SR-Phlx-2010-176 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.

[[Page 81323]]

All submissions should refer to File Number SR-Phlx-2010-176. 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 website 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 the filing also will be available for 
inspection and copying at the principal office of the Exchange.\18\ 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-2010-176 and should be 
submitted on or before January 18, 2011.
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    \18\ The text of the proposed rule change is available on the 
Commission's Web site at www.sec.gov.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32382 Filed 12-23-10; 8:45 am]
BILLING CODE 8011-01-P