Document ID: SEC-2023-0239-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq ISE, LLC
Posted Date: 2023-03-02T05:00Z

[Federal Register Volume 88, Number 41 (Thursday, March 2, 2023)]
[Notices]
[Pages 13182-13197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-04224]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96979; File No. SR-ISE-2023-08]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Proposed Rule Change To Make Permanent Certain P.M.-Settled Pilots

February 24, 2023.
    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 February 23, 2023, Nasdaq ISE, LLC (``ISE'' 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 make permanent the pilot to permit the 
listing and trading of options based on \1/5\ the value of the Nasdaq-
100 Index

[[Page 13183]]

(``Nasdaq-100'' or ``NDX'') and the Exchange's nonstandard expirations 
pilot program which are both currently set to expire on May 4, 2023.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/ise/rules, 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
    ISE proposes to make permanent 2 pilots, which are both set to 
expire on May 4, 2023: (1) the Exchange' s pilot to permit the listing 
and trading of options based on \1/5\ the value of the Nasdaq-100 Index 
(``NQX Pilot''), and (2) the Exchange's nonstandard expirations pilot 
program (``Nonstandard Pilot'').
NQX Pilot
    ISE filed a rule change to permit the listing and trading of index 
options on the Nasdaq 100 Reduced Value Index (``NQX'') on a twelve 
month pilot basis.\3\ NQX options trade independently of and in 
addition to NDX options, and the NQX options are subject to the same 
rules that presently govern the trading of index options based on the 
Nasdaq-100, including sales practice rules, margin requirements, 
trading rules, and position and exercise limits. Similar to NDX, NQX 
options are European-style and cash-settled, and have a contract 
multiplier of 100. The contract specifications for NQX options mirror 
in all respects those of the NDX options contract listed on the 
Exchange, except that NQX options are based on \1/5\ of the value of 
the Nasdaq-100, and are p.m.-settled pursuant to Options 4A, Section 
12(a)(6).
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    \3\ See Securities Exchange Act Release No. 82911 (March 20, 
2018), 83 FR 12966 (March 26, 2018) (SR-ISE-2017-106) (Approval 
Order).
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    The Exchange proposes to amend ISE Options 4A, Section 12(a)(6)(i) 
to make permanent the current NQX Pilot. The NQX Pilot was extended 
various times with the last extension through May 4, 2023.\4\ The 
Exchange continues to have sufficient capacity to handle additional 
quotations and message traffic associated with the listing and trading 
of NQX options. In addition, index options are integrated into the 
Exchange's existing surveillance system architecture and are thus 
subject to the relevant surveillance processes. The Exchange also 
continues to have adequate surveillance procedures to monitor trading 
in NQX options thereby aiding in the maintenance of a fair and orderly 
market. Additionally, there is continued investor interest in NQX.
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    \4\ See Securities Exchange Act Release Nos.86071 (June 10, 
2019), 84 FR 27822 (June 14, 2019) (SR-ISE-2019-18); 87379 (October 
22, 2019), 84 FR 57793 (October 28, 2019) (SR-ISE-2019-27); 88683 
(April 17, 2020), 85 FR 22768 (April 23, 2020) (SR-ISE-2020-18); 
90257 (October 22, 2020), 85 FR 68387 (October 28, 2020) (SR-ISE-
2020-33); 91485 (April 6, 2021), 86 FR 19052 (April 12, 2021) (SR-
ISE-2021-05); 93448 (October 28, 2021), 86 FR 60717 (November 3, 
2021) (SR-ISE-2021-22); 94632 (April 7, 2022), 87 FR 21940 (April 
13, 2022) (SR-ISE-2022-09); and 96177 (October 28, 2022), 87 FR 
66335 (November 3, 2022) (SR-ISE-2022-23).
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Nonstandard Pilot
    ISE filed a proposed rule change for the listing and trading on the 
Exchange, on a twelve month pilot basis, of p.m.-settled options on 
broad-based indexes with nonstandard expirations dates.\5\ The 
Nonstandard Pilot permits both Weekly Expirations and End of Month 
(``EOM'') expirations similar to those of the a.m.-settled broad-based 
index options, except that the exercise settlement value of the options 
subject to the pilot are based on the index value derived from the 
closing prices of component stocks. The Nonstandard Pilot was extended 
various times with the last extension through May 4, 2023.\6\
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    \5\ See Securities Exchange Act Release No. 82612 (February 1, 
2018), 83 FR 5470 (February 7, 2018) (approving SR-ISE-2017-111) 
(Order Approving a Proposed Rule Change to Establish a Nonstandard 
Expirations Pilot Program).
    \6\ See Securities Exchange Act Release Nos. 85030 (February 1, 
2019), 84 FR 2633 (February 7, 2019) (SR-ISE-2019-01); 85672 (April 
17, 2019), 84 FR 16899 (April 23, 2019) (SR-ISE-2019-11); 87380 
(October 22, 2019), 84 FR 57786 (October 28, 2019) (SR-ISE-2019-28); 
88681 (April 17, 2020), 85 FR 22775 (April 23, 2020) (SR-ISE-2020-
17); 90265 (October 23, 2020), 85 FR 68605 (October 29, 2020) (SR-
ISE-2020-34); 91486 (April 6, 2021), 86 FR 19048 (April 12, 2021) 
(SR-ISE-2021-06); and 93449 (October 28, 2021), 86 FR 60679 
(November 3, 2021) (SR-ISE-2021-23); 94632 (April 7, 2022), 87 FR 
21940 (April 13, 2022) (SR-ISE-2022-09); and 95992 (October 6, 
2022), 87 FR 62163 (October 13, 2022) (SR-ISE-2022-20).
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    Supplementary Material .07(a) to Options 4A, Section 12 provides 
that the Exchange may open for trading Weekly Expirations on any broad-
based index eligible for standard options trading to expire on any 
Monday, Wednesday, or Friday (other than the third Friday-of-the-month 
or days that coincide with an EOM expiration). Weekly Expirations are 
subject to all provisions of Options 4A, Section 12 and are treated the 
same as options on the same underlying index that expire on the third 
Friday of the expiration month. Unlike the standard monthly options, 
however, Weekly Expirations are p.m.-settled.
    Pursuant to Supplementary Material .07(b) to Options 4A, Section 12 
the Exchange may open for trading EOM expirations on any broad-based 
index eligible for standard options trading to expire on the last 
trading day of the month. EOM expirations are subject to all provisions 
of Options 4A, Section 12 and treated the same as options on the same 
underlying index that expire on the third Friday of the expiration 
month. However, the EOM expirations are p.m.-settled.
    At this time, the Exchange proposes to make permanent the 
Nonstandard Pilot. The Exchange has sufficient systems capacity to 
handle p.m.-settled options on broad-based indexes with nonstandard 
expirations dates and has not encountered any issues or adverse market 
effects as a result of listing them. Additionally, there is continued 
investor interest in these products.
    In support of the permanency of the NQX Pilot and the Nonstandard 
Pilot, the Exchange empirically assessed the impact of p.m.-settled NDX 
options on options market quality and examined market capacity around 
the market close.\7\ Specifically, the Exchange analyzed trading 
volume, open interest, spreads, and closing auction volumes. In recent 
years, ISE has implemented changes and introduced new types of index 
options tied to the Nasdaq-100 Index[supreg] (ticker symbol ``NDX''). 
This report presents a set of empirical findings relating the impact of 
these changes, submitted in support of a request for permanency of the 
NQX Pilot and the Nonstandard Pilot.
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    \7\ This includes p.m.-settled products trading on ISE (NQX 
Pilot and the Nonstandard Pilot) as well as p.m.-settled products 
trading on Phlx (XND Pilot and the Nonstandard Pilot). Phlx filed a 
similar request for permanency of its p.m.-settled pilots. See SR-
Phlx-2023-04 (not yet noticed).

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[[Page 13184]]

    A general timeline of events since 2017 is as follows:
     In January 2017, the Exchange discontinued licensing 
agreements with competing options exchanges for the listing and trading 
of NDX options. This discontinuation led to a gradual reduction in the 
number of NDX expiries listed on these exchanges. By 2019 trading in 
NDX-related options therefore became exclusively done on three Nasdaq-
affiliated exchanges: Nasdaq Phlx, LLC (``Phlx''), ISE, and Nasdaq 
GEMX, LLC (``GEMX'').
     In January 2018, the expiration of NDX options on Fridays, 
other than the third Friday-of-the-month, was changed from a.m.-settled 
to p.m.-settled. Third-Friday expirations continued to be a.m.-settled 
as before. The p.m.-settled index options were given the new trading 
symbol ``NDXP''. These contracts were exclusively listed on Phlx and 
ISE.
     In June 2018, a new contract was introduced based on the 
Nasdaq-100 Index but with reduced notional value. The underlying index 
of the new contract, symbol ``NQX,'' was set at one-fifth the value of 
the NDX (with contract multiplier remaining at $100). This contract 
trades exclusively on ISE, and is p.m. settled on Fridays.
     In September 2018, a p.m.-settled index option, ``NDXP,'' 
was introduced that expired on Wednesdays of each week. It was listed 
exclusively on Phlx and ISE.
     In February 2020, a p.m.-settled NDXP index option was 
introduced that expired on Mondays of each week. It was listed 
exclusively on Phlx and ISE.
     In April 2021, a second reduced value contract was 
introduced. The underlying index, ``XND'', is set at one-hundredth (1%) 
of the NDX (with contract multiplier remaining at $100). The notional 
value is therefore equal to the level of the Nasdaq-100 Index. This 
contract trades on Phlx and is p.m.-settled.
     On July 29, 2022, ISE received approval to list and trade 
p.m.-settled NDX index options that expire on Tuesday or Thursday under 
its Nonstandard Expirations Pilot Program.\8\
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    \8\ The Exchange notes that Tuesday and Thursday weeklies on the 
Nasdaq-100 Index have been trading for less than one month. See 
http://www.nasdaqtrader.com/MicroNews.aspx?id=OTA2022-26.
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     On October 3, 2022, ISE commenced listing p.m.-settled 
quarterly option on the Nasdaq-100 Index.
    Following terminological convention, the Exchange refers to the 
traditional third Friday expiration series as ``monthly'' contracts, 
while the other series are referred to as ``weekly'' contracts. In this 
report, the new p.m.-settled index options will be written as NDXP-Fri, 
NDXP-Wed, and NDXP-Mon based on their expiration day. The NDX contracts 
that formerly expired on Fridays, other than the third Friday-of-the-
month, will be referred to as NDX-Weekly, indicating their status as 
weekly contracts. The monthly third Friday NDX contract will be denoted 
NDX-Monthly. NQX and XND are considered weekly contracts. It may be 
noted that when Friday is a market holiday, the expiration moves to the 
prior Thursday.\9\ When Wednesday is a holiday, expiration of Wednesday 
contracts moves forward to Tuesday. When Monday is a holiday, Monday 
expirations move back to Tuesday.\10\
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    \9\ See Supplementary Material .07(a) of ISE Options 4A, Section 
12.
    \10\ Id.
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    The purpose of this report is to empirically assess the impact of 
these changes on NDX options markets, with a special focus on the 
market quality of the incumbent a.m.-settled NDX index options and 
market capacity around the market close. The Exchange provides a 
comprehensive analysis in this report on the impact of p.m.-settled 
index options on a.m.-settled NDX index options, including option 
trading volume, option open interests and option liquidity.\11\ In 
assessing the impact of the innovations on market quality, the Exchange 
uses options on the Invesco QQQ Trust Series 1 (``QQQ'') \12\ as a 
control group. While activity in QQQ options would capture trading 
interest in the Nasdaq-100 Index generally and may reflect market 
conditions, it would be largely unaffected by the innovations 
considered in this report. QQQ options include monthly third Friday 
expirations, weekly non-third Friday expirations, and contracts 
expiring the end of the quarter.\13\
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    \11\ Today, NDX options are a.m.-settled and p.m.-settled.
    \12\ Invesco QQQ\TM\ is an exchange-traded fund based on the 
Nasdaq-100 Index.
    \13\ For the purpose of spread analysis we match on option 
price, moneyness category, time to maturity and option's expiration 
month.
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    Historically there have been concerns that p.m.-settled index 
options could result in increased market and price volatility in the 
underlying component stocks, due to the unwinding of hedge-related 
positions at the close on expiration. A study conducted on behalf of 
the Securities and Exchange Commission's Division of Economic and Risk 
Analysis \14\ shows that the market share for p.m.-settled options on 
S&P 500[supreg] Index has grown substantially since 2007. As the 
expiration date for p.m.-settled index options is more scattered 
compared to that for a.m.-settled options, only a smaller percentage of 
open interest expires on each date. As a result, p.m.-settled index 
option expirations are unlikely to cause any disruptive effect on the 
market. The DERA Staff PM Pilot Memo also shows that expiring open 
interest of a.m.-settled options may have had an economically small 
impact on the volatility of the Nasdaq-100 index around the open.\15\ 
The DERA Staff PM Pilot Memo further shows that, although p.m.-settled 
index option trading volume may have a statistically significant 
relationship with the volatility of the underlying index around the 
market close, the economic significance was generally small. In its 
report, the Exchange provides additional analysis on market capacity 
around the market close. As the closing auction price is the most 
widely used reference price for mutual funds and for many exchange-
traded products, closing auction volume has grown substantially in 
recent years. In this report, the Exchange shows that the closing 
auction volume on the equity market have become much larger than the 
opening auction, which may indicate that there is sufficient liquidity 
in closing auctions to absorb liquidity demand associated with p.m.-
settlement of NDX and NQX index options.
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    \14\ See Securities and Exchange Commission, Division of 
Economic Risk and Analysis, Memorandum, Cornerstone Analysis of PM 
Cash-Settled Index Option Pilots (February 2, 2021) (``DERA Staff PM 
Pilot Memo''), available at: https://www.sec.gov/dera/staff-papers/studies-and-reports/analysis-of-pm-cash-settled-index-option-pilots.
    \15\ Table 20 of the DERA Staff PM Pilot Memo suggests that a 
$10 billion increase in option settlement quantity is associated 
with an increase in absolute return of 0.025% near the open. The 
report also shows that expiring open interest of a.m.-settled 
options had no significant impact on the volatility of the 
underlying index near the open for the S&P 500 Index.
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    In addition to analysis on closing auctions, the report presents 
findings on three market characteristics: trading volume, open 
interest, and spreads. The Exchange finds that the trading volume and 
the notional open interests for options that had NDX and NQX as the 
underlying increased during our sample period. In conclusion, there is 
no evidence that NDX and NQX options contracts, which are p.m.-settled, 
would result in reduced trading activity or degradation in market 
quality of the a.m.-settled index options.

[[Page 13185]]

Analysis of Volume
    The introduction of p.m.-settled index options and its impact on 
the trading activity of a.m.-settled options is likely the single most 
important factor under consideration. Volume is the primary indicator 
of trading interest and it drives market quality to a large extent. 
Consolidated volume information is available from The Options Price 
Reporting Authority (``OPRA''), the source of information used in this 
section. The sample period used for this report is 2017 through April 
2022.
Consolidation of Trading on Nasdaq Affiliated Exchanges
    As noted above, trading in NDX options began to consolidate 
exclusively onto Nasdaq-owned affiliated exchanges starting in 2017; 
the impact on volume was not immediate. Since January 2017, non-Nasdaq 
exchanges ceased listing new NDX options series, but continued with 
previously listed NDX options. The following table shows the percentage 
of NDX options contract volume traded on non-Nasdaq exchanges, which at 
the time included Cboe Exchange, Inc. (``Cboe''), NYSE American LLC, 
and NYSE Arca, Inc. Of these three markets, Cboe was the largest in 
volume. The Nasdaq affiliated exchanges trading NDX options were Phlx, 
ISE and GEMX.
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    \16\ As noted herein, this refers to the monthly third Friday 
a.m.-settled NDX contract.
    \17\ As noted above, this refers to the p.m.-settled NDX 
contracts that formerly expired on Fridays, other than the third 
Friday-of-the-month.
    \18\ NDXP-Wed and NDXP-Mon are the p.m.-settled NDX contracts 
expiring on Wednesday and Monday, respectively.
    \19\ The full data supporting the graph is shown in the 
appendix.

               Table 1-NDX Volume on Non-Nasdaq Exchanges
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                                                            Non-Nasdaq
                  Year                        Quarter        share  %
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2017....................................               1            22.2
                                                       2            16.4
                                                       3             2.2
                                                       4             5.5
2018....................................               1             0.3
                                                       2             0.7
                                                       3             0.1
                                                       4             4.2
------------------------------------------------------------------------

    By 2018 volume on the non-Nasdaq exchanges had largely disappeared. 
The surge in volume during the final quarter of 2018 was likely due to 
the end-of-year final closing of positions--note the similar bump in 
2017. There was no NDX options volume from non-Nasdaq exchanges after 
2018.
Contract Volume and Notional Volume
    Contract volume in the regular-sized Nasdaq-100 Index contracts may 
be broken down into five time series: (1) the incumbent NDX-Monthly; 
\16\ (2) the NDX-Weekly contract transitioning to NDXP-Fri; \17\ and 
(3) the introduction of NDXP-Wed and NDXP-Mon.\18\ The following graph 
shows monthly totals for each of these five groups.\19\
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN02MR23.022

    A number of observations can be drawn from the graph.
     The overall total contract volume remained almost flat 
until the pandemic market recovery started in the Spring of 2020. From 
Fall 2020 forward there has been substantial growth in volume. It 
appears that most of the recent growth has come from the NDX-Weekly 
contracts.
     The volumes of NDX-Monthly and NDX-Weekly were roughly 
equivalent during 2017. This is noteworthy for the fact that for any 
given month there would usually be at least three, and

[[Page 13186]]

sometimes four times, the number of front-month expiries for the weekly 
contract. The Exchange can infer, then, that the monthly contracts tend 
to have substantially higher volume per series than the weekly 
contracts.
     When NDX-Weekly transitioned to NDXP-Fri, the volume 
relationship with NDX-Monthly remained roughly the same.
     Soon after launch, the NDXP-Wed contracts achieved volume 
levels not much lower than the NDXP-Fri contracts, and, in turn, not 
much lower than the monthly contracts.
     Soon after launch, the NDXP-Monday contracts achieved 
volume levels not much lower than the NDXP-Fri contracts, and, in turn, 
not much lower than the monthly contracts.
     By the end of the sample period, each of the four 
remaining contract types had roughly the same value (again recognizing 
the differing number of expiries).
    Each of the current contract types garner substantial trading 
volume.
    Regarding the NDX-Weekly/NDXP-Fri transition, Figure 2, which ends 
in August 2018, takes a closer look at the timeframe immediately prior 
to the launch of NDXP-Wed. The transition month of January 2018 is not 
shown (both contract types had volume during January).
[GRAPHIC] [TIFF OMITTED] TN02MR23.023

    Though NDXP-Fri volume was relatively low in May 2018, there is no 
sign of a substantial sustained drop in volume accompanying the 
transition.
    During the timeframe under consideration in this report there has 
been a remarkable increase in the level of the Nasdaq-100 Index, a 
rough tripling of the index from early 2017 to April 2022. The notional 
value of a regular-sized contract is $100 times the level of the index, 
and so it has tripled during the sample period, and is currently 
roughly $1.3 million. In light of these changes, it is useful to 
consider volume from the perspective of notional value traded rather 
than contracts.
    Figure 3 shows the sum of monthly notional value traded for NDX-
Monthly and for the total of all five of the contract types. The 
notional value traded was computed as the sum of contracts traded times 
the monthly average value of the Nasdaq-100 Index times $100. The graph 
also shows linear trend lines for each time series.

[[Page 13187]]

[GRAPHIC] [TIFF OMITTED] TN02MR23.024

    It appears that while the notional volume of the incumbent monthly 
contract has been flat, the total volume of all contract types exhibit 
a positive trend, with remarkable growth since the Fall of 2020. It 
appears, therefore, that the introduction of p.m.-settlement is 
associated with an increase in NDX options trading.
Comparison With QQQ Volume
    The positive volume trend may be due to the remarkable performance 
of the Nasdaq-100 Index during this timeframe. To rule out this 
alternative explanation, the exchange compare the volume in NDX/NDXP 
index options to QQQ ETF options. It is worth noting that the notional 
volume of a QQQ option contract has been much lower than that of an 
index option. During the sample period, the average notional value of 
an index option contract was about $936,000, while a single QQQ 
contract had notional value of about $23,000.
    Figure 4 presents a time series of the ratio of the sum of monthly 
contract volume in the indicated index option contracts to the sum of 
contract volume in QQQ options. For NDX-Monthly index options, only QQQ 
volume from third Friday expiring contracts was used. Since both the 
index and ETF options have the same underlying index, the observed 
trend is similar if notional volumes were used instead.
[GRAPHIC] [TIFF OMITTED] TN02MR23.025

[[Page 13188]]

    The graph shows a substantial decline in the relative level of the 
index option volume during 2017. This decline is too large to be 
explained by the reduction in the share of options trading on non-
Nasdaq exchanges. The decline stabilized at the start of 2018.
NQX Volume
    In spite of the very high notional volume of NDX/NDXP options, 
volume in the reduced-value NQX options has never been higher than NDXP 
trading volume (perhaps due to the availability of QQQ options). Figure 
5 shows monthly volume for all NQX contracts. Shown are both the volume 
in terms of contracts traded, as well as NQX volume relative to the 
total volume of NDX/NDXP contracts. For the latter calculation, the NQX 
contract volume was divided by 5 to reflect its reduced notional value.
[GRAPHIC] [TIFF OMITTED] TN02MR23.026

    Since launch, NQX volume has grown, both in absolute terms and 
relative to NDX/NDXP volume. The period of extreme market volatility 
surrounding the pandemic crisis in the Spring of 2020 led to a volume 
spike, as did the market recovery of the Fall of 2020. Even so, the 
relative level of NQX volume was very low relative to that of the 
regular-valued indexes. Due to the low level of NQX volume, it seems 
unlikely that its introduction had a significant impact on the market 
quality of the full-sized NDX contracts. Therefore, no further analysis 
was attempted on NQX options.
XND Volume
    Trading in XND options contracts is relatively new.\20\ The 
following table shows XND monthly contract volume for the first year of 
trading.
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    \20\ As noted herein, XND began trading in April 2021.
    [GRAPHIC] [TIFF OMITTED] TN02MR23.027
    
    The low level of XND options volume suggests that the introduction 
of XND did not have a noticeable impact on the trading of the incumbent 
NDX/NDXP contracts.
Analysis of Open Interest
    The Exchange next considered trends in open interest for the 
Nasdaq-100 Index options. The Options Clearing Corporation (``OCC'') 
data was utilized as source data for this analysis. Open interest 
measures positions held overnight; positions that are established and 
closed during the day are not captured.
    Figure 6 shows the open interest, in contracts, as of the last 
trading day of the indicated month.

[[Page 13189]]

[GRAPHIC] [TIFF OMITTED] TN02MR23.028

    The open interest in NDX-Monthly is remarkably stable during this 
timeframe, and is substantially higher than that of the weekly 
contracts. After transitioning to p.m.-settlement, the open interest in 
NDXP-Fri contract started to decline while it increased in the second 
half of 2022. The open interest in the Wednesday and Monday contracts 
has always been relatively low.
    Further insight is shown in the following graph, which shows the 
ratio of open interest in weekly contracts to that of the monthly 
contract (that is, the open interest sum of NDX-Weekly, NDXP-Fri, -Wed, 
and Mon divided by the open interest in NDX-Monthly).
[GRAPHIC] [TIFF OMITTED] TN02MR23.029

    The graph shows a clear decline in the ratio of weekly to monthly 
open interest, starting at the beginning of 2018, but the declining 
trend stabilized at the end of Q1 2018. When considered with the volume 
information shown above, this may be because options traders with 
longer holding horizons may be more likely to trade the monthly 
contract, while those with shorter intra-day positions are more likely 
to use the weekly contracts. This tendency is reflected in the listing 
of expiries. At any given time, expirations out to a year or more are 
available for the monthlies, while expirations only out a month or so 
are available for the weeklies.
    As noted above, the notional value of Nasdaq-100 Index options has 
roughly tripled during this timeframe. It is therefore useful to 
consider the trends in open interest from a notional perspective, as 
shown in the following graph.

[[Page 13190]]

[GRAPHIC] [TIFF OMITTED] TN02MR23.030

    A clear positive trend is evident for the monthly contract in terms 
of notional value. The weeklies showed a flat trend that has increased 
since the Fall of 2020.
    As discussed above, we designate QQQ options as a control group for 
our analysis. Figure 9 shows the ratio (in contracts) of Nasdaq-100 
Index options to QQQ options. As noted herein, the trend is unaffected 
when measuring open interest in contracts or notional value. The graph 
shows the ratio for monthly contracts for NDX and QQQ, as well as for 
NDX/NDXP and QQQ.
[GRAPHIC] [TIFF OMITTED] TN02MR23.031

    This graph closely mirrors the volume graph shown above in Figure 
9. There was a distinct decline during 2017 in month-end open interest, 
but the trend stabilized at the start of 2018 and has remained flat 
since then.
Analysis of Spreads
    An important dimension of market quality is the cost of trading. 
Following Holden and Jacobsen (2014),\21\ the Exchange used duration 
weighted relative quoted spread as a measure of the cost of trading. In 
this section, the Exchange examines whether there is any deterioration 
of spreads to a.m.-settled

[[Page 13191]]

Nasdaq-100 Index options by introducing p.m.-settled index options. A 
particular challenge for measuring quoted spreads is created by the 
large number of options series tied to a particular underlying. In 
addition to the range of expiries, a given expiration will have many 
available strike prices. This set of combinations then is doubled by 
considering calls and puts. Many listed options series will be very 
infrequently traded. For example, at the start of the sample period on 
January 3, 2017, there were 3,720 individual options series that had 
NDX as the underlying, made up from 14 expiration dates and 382 strike 
prices. Of these listed options series, only 458 had traded volume on 
that date, with 233 options series with volume of at least 10 
contracts. Nearer to the end of the sample period, on April 29, 2022, 
there were 16,624 listed options series with NDX or NDXP as the 
underlying, consisting of 33 expiration dates and 675 strikes. Of the 
listed options series, 2,192 had some volume and 538 had volume of at 
least 10 contracts.
---------------------------------------------------------------------------

    \21\ See Holden, C. and Jacobsen, S., 2014, Liquidity 
Measurement Problems in Fast, Competitive Markets: Expensive and 
Cheap Solutions. Journal of Finance. 69, 1747-17852 (https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12127).
---------------------------------------------------------------------------

    To assess the trend in the relative NBBO quoted spread, the 
Exchange limited the number of options series under consideration by 
reviewing spreads in the front-month contracts (contract nearest 
expiration) on the first trading day of each month.\22\ The Exchange 
considered an NBBO quotation to be ``live'' and used in the computation 
when the National Best Offer (NBO) was non-zero.
---------------------------------------------------------------------------

    \22\ Although the Exchange believes that sampling the first 
trading day of each month between date January 2017 and April 2022 
would reflect the trend of market quality, the Exchange acknowledges 
that in some cases there may some information loss given a 
particular trading day. For example, a volatile trading day may not 
be representative of the market for that trading month.
---------------------------------------------------------------------------

    In the following section, the Exchanges shows the impact of the 
introduction of p.m.-settled index options on the liquidity of NDX 
contracts by showing the average monthly NDX spread over time (in 
Figure 10) as well as comparing the trend of relative quoted spread of 
NDX contracts with that of QQQ contracts (Figures 11 and 12). Figure 10 
shows the average monthly relative quoted spread for all options with 
NDX as the underlying. To better reflect the trend of the relative 
quoted spread, the Exchange plotted the average relative quoted spread 
benchmarked against (subtracted by) the average spread of 2017 as the 
dotted line in Figure 10. The dotted vertical line highlights the time 
when p.m.-settled index options were introduced. Specifically, the time 
series in the dotted line was computed using the following steps. 
First, the Exchange calculated the duration weighted average relative 
quoted spread for each contract on each day. Second, the Exchange took 
the average of the above daily spread across all contracts with NDX as 
the underlying for each day. Third, the Exchange calculated the average 
relative quoted spread for all months in 2017. Finally, the 2017 
average was subtracted from the monthly average to create a time series 
dataset. As can be seen from the plot, a consistent decrease in the 
relative quoted spread is prevalent from 2017 to 2022 and most 
importantly, there is no obvious change in the trend following the 
introduction of p.m.-settled index options.
    Although the above method is intuitive, it is well known that the 
option premia are correlated with option characteristics such as 
expiry, strike price, and whether the contract is a put or a call 
option. Also, option premia tend to increase when the expected 
volatility of the underlying asset increases, and premia increase may 
in turn cause the spread to increase. Inspired by Kaul, Nimalendran and 
Zhang (2004) \23\ and Albuquerque, Song and Chen (2020),\24\ the 
Exchange also employed the following regression model to control for 
factors related to option characteristics unrelated to the NQX Pilot 
and the Nonstandard Pilot: \25\
---------------------------------------------------------------------------

    \23\ See Kaul, G., Nimalendran, m., and Zhang D., 2004, Informed 
Trading and Option Spreads. Working Paper (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=547462).
    \24\ See Albuquerque, R., Song, S., and Yao, C., 2020, The Price 
Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment. 
Journal of Financial Economics. 138, 700-724 (https://www.sciencedirect.com/science/article/pii/S0304405X20301884).
    \25\ The calculation was inspired by Kaul, G., Nimalendran, m., 
and Zhang D., and Albuquerque, R., Song, S., and Yao, C. See notes 
21 and 22 above. The Exchange includes control variables used in 
Albuquerque, R., Song, S., and Yao, C. (2020) liquidity analysis and 
constructs Moneyness Categories following Kaul, Nimalendran and 
Zhang (2004).
[GRAPHIC] [TIFF OMITTED] TN02MR23.032

    In the above model, Spread is the relative quoted spread. 
InverseofPrice is the inverse of the option price. Call/Put Dummy is a 
dummy variable that equals 1 for call options and 0 otherwise. Expiry 
is the number of the days to the expiration date. Moneyness is a dummy 
variable for moneyness category of each option. Specifically, all 
option contracts were classified into 5 moneyness categories. The 
moneyness for call options was calculated as:
[GRAPHIC] [TIFF OMITTED] TN02MR23.033

for put options, where ``S'' is the stock price and ``X'' is the 
exercise price. The cut-offs for the five moneyness groups were: -30%; 
-10%; 10%; and 30%. Month Fixed Effect is a dummy variable for each 
month.
    In constructing the plot, the coefficients for those month fixed 
effects were adjusted. The raw coefficients for each month were 
collected from the regression output. The first month in the sample, 
January 2017, implicitly had a coefficient of zero. The average 
coefficient for the 12 months in 2017 was then calculated. Finally, the 
average coefficients across all 12 months in 2017 were subtracted from 
the raw coefficients to create a time series dataset, which is depicted 
as the unbroken line in Figure 10.
    As can be seen from the plot, there is a steady decrease in the 
relative quoted spread for NDX option contracts. The average relative 
quoted spread for NDX contracts decreased by about 30%-40% from the 
beginning of 2017 until the end of the sample period. Since the 
regression model controls for factors that affect the spread, the 
unbroken line

[[Page 13192]]

based on the regression model tends to be less volatile. However, there 
is no large difference in the results between the average spread and 
results based on the regression models, but there is some divergence at 
certain points in time. The Exchange conjectures that the divergence is 
due to higher option premia caused by the elevated levels of 
volatility. In summary, based on both methods, a consistent decrease in 
relative quoted spread is observed from 2017 to 2022.
[GRAPHIC] [TIFF OMITTED] TN02MR23.034

    The Exchange then compared the spread trend of NDX monthly 
contracts to that of QQQ monthly contracts. The average monthly spread 
for QQQ contracts was constructed the same way as that for the NDX 
monthly contracts (as described in detail above). Figure 11, below, 
displays the patterns of relative quoted spread for NDX and QQQ, which 
are remarkably similar and decreased during the sample period. Figure 
12, below, highlights the difference in Figure 11 as between NDX and 
QQQ. Relative to a QQQ control, there is therefore no evidence of a 
deterioration of NDX monthly spreads during the sample period. In 
summary, the results suggest that there is gradual decrease in both the 
NDX monthly contracts spread and the QQQ contracts spread during the 
sample period.
---------------------------------------------------------------------------

    \26\ NBBO data was unavailable between August 1, 2021 and August 
11, 2021, and, therefore, August 2021 was excluded from the plot. 
Also, with respect to Figure 10, Regression plots the coefficients 
of dummies for each month (i.e., fixed effects). Average Spread 
plots the average monthly relative quoted spread subtracted by the 
2017 average relative quoted spread.
---------------------------------------------------------------------------

    As the introduction of p.m.-settled index options may affect the 
transaction cost for NDX monthly contracts, it is unlikely to affect 
the spread of QQQ options. Therefore, the Exchange uses the following 
regression to formally test whether the spread of NDX contract changed 
after the introduction of p.m.-settled index options. NDX and QQQ 
options are included in the sample for the period between January 2017 
and December 2018. This regression looks at a sample period starting 
from one year before and ending one year after the introduction of 
p.m.-settled index options.
[GRAPHIC] [TIFF OMITTED] TN02MR23.035

    Similar to regression model (1), Spread is the relative quoted 
spread. InverseofPrice is the inverse of the option price. Call/Put 
Dummy is a dummy variable that equals 1 for call options and 0 
otherwise. Expiry is the number of the days to the expiration date.\27\ 
Moneyness is a dummy variable for moneyness category of each option. 
NDX is a dummy variable that equals one if the underlying asset of the 
option is NDX index and zero otherwise. Post is a dummy variable that 
equals to one for days after January 2018 and zero otherwise. The 
Exchange also includes the interaction terms of the post dummy and the 
NDX dummy (NDX * Post).
---------------------------------------------------------------------------

    \27\ The Exchange notes that there was no transformation.
---------------------------------------------------------------------------

    Table 3 shows that the coefficient of the interaction term is 
negative but it is statistically insignificant. Therefore, the Exchange 
concludes that the introduction of p.m.-settled index options did not 
negatively affect the liquidity of a.m.-settled NDX options.\28\
---------------------------------------------------------------------------

    \28\ Id.

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

[[Page 13193]]

[GRAPHIC] [TIFF OMITTED] TN02MR23.036

[GRAPHIC] [TIFF OMITTED] TN02MR23.037

[[Page 13194]]

                                           Table 3--Regression Results
----------------------------------------------------------------------------------------------------------------
                                                               coef                     std              t
----------------------------------------------------------------------------------------------------------------
Constant.......................................  *** 0.26.......................            0.01           37.50
NDX............................................  *** 0.28.......................            0.01           28.62
Post...........................................  -0.01..........................            0.02           -0.80
NDX * Post.....................................  * -0.02........................            0.01           -1.73
InverseofPrice.................................  *** 0.00.......................            0.00           48.65
Call/Put Dummy.................................  *** 0.26.......................            0.01           37.77
Expiry.........................................  *** 0.00.......................            0.00           46.29
Moneyness Categories Fixed Effect..............  Yes............................
Month Fixed Effect.............................  Yes............................
----------------------------------------------------------------------------------------------------------------

    The report considered one additional question regarding quoted 
spreads--whether the move from a.m.-settlement to p.m.-settlement for 
Friday weeklies (NDX-Weekly to NDXP-Fri) led to changes in spreads for 
those contracts. This sample timeframe was from July 2017 through 
August 2018, prior to the launch of NDXP-Wed contracts. As before, the 
Exchange presented both the simple average monthly relative quoted 
spread as well as the average spread calculated using the regression 
model.
---------------------------------------------------------------------------

    \29\ Id.
    [GRAPHIC] [TIFF OMITTED] TN02MR23.038
    
    The relative quoted spread went down at the first part of 2018 and 
up in May and June 2018; it remained comparable to the 2017 average.
---------------------------------------------------------------------------

    \30\ With respect to Figure 13, Reg-NDX plots the coefficients 
of dummies for each month for NDX contracts. Reg-NDXP plots the 
coefficients of dummies for each month for NDXP contracts. Simple-
NDX plots the average monthly relative quoted spread subtracted by 
the 2017 average relative quoted spread for NDX contracts. Simple-
NDXP plots the average monthly relative quoted spread subtracted by 
the 2017 average relative quoted spread for NDXP contracts.
---------------------------------------------------------------------------

    Overall, the Exchange sees no evidence of deterioration of spreads 
associated with the introduction of p.m.-settled NDX options.
Market Capacity Around the Market Close
    The Exchange next analyzed the impact that p.m.-settled index 
options may have on the closing process of the equity markets.\31\ The 
DERA Staff PM Pilot Memo concluded that while p.m.-settled index 
options activity may have had a statistically detectable impact on 
volatility, the economic significance was generally small. The DERA 
Staff PM Pilot Memo provided,
---------------------------------------------------------------------------

    \31\ This analysis considers the DERA Staff PM Pilot Memo.

    However, the report suggests that the magnitude of the effect of 
expiring p.m. cash-settled index options open interest on the 
measure of volatility and price reversals for index futures, the 
underlying cash index, and index component securities is 
economically very small.\32\
---------------------------------------------------------------------------

    \32\ See DERA Staff PM Pilot Memo at page 1.

[[Page 13195]]

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

    The following provides an illustration using some of the regression 
results from the DERA Staff PM Pilot Memo. Among the volatility 
variables analyzed by the DERA Staff PM Pilot Memo was the ``Magnitude 
of Maximum Reversal Overlapping Close'' of index futures prices. The 
DERA Staff PM Pilot Memo found that this metric was higher when the 
options settlement volume was higher, for both the S&P 500 and the 
Nasdaq-100 Index options. Using data provided in the DERA Staff PM 
Pilot Memo, the Exchange can estimate the impact of a very large 
increase in settlement volume: an increase from its 25th percentile to 
its 75th percentile. The following table shows the steps of the 
calculation.

                                                                      Table 4 \33\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Settlement volume
                                         ------------------------------------------------   Regression        Impact         Median of      Rel. impact
                                               25th            75th            Diff.        coefficient                      variable           (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
S&P500..................................            0.40            1.66            1.26           0.317            0.40            1.96            20.4
Nq-100..................................            0.07            0.17            0.10            2.39            0.24            1.58            15.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The percentiles of settlement volume (in units of $10 billion 
notional) are shown in Table 25 of the DERA Staff PM Pilot Memo, which 
indicated that the volume of S&P 500 contracts was much higher than 
that of Nasdaq-100 contracts. The regression coefficients are from 
Table 5 (S&P 500) and Table 19 (Nasdaq-100) of the DERA Staff PM Pilot 
Memo. The estimated impact is the product of the volume difference 
times the coefficient. Table 5 of the DERA Staff PM Pilot Memo provided 
the median of the volatility metric during the sample period. The 
relative impact is the estimated impact divided by the sample median, 
i.e., the estimated change in the volatility metric, relative to its 
median value, due to an increase in settlement volume. As shown, the 
relative impact was small for both indexes, about 20% for the S&P 500 
and 15% for the Nasdaq-100.
---------------------------------------------------------------------------

    \33\ See DERA Staff PM Pilot Memo.
---------------------------------------------------------------------------

    The Exchange provides some additional analysis on market capacity 
around the market close. Specifically, the Exchange believes it is 
important to recognize that in recent years the closing auctions on the 
equity markets have steadily grown to a point where they are much 
larger than the opening auctions. To illustrate this point, the 
following chart shows the percentage of dollar volume of Nasdaq-100 
Index components executed in the opening and closing auctions on 
Fridays.
[GRAPHIC] [TIFF OMITTED] TN02MR23.039

BILLING CODE 8011-01-C
    The percentage of volume executed in the close is uniformly higher 
than that of the open. The spikes in the closing percentages represent 
third Fridays, and in a few cases Fridays that corresponded to the end 
of a month. The opening percentage is slightly declining, the closing 
percentage slightly increasing during this timeframe. As another 
illustration, consider the opening and closing dollar volume 
percentages for Fridays, other than the third Friday-of-the-month, from 
the second half of 2017 compared with the first half of 2018. This 
timeframe corresponds to the introduction of NDXP options,\34\ in which 
non-third Friday series moved to p.m.-settled. The following table 
present the average percentages.
---------------------------------------------------------------------------

    \34\ NDXP options are p.m.-settled index options on broad-based 
indexes with nonstandard expirations dates which are also the 
subject of a pilot program. NDXP are listed on ISE and Phlx.

[[Page 13196]]

   Table 5--Dollar Volume for Nasdaq-100 Components on Non-3rd Fridays
------------------------------------------------------------------------
                                    Auction vol. as percentage of total
                                                   vol.
                                 ---------------------------------------
                                        Opening             Closing
------------------------------------------------------------------------
Jul-Dec 2017....................                1.48                6.40
Jan-Jun 2018....................                1.13                6.76
Difference......................               -0.35                0.36
------------------------------------------------------------------------

    As would be expected, the relative size of the opening auction 
declined, and the closing auction increased by roughly the same amount. 
The percentage of about 0.35% would be an estimate of the volume impact 
of NDX/NDXP options settlement on the equity market auctions. This 
percentage is small to begin with, but it is a much smaller proportion 
of the closing auction than the opening auction. Therefore, the 
Exchange believes that the liquidity available at or around the close 
would be able to mitigate any excess volatility created by the options 
settlement at the market close.
    As a third example, the Exchange considered the level of options 
settlement volume relative to the size of the closing and opening 
auctions.\35\ To provide the most up-to-date view of the current 
situation, the Exchange examined activity from the start of 2021 
through April 2022. The below table shows the notional settlement 
volume (in billions of dollars) along with the notional volume in the 
auctions for Nasdaq-100 Index components. Settlement volume is the 
average dollar volume settled at OCC, Closing Auction is the average 
dollar volume executed in the closing auction, Pct of Close is 
calculated as Settlement Volume divided by Closing Auction, Open 
Auction is the average notional volume executed in the open auction, 
and Pct of Open is calculated as Settlement Volume divided by Opening 
Auction.
---------------------------------------------------------------------------

    \35\ Options settlement volume is the primary size metric used 
in the DERA Staff PM Pilot Memo. Options settlement volume is the 
notional volume settled in the closing auction.

                     Table 6--Settlement Volume for NDX/NDXP vs Auctions: Jan 2021- Apr 2022
----------------------------------------------------------------------------------------------------------------
                                    Settlement        Closing      Percentage of      Opening      Percentage of
            Exp. day                  volume          auction          close          auction          open
----------------------------------------------------------------------------------------------------------------
                                                      NDXP
----------------------------------------------------------------------------------------------------------------
Monday..........................            $2.4            $9.9            25.9  ..............  ..............
Wed.............................             2.7             9.0            30.2  ..............  ..............
Non 3rd Fri.....................             4.1             9.6            44.7  ..............  ..............
----------------------------------------------------------------------------------------------------------------
                                                       NDX
----------------------------------------------------------------------------------------------------------------
3rd Friday......................            13.1            23.0            78.0            $6.6           230.4
----------------------------------------------------------------------------------------------------------------

    Table 6 shows that the settlement volume for NDXP settlements 
averages between 26% and 45% of the closing auction volume, the Friday 
NDXP settlements being the largest. NDX settlement volumes are larger, 
and relative to the opening auction--the relevant auction--they average 
more than twice the size of the auctions. By contrast, the relative 
size of the settlement volume would be about a third less if it were 
compared to the closing auctions on the third Fridays. As documented in 
the DERA Staff PM Pilot Memo, p.m.-settled option activities only have 
a very small impact on the volatility of the underlying index. 
Additionally, the size of the option settlement value is relatively 
small compared with the size of the closing auction value. Therefore, 
the Exchange believes that it is difficult to manipulate the underlying 
Nasdaq-100 Index during the closing auction. The equity closing 
auctions have grown to be substantial liquidity events (for the period 
examined the closing auction volume is larger than the opening auction 
volume) and would therefore be suited for handling the excess liquidity 
demand created by index options settlement.
Technical Amendment to Rule Text
    The Exchange proposes to amend Supplementary Material .07 to 
Options 4A, Section 12 to remove ``c'' and re-letter ``d'' as ``c.''
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\36\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\37\ 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 by proposing to make permanent the NQX Pilot and the 
Nonstandard Pilot.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(b).
    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Previously, the Commission has raised concerns about expanding p.m. 
settlement.\38\ Specifically, the Commission noted in the Cboe Pilot 
Order that it had concerns about the adverse effects and impact of p.m. 
settlement upon market volatility and the operation of fair and orderly 
markets on the underlying cash market at or near the close of 
trading.\39\ The Commission noted in the Cboe Pilot Order that the 
information requested of Cboe would enable the Commission to evaluate 
whether allowing p.m. settlement for EOW and EOMs will result in 
increased market and price volatility in the underlying component 
stocks.\40\

[[Page 13197]]

Further, the p.m. settlement Pilot information should help the 
Commission assess the impact on the markets and determine whether other 
changes are necessary.\41\ Furthermore, the Exchange's ongoing analysis 
of the Pilot should help it monitor any potential risks from large 
p.m.-settled positions and take appropriate action if warranted.\42\
---------------------------------------------------------------------------

    \38\ See Securities Exchange Act Release No. 62911 (September 
14, 2010), 75 FR 57539 (September 21, 2010) (SR-CBOE-2009-075) 
(Order Approving Notice of Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2, to Establish a Pilot Program to List P.M.-
Settled End of Week and End of Month Expirations for Options on 
Broad-Based Indexes) (``Cboe Pilot Order'').
    \39\ Id at 57540.
    \40\ Id at 57540.
    \41\ Id at 57540.
    \42\ Id at 57540.
---------------------------------------------------------------------------

    Similar to Cboe, ISE has provided pilot data to the Commission with 
respect to its NQX Pilot and Nonstandard Pilot. The Exchange's analysis 
presents data that the introduction of p.m.-settlement has led to an 
increase in options trading tied to the Nasdaq-100 Index. The Exchange 
notes within its analysis that it seems unlikely that the introduction 
of NQX option contracts or XND contracts \43\ had a significant impact 
on the market quality of the full-sized Nasdaq-100 Index option 
contracts. The Exchange observed a consistent decrease in relative 
quoted spread is observed from 2017 to 2022 for NDX options. When the 
Exchange compared the spread trend of NDX monthly contracts to that of 
QQQ monthly contracts, the results suggest that there is gradual 
decrease in both the NDX monthly contracts spread and the QQQ contracts 
spread during the sample period.
---------------------------------------------------------------------------

    \43\ See note 7 above.
---------------------------------------------------------------------------

    The Exchange also considered whether the move from a.m.-settlement 
to p.m.-settlement for Friday weeklies (NDX-Weekly to NDXP-Fri) led to 
changes in spreads for those contracts. Overall, the Exchange sees no 
evidence of deterioration of spreads associated with the changes the 
Exchange has made to its Nasdaq-100 Index product offering by 
introducing p.m.-settled products.
    Finally, in considering impact on the closing process in equity 
markets, the Exchange concluded that it is difficult to manipulate the 
underlying Nasdaq-100 Index. Specifically, the equity closing auctions 
have grown to be substantial liquidity events that are much larger than 
the opening auctions, and would therefore be better suited for handling 
the excess liquidity demand created by index options settlement. The 
Exchange believes the expiration of p.m.-settlement options would not 
adversely affect the options market or the underlying cash equities 
market.
    Further, the Exchange has sufficient systems capacity to handle 
p.m.-settled options on broad-based indexes with nonstandard 
expirations dates and has not encountered any issues or adverse market 
effects as a result of listing them.
    Accordingly, the Exchange believes that weekly expirations and 
EOMs, including the NQX expirations, in the p.m.-settled products 
should create greater trading and hedging opportunities and flexibility 
and provide customers with the ability to more closely tailor their 
investment objectives.

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. Making permanent the NQX Pilot 
and the Nonstandard Pilot will not impose an undue burden on 
competition, rather, it will continue to provide investors with greater 
trading and hedging opportunities and flexibility, as well as the 
ability to more closely tailor their investment objectives.
    Additionally, the Exchange does not believe the proposal will 
impose any burden on intermarket competition as market participants are 
welcome to become Members and trade at ISE if they determine that this 
proposed rule change has made ISE more attractive or favorable. 
Finally, all options exchanges are free to compete by listing and 
trading their own broad-based index options with weekly or end of month 
expirations.

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 email to [email protected]. Please include 
File Number SR-ISE-2023-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2023-08. 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 website (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 10:00 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-ISE-2023-08, and should be submitted on 
or before March 23, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-04224 Filed 3-1-23; 8:45 am]
BILLING CODE 8011-01-P