Document ID: SEC-2009-1309-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2009-09-14T04:00Z

[Federal Register: September 14, 2009 (Volume 74, Number 176)]
[Notices]               
[Page 47032-47034]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14se09-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60627; File No. SR-Phlx-2009-78]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
an Extension of the FLEX Minimum Size Pilot Program

September 4, 2009.

    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 September 3, 2009, NASDAQ OMX PHLX, Inc. (``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 Exchange 
filed the proposal as a ``non-controversial'' proposed rule change 
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Phlx rules to amend its Rule 1079 
(FLEX Index, Equity and Currency Options), to amend its Rule 1079 (FLEX 
Index, Equity and Currency Options), [sic] to extend through September 
4, 2010, the Exchange's pilot program that reduced from 250 contracts 
to 150 contracts the minimum value size for an opening transaction 
(other than FLEX Quotes responsive to a FLEX Request for Quotes) \5\ in 
any FLEX Equity Option \6\ series in which there is no open interest at 
the time a FLEX Request for Quotes (``RFQ'') is submitted (the ``Pilot 
Program'').\7\
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    \5\ FLEX Quotes responsive to a FLEX Request for Quote (``RFQ'') 
have different parameters that were not changed by the pilot program 
proposal. See Phlx Rule 1079(a)(8)(C).
    \6\ FLEX Equity Options are flexible exchange-traded options 
contracts that overlie equity securities. FLEX Equity Options 
provide investors with the ability to customize basic option 
features including size, expiration date, exercise style, and 
certain exercise prices. FLEX Equity Options (as also FLEX index 
options) may have expiration dates within five years. See Phlx Rule 
1079.
    \7\ See Securities Exchange Act Release No. 57824 (May 15, 
2008), 73 FR 29805 (May 22, 2008) (SR-Phlx-2008-35) (notice of 
filing and immediate effectiveness establishing the Pilot Program).
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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 extend the Pilot 
Program through September 4, 2010.
    On or about May 15, 2008, the Exchange filed SR-Phlx-2008-35 with 
the Commission to establish the Pilot Program. The Pilot Program 
reduced the minimum value size for an opening transaction (other than 
FLEX Quotes responsive to a FLEX RFQ) in any FLEX Equity Option series 
in which there is no open interest at the time an RFQ is submitted.\8\ 
The proposed extension of the Pilot Program for opening FLEX option 
transactions should provide members that use FLEX Equity Options 
greater flexibility in structuring the terms of such options to better 
comport with the particular needs of the members and their customers.
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    \8\ See Securities Exchange Act Release No. 57824 (May 15, 
2008), 73 FR 29805 (May 22, 2008) (SR-Phlx-2008-35) (notice of 
filing and immediate effectiveness establishing the Pilot Program). 
The filing also modified the minimum value size for an opening 
transaction in a currently-opened FLEX Equity series (other than 
FLEX Quotes responsive to a RFQ) to the lesser of 100 contracts or 
the number of contracts overlying $1 million in the underlying 
securities. Other options exchanges have established FLEX pilot 
programs that are similar to the Exchange's. See, e.g., Securities 
Exchange Act Release No. 57429 (March 4, 2008), 73 FR 13058 (March 
11, 2008) (SR-CBOE-2006-36) (approval order).
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    Prior to the Pilot Program, Phlx Rule 1079(a)(8)(A) set the minimum 
opening transaction value size in the case of a FLEX Equity Option in a 
newly

[[Page 47033]]

established series as the lesser of (i) 250 contracts or (ii) the 
number of contracts overlying $1 million in the underlying securities. 
Under the Pilot Program, the Exchange reduced the ``250 contracts'' 
component to ``150 contracts''; the $1 million underlying value 
component continued to apply unchanged.\9\
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    \9\ Under the Pilot Program, an opening transaction in a FLEX 
Equity series in a stock priced at approximately $66.67 or more 
would reach the $1 million limit before it would reach the contract 
size limit, i.e., 150 contracts times the multiplier (100) times the 
stock price ($66.67) equals just over $1 million in underlying 
value. For a FLEX Equity series in a stock priced at less than 
$66.67, the 150 contract size limit would apply.
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    The Exchange now proposes to extend the Pilot Program.
    Given that FLEX Equity Option transactions can occur in increments 
of 100 or more contracts in subsequent opening transactions,\10\ the 
Exchange believes it is reasonable to permit the initial series opening 
transaction size to be 150 contracts (or $1 million in underlying 
value, whichever is less). The Exchange notes that the opening size 
requirement for FLEX Equity Options was originally put in place to 
limit participation in FLEX Equity Options to sophisticated, high net 
worth investors rather than retail investors.\11\ The Exchange believes 
that the reduction of the minimum value size for opening a series, per 
the Pilot Program, provides FLEX-participating members and their 
customers with greater flexibility in structuring the terms of FLEX 
Equity Options to better suit the FLEX traders' particular needs. The 
Exchange believes that market participants benefit from being able to 
trade these customized options in an exchange environment in several 
ways, including, but not limited to, enhanced efficiency in initiating 
and closing out positions; increased market transparency; and 
heightened contra-party creditworthiness due to the role of The Options 
Clearing Corporation as issuer and guarantor of FLEX Equity Options.
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    \10\ Specifically, for FLEX Equity Options the minimum value 
size for a transaction in any currently-opened FLEX series is the 
lesser of 100 contracts or the number of contracts overlying $1 
million in the underlying securities; or the lesser of 25 contracts 
or the remaining size in the case of a closing transaction. 
Additionally, the minimum value size for a FLEX Quote entered in 
response to a RFQ in FLEX Equity Options is the lesser of 25 
contracts or the remaining size in a closing transaction. See Phlx 
Rules 1079(a)(8)(B)(ii) and 1079(a)(8)(C)(ii).
    \11\ The existing customer base for FLEX Options includes 
institutional investors, retail investors, and high net worth 
individuals.
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    In support of extending the Pilot Program, the Exchange has 
submitted to the Commission a FLEX Pilot Program Report (``Report'') 
detailing the Exchange's experience with the Pilot Program. 
Specifically, the Report contains data and written analysis regarding: 
(i) The open interest and trading volume in FLEX Equity Options for 
which series were opened with a minimum opening size of 150 to 249 
contracts and less than $1 million in underlying value; and (ii) 
analysis on the types of investors that initiated opening FLEX Equity 
Options transactions (i.e., institutional, high net worth, or retail, 
if any). The Report was submitted under separate cover and seeks 
confidential treatment under the Freedom of Information Act.
    The Exchange believes there is sufficient investor interest and 
demand in the Pilot Program to warrant its extension. The Exchange 
believes that, during the time that the Pilot Program has been in 
operation, it has afforded investors with additional means of managing 
their risk exposures and carrying out their investment objectives. The 
Exchange represents that it has the necessary system capacity to 
continue to support the option series listed under the Pilot Program.
    Should the Exchange desire to propose an extension, expansion, or 
permanent implementation of the Pilot Program, the Exchange would 
submit, along with a filing proposing any necessary amendments to the 
Pilot Program, a pilot program Report for the extended period during 
which the Pilot Program is in effect.\12\ The Report, along with any 
filing to extend or permanently implement the Pilot Program, would be 
submitted to the Commission at least forty-five days prior to the 
expiration date of the Pilot Program.
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    \12\ The report would provide: (i) Data and analysis on the open 
interest and trading volume in FLEX Equity Options for which series 
were opened with a minimum opening size of 150 to 249 contracts and 
less than $1 million in underlying value; and (ii) analysis on the 
types of investors that initiated opening FLEX Equity Options 
transactions (i.e., institutional, high net worth, or retail, if 
any).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \14\ 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 extending the Exchange's Pilot Program in respect of FLEX 
options. The Exchange believes that extension of the Pilot Program will 
result in a continuing benefit to investors by allowing them additional 
means to manage their risk exposure and carry out their investment 
objectives, and will allow the Exchange to further study investor 
interest in the Pilot Program.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 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

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, 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 \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the self-regulatory organization to submit to the 
Commission 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 satisfied 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.\17\ 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.\18\ The Exchange has requested that the Commission 
waive the 30-day operative delay so that the proposal may become 
operative immediately upon filing, thereby allowing the Exchange to 
seamlessly continue the Pilot Program in respect of FLEX options.
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    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ See id.
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of

[[Page 47034]]

investors and the public interest because such waiver will allow the 
Exchange to continue its Pilot Program without interruption in its 
current form. The Commission notes that the Exchange did not provide a 
pilot program report to the Commission at least ninety days prior to 
the expiration date of the Pilot Program as the Exchange had undertaken 
to do as part of its original proposal.\19\ Waiving the operative delay 
to accommodate an extension of the Pilot Program will provide investors 
with a continued ability to utilize the lower minimum value size for an 
opening transaction in a FLEX Equity Option series on Phlx and also 
will provide the Exchange with additional time to collect data and 
prepare and submit to the Commission a pilot program report in the 
event that it seeks to extend or permanently implement the Pilot 
Program.\20\ For these reasons, the Commission designates the proposed 
rule change as operative upon filing.\21\
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    \19\ See Securities Exchange Act Release No. 57824 (May 15, 
2008), 73 FR 29805, 29806 (May 22, 2008) (SR-Phlx-2008-35).
    \20\ The Commission notes that the Exchange has undertaken in 
this filing to submit a pilot program report at least forty-five 
days prior to the expiration date of the Pilot Program.
    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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.\22\
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    \22\ 15 U.S.C. 78s(b)(3)(C).
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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-2009-78 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-2009-78. 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 inspection and 
copying 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. 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-2009-78 and should be 
submitted on or before October 5, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-21993 Filed 9-11-09; 8:45 am]

BILLING CODE 8010-01-P