Document ID: SEC-2009-1154-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2009-08-17T04:00Z

[Federal Register: August 17, 2009 (Volume 74, Number 157)]
[Notices]               
[Page 41475-41477]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17au09-123]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60466; File No. SR-Phlx-2009-65]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASDAQ OMX PHLX, Inc. Relating to Strike Price Intervals of 
$0.50 for Options on Stocks Trading at or Below $3.00

August 10, 2009.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on July 31, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 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 \4\ and Rule 
19b-4 thereunder,\5\ proposes to amend Rule 1012, Series of Options 
Open for Trading, Commentary .05, in order to establish strike price 
intervals of $0.50, beginning at $1, for certain options classes whose 
underlying security closed at or below $3 in its primary market on the 
previous trading day.
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
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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 organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to expand the ability of 
investors to hedge risks associated with stocks trading at or under $3. 
Currently, Commentary .05(a)(ii) to Phlx Rule 1012 provides that the 
interval of strike prices of series of options on individual stocks may 
be $2.50 or greater where the strike price is $25 or less. 
Additionally, Commentary .05(a)(i) to Phlx Rule 1012 allows the 
Exchange to establish $1 strike price intervals (the ``$1 Strike 
Program'') on options classes overlying no more than fifty-five 
individual stocks designated by the Exchange. In order to be eligible 
for selection into the $1 Strike Program, the underlying stock must 
close below $50 in its primary market on the previous trading day. If 
selected for the $1 Strike Program, the Exchange may list strike prices 
at $1 intervals from $1 to $50, but no $1 strike price may be listed 
that is greater than $5 from the underlying stock's closing price in 
its primary market on the previous day. The Exchange may also list $1 
strikes on any other option class designated by another securities 
exchange that employs a similar $1 Strike Program its own rules.\6\ The 
Exchange is restricted from listing any series that would result in 
strike prices being within $0.50 of a strike price set pursuant to 
Commentary .05(a)(ii) to Phlx Rule 1012 at intervals of $2.50.
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    \6\ The Exchange may not list long-term option series 
(``LEAPS'') at $1 strike price intervals for any class selected for 
the Program.
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    The Exchange is now proposing to establish strike prices of $1, 
$1.50, $2, $2.50, $3 and $3.50 for certain stocks that trade at or 
under $3.00.\7\ The listing of these strike prices will be limited to 
options classes whose underlying security closed at or below $3 in its 
primary market on the previous trading day, and which have national 
average daily volume that equals or exceeds 1000 contracts per day as 
determined by The Options Clearing Corporation during the preceding 
three calendar months. The listing of $0.50 strike prices would be 
limited to options classes overlying no more than 5 individual stocks 
(the ``$0.50 Strike Program'') as specifically designated by the 
Exchange. The Exchange would also be able to list $0.50 strike prices 
on any other option classes if those classes were specifically 
designated by other securities exchanges that employed a similar $0.50 
Strike Program under their respective rules.
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    \7\ The Exchange recently amended Exchange Rule 1010, Withdrawal 
of Approval of Underlying Securities or Options, to eliminate the $3 
market price per share requirement for continued approval for an 
underlying security. The amendment eliminated the prohibition 
against listing additional series or options on an underlying 
security at any time when the price per share of such underlying 
security is less than $3. The Exchange explained in that proposed 
rule change that the market price for a large number of securities 
has fallen below $3 in the current volatile market environment. See 
Securities Exchange Act Release No. 59346 (February 3, 2009), 74 FR 
6681 (February 10, 2009).
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    Currently, the Exchange may list options on stocks trading at $3 at 
strike prices of $1, $2, $3, $4, $5, $6, $7 and $8 if they are 
designated to participate

[[Page 41476]]

in the $1 Strike Program.\8\ If these stocks have not been selected for 
the Exchange's $1 Strike Program, the Exchange may list strike prices 
of $2.50, $5, $7.50 and so forth as provided in Commentary .05(a), but 
not strike prices of $1, $2, $3, $4, $6, $7 and $8.\9\
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    \8\ Additionally, market participants may be able to trade $2.50 
strikes on the same option at another exchange, if that exchange has 
elected not to select the stock for participation in its own similar 
$1 Strike Program.
    \9\ Again, market participants may also be able to trade the 
option at $1 strike price intervals on other exchanges, if those 
exchanges have selected the stock for participation in their own 
similar $1 Strike Program.
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    The Exchange is now proposing to amend Commentary .05 to Phlx Rule 
1012 by adding new section (ii) to list strike prices on options on a 
number of qualifying stocks that trade at or under $3.00, not simply 
those stocks also participating in the $1 Strike Program, in finer 
intervals of $0.50, beginning at $1 up to $3.50.\10\ Thus, a qualifying 
stock trading at $3 would have option strike prices established not 
just at $2.50, $5.00, $7.50 and so forth (for stocks not in the 
Exchange's $1 Strike Program) or just at $1, $2, $3, $4, $5, $6, $7 and 
$8 (for stocks designated to participate in the $1 Strike Program), but 
rather at strike prices established at $1, $1.50, $2, $2.50, $3 and 
$3.50.\11\
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    \10\ Current sections (ii), (iii) and (iv) would be renumbered 
as sections (iii), (iv) and (v) respectively.
    \11\ The option on the qualifying stock could also have strike 
prices set at $5, $7.50 and so forth at $2.50 intervals (pursuant to 
Commentary .05(a)(ii) to Phlx Rule 1012) or, if it has been selected 
for the $1 Strike Program, at $4, $5, $6, $7 and $8.
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    The Exchange believes that current market conditions demonstrate 
the appropriateness of the new strike prices. Recently the number of 
securities trading below $3.00 has increased dramatically.\12\ Unless 
the underlying stock has been selected for the $1 Strike Program, there 
is only one possible in-the-money call (at $2.50) to be traded if an 
underlying stock trades at $3.00. Similarly, unless the underlying 
stock has been selected for the $1 Strike Program, only one out-of-the-
money strike price choice within 100% of a stock price of $3 is 
available if an investor wants to purchase out-of-the-money calls. 
Stated otherwise, a purchaser would need over a 100% move in the 
underlying stock price in order to have a call option at any strike 
price other than the $5 strike price become in-the-money. If the stock 
is selected for the $1 Strike Program, the available strike price 
choices are somewhat broader, but are still greatly limited by the 
proximity of the $3 stock price to zero, and the very large percent 
gain or loss in the underlying stock price, relative to a higher priced 
stock, that would be required in order for strikes set at $1 or away 
from the stock price to become in-the-money and serve their intended 
hedging purpose.
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    \12\ As of July 31, 2009, stocks trading at or below $3 include 
E*Trade Financial Corporation, Ambac Financial Group, Inc., Alcael-
Lucent, Federal Home Loan Mortgage Corporation (Freddie Mac) and 
Federal National Mortgage Association (Fannie Mae). A number of 
these stocks are widely held and actively traded equities, and the 
options overlying these stocks also trade actively on Phlx.
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    As a practical matter, a low-priced stock by its very nature 
requires narrow strike price intervals in order for investors to have 
any real ability to hedge the risks associated with such a security or 
execute other related options trading strategies. The current 
restriction on strike price intervals, which prohibits intervals of 
less than $2.50 (or $1 for stocks in the $1 Strike Program) for options 
on stocks trading at or below $3, could have a negative affect on 
investors. The Exchange believes that the proposed $0.50 strike price 
intervals would provide investors with greater flexibility in the 
trading of equity options that overlie lower priced stocks by allowing 
investors to establish equity option positions that are better tailored 
to meet their investment objectives. The proposed new strike prices 
would enable investors to more closely tailor their investment 
strategies and decisions to the movement of the underlying security. As 
the price of stocks decline below $3 or even $2, the availability of 
options with strike prices at intervals of $0.50 could provide 
investors with opportunities and strategies to minimize losses 
associated with owning a stock declining in price.
    With regard to the impact on system capacity, Phlx has analyzed its 
capacity and represents that it and the Options Price Reporting 
Authority have the necessary systems capacity to handle the additional 
traffic associated with the listing and trading of an expanded number 
of series as proposed by this filing.
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 expanding the ability of investors to hedge risks 
associated with stocks trading at or under $3. The proposal should 
create greater trading and hedging opportunities and flexibility, and 
provide customers with the ability to more closely tailor investment 
strategies to the price movement of the underlying stocks, trading in 
many of which is highly liquid.
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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 that is 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 solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve 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-2009-65 on the subject line.

Paper Comments

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

[[Page 41477]]

All submissions should refer to File Number SR-Phlx-2009-65. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for 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-2009-65 and should be 
submitted on or before September 8, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-19573 Filed 8-14-09; 8:45 am]

BILLING CODE 8010-01-P