Document ID: SEC-2021-0518-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq PHLX LLC
Posted Date: 2021-04-15T04:00Z

[Federal Register Volume 86, Number 71 (Thursday, April 15, 2021)]
[Notices]
[Pages 19909-19912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07677]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91524; File No. SR-Phlx-2021-07]

Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a 
Proposed Rule Change, as Modified by Amendment No. 1, To Permit the 
Listing and Trading of Options Based on 1/100th the Value of the 
Nasdaq-100 Index

April 9, 2021.

I. Introduction

    On February 10, 2021, Nasdaq PHLX LLC (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to permit the 
listing and trading of index options on based on 1/100th the value of 
the Nasdaq-100 Index. The proposed rule change was published for 
comment in the Federal Register on February 26, 2021.\3\ On March 17, 
2021, the Exchange filed Amendment No. 1 to the proposed

[[Page 19910]]

rule change.\4\ The Commission is approving the proposed rule change, 
as modified by Amendment No. 1, subject to a pilot period set to expire 
on November 4, 2021.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 91178 (February 22, 
2021), 86 FR 11807.
    \4\ In Amendment No. 1, the Exchange amended the proposal to: 
(1) Extend the duration of the proposed pilot period for XND options 
from May 4, 2021 to November 4, 2021; and (2) specify that the 
Exchange intends to begin implementation of the proposed rule change 
prior to May 1, 2021. Because Amendment No. 1 to the proposed rule 
change is technical in nature and does not materially alter the 
substance of the proposed rule change or raise any novel regulatory 
issues, it is not subject to notice and comment. Amendment No. 1, 
which amended and replaced the original proposal in its entirety, is 
available on the Commission's website at: https://www.sec.gov/comments/sr-phlx-2021-07/srphlx202107-8513064-230103.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    The Exchange is proposing to amend its rules to permit the listing 
and trading of index options on the Nasdaq 100 Micro Index (``XND'') on 
a pilot basis. The Exchange states that the XND options contract will 
be the same in all respects as the current Nasdaq-100 Index (``NDX'') 
options contract listed on the Exchange,\5\ except that it will be 
based on 1/100th of the value of the Nasdaq-100 Index, and will be 
P.M.-settled with an exercise settlement value based on the closing 
index value of the Nasdaq-100 Index on the day of expiration.\6\ In 
particular, XND options will be subject to the same rules that 
presently govern the trading of index options based on the Nasdaq-100 
Index, including sales practice rules, margin requirements, trading 
rules, and position and exercise limits. Like NDX options, XND options 
will be European-style and cash-settled, and will have a contract 
multiplier of 100. XND options will have a minimum trading increment of 
$0.01 for all series.\7\ Strike price intervals will be set at $2.50 or 
greater, subject to conditions described in Options 4A, Section 
12(a)(2).\8\ Consistent with the Exchange's existing rules for index 
options, the Exchange will allow up to six expiration months at any one 
time that may expire at three-month intervals or in consecutive months, 
as well as LEAPS.\9\ The Exchange states that, pursuant to Phlx Options 
4A, Section 12(b)(5), XND options may be listed and traded in 
accordance with the Nonstandard Expirations Pilot Program, which 
permits the Exchange to list Weekly Expirations \10\ and End of Month 
(``EOM'') Expirations \11\ on any broad-based index \12\ eligible for 
standard options trading. XND options will have European-style exercise 
and will not be subject to position limits, although the Exchange 
proposes to amend Options 4A, Section 6 to describe how positions in 
micro index value options would be aggregated with full value and 
reduced value options.\13\
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    \5\ See Options 4A, Section 12(e)(II).
    \6\ The Exchange notes that similar features are available with 
other index options contracts listed or approved for trading on the 
Exchange and other options exchanges, including the Exchange's 
affiliate, Nasdaq ISE, LLC (``ISE''), which lists options contracts 
based on 1/5th the value of the Nasdaq-100 (``NQX''). See Amendment 
No. 1, supra note 4, at 5.
    \7\ More specifically, the Exchange proposes that as long as QQQ 
options participate in the Penny Interval Program, XND options shall 
have a minimum increment of $.01. See proposed Supplementary 
Material .03 to Options 3, Section 3.
    \8\ Generally, pursuant to Options 4A, Section 12(a)(2), except 
as provided in Supplementary Material .04 to Options 4A, Section 12, 
index options listed on the Exchange are subject to strike price 
intervals of no less than $5, provided that certain classes of index 
options (including Reduced Value NDX options) have strike price 
intervals of no less than $2.50. The Exchange proposes to amend 
Options 4A, Section 12(a)(2) to add XND options to the list of 
classes where strike price intervals of no less than $2.50 are 
generally permitted, if the strike price is less than $200. The 
Exchange will not list long term index options series (``LEAPS'') on 
XND options at intervals less than $5. If the Exchange determines to 
add XND options to the Short Term Option Series (``STOS'') or 
Quarterly Option Series programs, such options will be listed with 
the expirations and strike prices described in Supplementary 
Material .02 to Options 4A, Section 12. The Exchange notes that it 
expects to add XND options to the STOS program. See Amendment No. 1, 
supra note 4 at 11, n.18.
    \9\ See id. at 11 & n.16.
    \10\ Weekly Expirations may expire on any Monday, Wednesday, or 
Friday (other than the third Friday-of-the-month or days that 
coincide with an EOM expiration). See Options 4A, Section 12(b)(5).
    \11\ EOMs expire on last trading day of the month. See Options 
4A, Section 12(b)(5).
    \12\ The Exchange states XND is a broad-based index. See 
Amendment No. 1, supra note 4, at 4, n.6. To the extent the Exchange 
lists XND options pursuant to the Nonstandard Expirations Pilot 
Program, the Exchange would be required to provide the same 
information with respect to XND that it does for others options 
listed pursuant to the Nonstandard Expirations Pilot Program in the 
reports and data it provides to the Commission.
    \13\ For a more detailed description of the proposed XND 
contract, see Amendment No. 1, supra note 4. The Exchange also 
proposes to add new Options 4A, Section 12(a)(5) titled ``European-
Style Exercise'' to clarify in the Exchange's rules which Exchange-
listed index options will trade European-Style Exercise, and to add 
rule text within Options 4A, Section 12(b)(2), which describes 
LEAPS, to specifically allow for the listing of long term options 
series on XND.
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    As proposed, XND options would be subject to a pilot for a period 
that would end on November 4, 2021 (``Pilot Program''). If the Exchange 
were to propose an extension of the Pilot Program or should the 
Exchange propose to make the Pilot Program permanent, then the Exchange 
would submit a filing proposing such amendments to the Pilot Program. 
The Exchange notes that any positions established under the pilot would 
not be impacted by the expiration of the pilot. For example, a position 
in an XND options series that expires beyond the conclusion of the 
pilot period could be established during the pilot. If the Pilot 
Program were not extended, then the position could continue to exist. 
However, the Exchange notes that any further trading in the series 
would be restricted to transactions where at least one side of the 
trade is a closing transaction.
    The Exchange proposes to submit a Pilot Program report to 
Commission at least two months prior to the expiration date of the 
Pilot Program (the ``annual report''). The annual report would contain 
an analysis of volume, open interest, and trading patterns. The 
analysis would examine trading in the proposed option product as well 
as trading in the securities that comprise the Nasdaq-100 Index. In 
addition, for series that exceed certain minimum open interest 
parameters, the annual report would provide analysis of index price 
volatility and share trading activity. In addition to the annual 
report, the Exchange would provide the Commission with periodic interim 
reports while the Pilot Program is in effect that would contain some, 
but not all, of the information contained in the annual report. The 
annual report would be provided to the Commission on a confidential 
basis. The annual report would contain the following volume and open 
interest data:
    (1) Monthly volume aggregated for all trades;
    (2) monthly volume aggregated by expiration date;
    (3) monthly volume for each individual series;
    (4) month-end open interest aggregated for all series;
    (5) month-end open interest for all series aggregated by expiration 
date; and
    (6) month-end open interest for each individual series.
    In addition to the annual report, the Exchange would provide the 
Commission with interim reports of the information listed in items (1) 
through (6) above periodically as required by the Commission while the 
Pilot Program is in effect. These interim reports would also be 
provided on a confidential basis.
    Finally, the annual report would contain the following analysis of 
trading patterns in third Friday of the month (``Expiration Friday''), 
P.M.-settled XND option series in the Pilot Program: (1) A time series 
analysis of open interest; and (2) an analysis of the distribution of 
trade sizes. Also, for series that exceed certain minimum parameters, 
the

[[Page 19911]]

annual report would contain the following analysis related to index 
price changes and underlying share trading volume at the close on 
Expiration Fridays: A comparison of index price changes at the close of 
trading on a given Expiration Friday with comparable price changes from 
a control sample. The data would include a calculation of percentage 
price changes for various time intervals and compare that information 
to the respective control sample. Raw percentage price change data as 
well as percentage price change data normalized for prevailing market 
volatility, as measured by an appropriate index as agreed by the 
Commission and the Exchange, would be provided. The Exchange would 
provide a calculation of share volume for a sample set of the component 
securities representing an upper limit on share trading that could be 
attributable to expiring in-the-money series. The data would include a 
comparison of the calculated share volume for securities in the sample 
set to the average daily trading volumes of those securities over a 
sample period. The minimum open interest parameters, control sample, 
time intervals, method for randomly selecting the component securities, 
and sample periods would be determined by the Exchange and the 
Commission.\14\
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    \14\ See id. The proposed Pilot Program for XND options is 
similar to the pilot program approved for the listing and trading of 
P.M.-settled options on the full value of the Nasdaq-100 (``NDXPM'') 
on the Exchange and NQX options on ISE. See Securities Exchange Act 
Release Nos. 81293 (August 2, 2017), 82 FR 37138 (August 8, 
2017)(``NDXPM Order'') and 82911 (March 20, 2018), 83 FR 12966 
(March 26, 2018) (``NQX Order'').
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III. Discussion and Commission Findings

    After careful consideration of the proposal, the Commission finds 
that the proposed rule change, as modified by Amendment No. 1, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange,\15\ and, in particular, the requirements of Section 6 of the 
Act.\16\ Specifically, the Commission finds that the proposed rule 
change, as Modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act,\17\ which requires that an exchange have rules 
designed to remove impediments to and perfect the mechanism of a free 
and open market and to protect investors and the public interest, to 
allow the Exchange to conduct a limited, and carefully monitored, pilot 
as proposed.
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    \15\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f.
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission has previously approved the listing and trading of 
options based on a reduced value of the Nasdaq-100 Index,\18\ including 
P.M.-settled reduced value options,\19\ and, as stated in the 
Commission's order approving the listing and trading of NDXPM on the 
Exchange on a pilot program basis, the Commission has had concerns 
about the potential 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, including for 
cash-settled derivatives contracts based on a broad-based index.\20\ 
The potential impact today remains unclear, given the significant 
changes in the closing procedures of the primary markets in recent 
decades. The Commission is mindful of the historical experience with 
the impact of P.M. settlement of cash-settled index derivatives on the 
underlying cash markets, but recognizes that these risks may be 
mitigated today by the enhanced closing procedures that are now in use 
at the primary equity markets.
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    \18\ See, e.g., Securities Exchange Act Release Nos. 57654 
(April 11, 2008), 73 FR 21003 (April 17, 2008) and 51121 (February 
1, 2005), 70 FR 6476 (February 7, 2005).
    \19\ See NQX Order, supra note 14.
    \20\ See NDXPM Order, supra note 14, at 37140. See also 
Securities Exchange Act Release Nos. 64599 (June 3, 2011), 76 FR 
33798, 33801-02 (June 9, 2011) (order instituting proceedings to 
determine whether to approve or disapprove a proposed rule change to 
allow the listing and trading of SPXPM options); 65256 (September 2, 
2011), 76 FR 55969, 55970-76 (September 9, 2011) (order approving 
proposed rule change to establish a pilot program to list and trade 
SPXPM options); and 68888 (February 8, 2013), 78 FR 10668, 10669 
(February 14, 2013) (order approving the listing and trading of 
SPXPM on CBOE).
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    For the reasons described below, the Commission believes that the 
Exchange's proposed XND Pilot Program is designed to mitigate concerns 
regarding P.M. settlement and will provide additional trading 
opportunities for investors while providing the Commission with data to 
monitor the effects of XND options and the impact of P.M. settlement on 
the markets. To assist the Commission in assessing any potential impact 
of a P.M.-settled XND option on the options markets as well as the 
underlying cash equities markets, the Exchange will be required to 
submit data to the Commission in connection with the Pilot Program. The 
Commission believes that the Exchange's proposed Pilot Program, 
together with the data and analysis that the Exchange will provide to 
the Commission, will allow the Exchange and the Commission to monitor 
for and assess any potential for adverse market effects of allowing 
P.M. settlement for XND options, including on the underlying component 
stocks. In particular, the data collected from the Exchange's XND Pilot 
Program will help inform the Commission's consideration of whether the 
Pilot Program should be modified, discontinued, extended, or 
permanently approved. Furthermore, the Exchange's ongoing analysis of 
the Pilot Program should help it monitor any potential risks from large 
P.M.-settled positions and take appropriate action on a timely basis if 
warranted.
    The Exchange represents that it has adequate surveillance 
procedures to monitor trading in these options thereby helping to 
ensure the maintenance of a fair and orderly market, and has 
represented that it has sufficient capacity to handle additional 
traffic associated with this new listing.\21\
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    \21\ See Amendment No. 1, supra note 4, at 17. In addition, the 
Commission notes that the Exchange would have access to information 
through its membership in the Intermarket Surveillance Group with 
respect to the trading of the securities underlying the XND, as well 
as tools such as large options positions reports to assist its 
surveillance of XND options.
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    For the reasons discussed above, the Commission finds that the 
Exchange's proposal is consistent with the Act, including Section 
6(b)(5) thereof, in that it is designed to remove impediments to and 
perfect the mechanism of a free and open market, and, in general, to 
protect investors and the public interest. In light of the enhanced 
closing procedures at the underlying markets and the potential benefits 
to investors discussed by the Exchange in its filing,\22\ the 
Commission finds that it is appropriate and consistent with the Act to 
approve the Exchange's proposal on a pilot basis. The collection of 
data during the Pilot Program and the Exchange's active monitoring of 
any effects of XND options on the markets will help the Exchange and 
the Commission assess any impact of P.M. settlement in today's market.
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    \22\ See Amendment No. 1, supra note 4.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-Phlx-2021-07), as modified 
by Amendment No. 1, be, and hereby is, approved, subject to a pilot 
period set to expire on November 4, 2021.
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    \23\ 15 U.S.C. 78s(b)(2).

[[Page 19912]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-07677 Filed 4-14-21; 8:45 am]
BILLING CODE 8011-01-P