[Federal Register Volume 75, Number 103 (Friday, May 28, 2010)]
[Notices]
[Pages 30078-30081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-12871]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62151; File No. SR-Phlx-2010-72]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASDAQ OMX PHLX, Inc. to Make Changes to Expand the $1 Strike
Program
May 21, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on May 7, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``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\ 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 is filing with the Commission a proposal to modify
Commentary .05 to Phlx Rule 1012 (Series of Options Open for Trading)
to expand the Exchange's $1 Strike Price Program (the ``$1 Strike
Program'' or ``Program'') \3\ to allow the Exchange to select 150
individual stocks on which options may be listed at $1 strike price
intervals.
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\3\ The $1 Strike Program was initially approved on June 11,
2003 as pilot, and was then extended several times until June 5,
2008. See Securities Exchange Act Release Nos. 48013 (June 11,
2003), 68 FR 35933 (June 17, 2003) (SR-Phlx-2002-55) (approval of
pilot program); 49801 (June 3, 2004), 69 FR 32652 (June 10, 2004)
(SR-Phlx-2004-38); 51768 (May 31, 2005), 70 FR 33250 (June 7, 2005)
(SR-Phlx-2005-35); 53938 (June 5, 2006), 71 FR 34178 (June 13, 2006)
(SR-Phlx-2006-36); and 55666 (April 25, 2007), 72 FR 23879 (May 1,
2007) (SR-Phlx-2007-29). The program was subsequently expanded and
made permanent in 2008. See Securities Exchange Act Release No.
57111 (January 8, 2008), 73 FR 2297 (January 14, 2008) (SR-Phlx-
2008-01). The program was last expanded in 2009. See Securities
Exchange Act Release No. 59590 (March 17, 2009), 74 FR 12412 (March
24, 2009) (SR-Phlx-2009-21). The $1 Strike Program is found in
Commentary .05 to Rule 1012.
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The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, 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.
[[Page 30079]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to modify Commentary
.05 to Phlx Rule 1012 to allow the Exchange to select 150 individual
stocks on which options may be listed at $1 strike price intervals.
Currently, the $1 Strike Program allows Phlx to select a total of
55 individual stocks on which option series may be listed at $1 strike
price intervals. In order to be eligible for selection into the
Program, the underlying stock must close below $50 in its primary
market on the previous trading day. If selected for the Program, the
Exchange may list strike prices at $1 intervals from $3 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
Program under their respective rules.
The restrictions in the current $1 Strike Program remain and are
not proposed to be modified by this filing. The Exchange may not list
$1 strike intervals on any issue where the strike price is greater than
$50. The Exchange may not list long-term option series (``LEAPS'') \4\
at $1 strike price intervals for any class selected for the Program,
except as specified in subparagraph (C) of Commentary .05.\5\ The
Exchange is also restricted from listing series with $1 intervals
within $0.50 of an existing strike price in the same series, except
that strike prices of $2, $3, and $4 shall be permitted within $0.50 of
an existing strike price for classes also selected to participate in
the $0.50 Strike Program.\6\
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\4\ LEAPS are long-term options that generally have up to
thirty-nine months from the time they are listed until expiration.
Commentary .03 to Rule 1012. Long-term FLEX options and index
options are considered separately in Rules 1079(a)(6) and
1101A(b)(iii), respectively.
\5\ Subsection (C) of Commentary .05 states that: The Exchange
may list $1 strike prices up to $5 in LEAPS(R) in up to 200 option
classes on individual stocks. See Securities Exchange Act Release
No. 61277 (January 4, 2010), 75 FR 1442 (January 11, 2009) (SR-Phlx-
2009-108)(notice of filing and immediate effectiveness).
\6\ Regarding the $0.50 Strike Program, which allows $0.50
strike price intervals for options on stocks trading at or below
$3.00, see Commentary .05(a)(ii) to Rule 1012 and Securities
Exchange Act Release No. 60694 (September 18, 2009), 74 FR 49048
(September 25, 2009) (SR-Phlx-2009-65)(order approving). See also
Securities Exchange Act Release No. 61630 (March 2, 2010), 75 FR
11211 (March 10, 2010) (SR-Phlx-2010-26) (notice of filing and
immediate effectiveness allowing concurrent listing of $3.50 and $4
strikes for classes that participate in both the $0.50 Strike
Program and the $1 Strike Program).
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The $1 Strike Program has been extremely successful since it was
initiated as a pilot program in 2003, with no substantive problems
attributed to the Program or listing and trading options at $1 strike
intervals. During the time that the $1 Strike Program was a pilot, the
Exchange submitted three pilot reports to the Commission in which the
Exchange discussed, among other things, the strength and efficacy of
the Program based upon the steady increase in volume and open interest
of options traded on the Exchange at $1 strike price intervals; and
that the Program had not and, in the future, should not create capacity
problems for the Phlx or the Options Price Reporting Authority
(``OPRA'') systems.\7\ This has not changed. Moreover, the number of $1
strike options traded on the Exchange has continued to increase since
the inception of the Program such that these options are now among some
of the most popular products traded on the Exchange.
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\7\ See Securities Exchange Act Release Nos. 49801 (June 3,
2004), 69 FR 32652 (June 10, 2004) (SR-Phlx-2004-38); 51768 (May 31,
2005), 70 FR 33250 (June 7, 2005) (SR-Phlx-2005-35); 53938 (June 5,
2006), 71 FR 34178 (June 13, 2006) (SR-Phlx-2006-36); and 55666
(April 25, 2007), 72 FR 23879 (May 1, 2007) (SR-Phlx-2007-29).
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There are now approximately 326 $1 strike price option classes
listed (and traded) across all options exchanges including Phlx; 55 of
which are classes chosen by Phlx for the $1 Strike Program. The
Exchange has received repeated requests from its members to list more
issues at $1 strike intervals, that is, to expand the $1 Strike
Program. However, the Exchange is constrained from doing so because it
has reached the limit of 55 individual stocks on which option series
may be listed at $1 strike price intervals per Commentary .05 to Rule
1012. It is for this reason that the Exchange proposes to expand the
Program to allow Phlx to select a total of 150 individual stocks on
which option series may be listed at $1 strike price intervals. The
proposal would expand $1 strike offerings to market participants (e.g.
traders and retail investors) and thereby enhance their ability to
tailor investing and hedging strategies and opportunities in a volatile
market place. The $1 Strike Program (including the existing
restrictions such as not listing any series that would result in strike
prices being $0.50 apart) would otherwise remain unchanged.
Currently, there are more than 2,000 options trading on issues
priced below $50 (generally, the ``low cost options'') that are outside
the $1 Strike Program. These include high volume options such as, for
example, Winstream Corp, The Mosaic Company, and General Growth PPTYS
Inc. that traded 26,013 contracts, 9,826 contracts, and 20,107
contracts (23-day average volume), respectively. Because of the
numerical limitation on how many issues may be chosen by the Exchange
to be in the $1 Strike Program, however, these low cost options must
trade at $2.50 or wider strike price increments.
The wide strike price increments for low cost options, when
compared to the price of underlying issues, often lead to significant
negative impact on investors. As an example:
Sanofi Aventis (SNY), which has recently traded at a low
of about $33 per share, is not currently in the $1 Strike Program. This
means that options on Sanofi Aventis are offered at strike price
intervals of $2.50. If an investor desired to protect 100 shares of
Sanofi Aventis in the event of a 10% drop in the SNY share price for an
intermediate time period, the investor ideally would want the ability
to choose between buying a September 30 SNY put option, September 29
put option, or September 28 put option. Today, however, at $2.50 strike
price intervals the investor would only have the choice of buying
September 30 put options offered at $1.65 or September 25 puts offered
at $0.45 (approximate numbers). Having the ability (choice) to buy 28
strike or 29 strike puts could significantly lower the investor's
monetary outlay to purchase the desired insurance premium. This is
because, as opposed to September 30 puts priced at $1.65, September 29
puts would be priced at approximately $1.10 and September 28 puts would
be priced at approximately $0.90, which would potentially reduce the
hedging cost to the investor by about a third. Clearly, options on
Sanofi Aventis priced at $1 intervals could significantly improve the
menu of hedging choices to the benefit of an investor in this issue.
Tenaris S A (TS), which has recently traded at about $38
per share, is not currently in the $1 Strike Program. As such, strike
intervals for TS are mostly in $5 (as well as $2.50) increments. If an
investor sought to enhance his yield from owning 100 shares of Tenaris
S A, the investor could sell a call option with a strike price
approximately 10% higher than the current underlying issue price.
Ideally, the investor could choose between the September 45 calls, the
September 44 calls, or the September 43 calls. Not being in the $1
Strike Program, however, the September 44 and
[[Page 30080]]
September 43 call strikes would not be available. And, like the Sanofi
Aventis example, the lack of the September 44 and September 43 strikes
would limit the investor's choices to maximize returns or execute the
simplest of strategies.
By expanding the $1 Strike Program, such investors would be able to
better enhance returns and manage risk. The Exchange feels that, having
received requests to expand the Program and in light of the disparity
between non $1 strike prices and stock prices underlying low-cost
options, expanding the Program as requested would be greatly beneficial
to investors and the financial community.
As stated in the Commission order that initially approved Phlx's
Program and in subsequent Program extension and expansion approval
orders and filings (the ``prior orders''),\8\ the Exchange believes
that $1 strike price intervals provide investors with significantly
greater flexibility in the trading of equity options that overlie lower
price stocks by allowing investors to establish equity options
positions that are better tailored to meet their investment, trading
and risk management objectives. These prior orders recognized, as we
have noted pursuant to this proposal, that member firms representing
customers have repeatedly requested that Phlx seek to expand the
Program in terms of the number of classes on which option series may be
listed at $1 strike price intervals. In addition, market conditions
have led to an increase in the number of securities trading below $50,
further warranting the proposed comparatively modest expansion of the
$1 Strike Program.\9\
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\8\ See supra note 3.
\9\ See, c.f., Securities Exchange Act Release No. 59590 (March
17, 2009), 74 FR 12412 (March 24, 2009) (SR-Phlx-2009-21) (more than
five-fold increase in the number of individual stocks on which
options may be listed at $1 intervals).
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The Exchange notes that, in addition to options classes that are
trading pursuant to the $1 strike programs of options exchanges, there
are also options trading at $1 strike intervals on approximately 282
Exchange Traded Fund Shares (``ETFs''),\10\ ETF options trading at $1
intervals has not, however, negatively impacted the system capacity of
the Exchange or OPRA.
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\10\ Options on ETFs have been trading for about a decade. See
Securities Exchange Act Release Nos. 34- (July 1, 1998), 63 FR 37426
(July 10, 1998) (SR-AMEX-96-44) (approval order regarding, among
other things, $1 strike price intervals for ETFs); and 44055 (March
8, 2001), 66 FR 15310 (March 16, 2001) (SR-Phlx-01-32) (notice of
filing and immediate effectiveness regarding, among other things, $1
strike price intervals for ETFs). See also Commentary .05 to Rule
1012(a)(iv) allowing $1 strike price intervals for ETF options where
the strike price is $200 or less.
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With regard to the impact of this proposal on system capacity, Phlx
has analyzed its capacity and represents that it and OPRA have the
necessary systems capacity to handle the potential additional traffic
associated with the listing and trading of an expanded number of series
in the $1 Strike Program.
The Exchange believes that the $1 Strike Program has provided
investors with greater trading opportunities and flexibility and the
ability to more closely tailor their investment and risk management
strategies and decisions to the movement of the underlying security.
Furthermore, the Exchange has not detected any material proliferation
of illiquid options series resulting from the narrower strike price
intervals. For these reasons, the Exchange requests an expansion of the
current Program and the opportunity to provide investors with
additional strikes for investment, trading, and risk management
purposes.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \11\ in general, and furthers the objectives of Section
6(b)(5) of the Act \12\ 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. The Exchange believes that expanding the current $ 1 Strike
Program will result in a continuing benefit to investors by giving them
more flexibility to closely tailor their investment decisions in
greater number of securities.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 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
such 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 [email protected]. Please include
File Number SR-Phlx-2010-72 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-2010-72. 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and
[[Page 30081]]
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-2010-72 and should be submitted on
or before June 18, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12871 Filed 5-27-10; 8:45 am]
BILLING CODE 8010-01-P