[Federal Register Volume 75, Number 247 (Monday, December 27, 2010)]
[Notices]
[Pages 81320-81323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32382]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63575; File No. SR-Phlx-2010-176]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change Relating to Listing and Trading of Alpha
Index Options
December 17, 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 December 10, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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 \3\ and Rule
19b-4 thereunder,\4\ proposes to amend certain of its rules to provide
for the listing and trading of options on NASDAQ OMX Alpha Indexes \SM\
(the ``Alpha Indexes'') on the Exchange's electronic trading platform
for options, Phlx XL.\5\
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
\5\ This proposal refers to ``PHLX XL'' as the Exchange's
automated options trading system. In May 2009 the Exchange enhanced
the system and adopted corresponding rules referring to the system
as ``Phlx XL II.'' See Securities Exchange Act Release No. 59995
(May 28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
---------------------------------------------------------------------------
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 permit the Exchange
to list and trade cash-settled, European-style options on Alpha
Indexes, a family of indexes developed by NASDAQ OMX Group, Inc.
(``Nasdaq''). Alpha Indexes measure relative total returns of one
underlying stock and one exchange traded fund share (``ETF'')
underlying options which are also traded on the Exchange (each such
combination of two components is referred to as an ``Alpha Pair'').\6\
Thus, an Alpha Index measures the relative total return of one stock
and one ETF. The first component identified in an Alpha Pair (the
``Target Component'') is measured against the second component
identified in the Alpha Pair (the ``Benchmark Component'').
---------------------------------------------------------------------------
\6\ Total return measures performance (rate of return) of price
appreciation plus dividends over a given evaluation period.
---------------------------------------------------------------------------
At this time the Exchange is requesting Commission approval to list
and trade Alpha Index options only on the following Alpha Pairs: AAPL/
SPY, AMZN/SPY, CSCO/SPY, F/SPY, GE/SPY, GOOG/SPY, HPQ/SPY, IBM/SPY,
INTC/SPY, KO/SPY, MRK/SPY, MSFT/SPY, ORCL/SPY, PFE/SPY, RIMM/SPY, T/
SPY, TGT/SPY, VZ/SPY and WMT/SPY. The Exchange will not list Alpha
Index options on other Alpha Pairs without filing a proposed rule
change seeking Commission approval for the listing and trading of any
such additional Alpha Pairs.
Index Design and Calculation
In order to calculate an Alpha Index, Nasdaq measures the total
return performance of the Target Component relative to the total return
performance of the Benchmark Component, based upon prices of
transactions on the primary listing exchange of each underlying
component. Any Target Component or Benchmark Component upon which an
Alpha Index is based will meet the Exchange's listing standards and
options overlying them will already be listed and traded on the
Exchange. Each Alpha Index will initially be set at 100.00.
In order to calculate an Alpha Index, Nasdaq first calculates a
daily total return for both the Target Component and the Benchmark
Component of the Alpha Pair. For example, to calculate the daily total
return today, the previous day's closing market price for the component
would be subtracted from today's closing market price for the component
to determine a price difference (the ``Price Difference''). The Price
Difference would be added to any declared dividend if today were an
``ex-dividend'' date to yield the Price Plus Dividend Difference for
the component. The Price Plus Dividend Difference for the component is
then divided by the previous trading day's closing market price for the
component and the result is rounded, using simple rounding, to four
decimal places to yield the total daily return.
The total daily return for each component is then added to the
whole number one (e.g., 0.0156 plus 1 equals 1.0156) which permits the
ultimate Alpha Index to be expressed in percentage terms. This figure
for the Target Component is then divided by the comparable figure for
the Benchmark Component, and then multiplied by previous trading day's
closing Alpha Index value. The resulting level depicts the Target
Component's total return performance versus that of the previous
trading day.
The following example illustrates the Alpha Index calculation for
ABC stock as against SPY.\7\
---------------------------------------------------------------------------
\7\ Daily total return values and Alpha Index values will be
updated based upon prices of each reported transaction in the
primary listing market. In the example below, closing prices are
used simply for purposes of illustration.
---------------------------------------------------------------------------
Step 1.) For both ABC and SPY, the previous trading day's closing
market price is subtracted from today's closing market price with the
result added to any dividend declared today as the ``ex-dividend''
date. For example, today's closing price for ABC (214.01) minus the
previous day's closing price (210.73) equals 3.28. Today is not an ex-
dividend date for ABC; therefore, nothing is added to 3.28. Similarly,
today's closing price for SPY (113.33) minus the previous trading day's
closing price (111.44) equals 1.89. Today is not an ex-dividend date
for SPY; therefore, nothing is added to 1.89.
Step 2.) The step one result is divided by the previous trading
day's closing market price and the new result is rounded, using simple
rounding, to four decimal places to yield the daily total return. For
ABC, 3.28 would be divided
[[Page 81321]]
by 210.73 to yield a daily total return of 0.0156. Similarly, for SPY,
1.89 would be divided by 111.44 and yield a daily total return of
0.0170.
Step 3.) The step two results above are added to the whole number
one. For ABC, the daily total return of 0.0156 would be added to 1 for
a result of 1.0156. For SPY the daily total return of 0.0170 would be
added to 1 for a result of 1.0170.
Step 4.) In order to calculate the Alpha Index, the 1.0156 ABC
figure is divided by the 1.0170 SPY figure and then multiplied by the
previous trading day's closing Alpha Index value. Thus, assuming in the
example that the previous trading day's closing Alpha Index value was
100.00, today's closing Alpha Index value would be 99.86 (1.0156/1.0170
x 100.00 = 99.86). The 99.86 index level reflects that ABC's total
return performance today versus yesterday was -.14% relative to SPY.
In the event of a corporate event which eliminates one of the
underlying components of an Alpha Pair, Nasdaq will cease calculation
of the Alpha Index for that Alpha Pair and all outstanding option
positions will be immediately settled at the last disseminated price of
that Alpha Index. In the event of a corporate event such as a spin off
that affects the price of one of the underlying components, Nasdaq will
make an appropriate one-time adjustment to the price of the underlying
component used in the calculation to ensure that the Alpha Index
continues to reflect the daily total return of the component.
Alpha Index values will be disseminated every second over the
NASDAQ OMX Global Index Data Service (GIDS), which also disseminates
the NASDAQ-100 index, the spot values for the PHLX currency options and
the PHLX sector indexes.\8\
---------------------------------------------------------------------------
\8\ See http://www.nasdaqtrader.com/Trader.aspx?id=globalindexDS.
---------------------------------------------------------------------------
Listing Requirements
Alpha Index options will be listed only on Alpha Indexes comprised
of Alpha Pairs that are actively traded. Rule 1009A, Designation of the
Index, is being amended to provide that at the time of listing an Alpha
Index option, options on each underlying component will also be listed
and traded on the Exchange and will meet the requirements of Rule 1009,
Criteria for Underlying Securities. Additionally, each underlying
component's trading volume (in all markets in which the underlying
security is traded) must have averaged at least 2,250,000 shares per
day in the preceding twelve months. Following the listing of an Alpha
Index option, options on each of the component securities of the Alpha
Index must continue to meet the continued listing standards set forth
by Exchange Rule 1010, Withdrawal of Approval of Underlying Securities
or Options. Additionally, each underlying component's trading volume
(in all markets in which the underlying security is traded) must have
averaged at least 2,000,000 shares per day in the preceding twelve
months.
Finally, no Alpha Index option will be listed unless and until
options overlying each of the Alpha Index component securities have
been listed and traded on a national securities exchange with an
average daily options trading volume during the three previous months
of at least 10,000 contracts. Following the listing of an Alpha Index
option, options on each of the component securities of the Alpha Index
must continue to meet this options average daily volume standard.
Index Option Trading
Strike prices will be set to bracket Alpha Indexes in 1 point
increments; thus, the interval between strike prices will be no less
than $1.00.\9\ Phlx anticipates less volatility in Alpha Index options
than in existing stock options. Additionally, options on components of
an Alpha Pair may also have strikes with $1.00 strikes. The Exchange
therefore believes that $1.00 strike intervals are appropriate for this
product. The Exchange proposes to list series at $1 or greater strike
price intervals for each Alpha Index option, and to list at least two
strike prices above and two strike prices below the current value of
each Alpha Index option at about the time a series is opened for
trading on the Exchange. The Exchange would also list additional strike
prices at any price point, with a minimum of a $1.00 interval between
strike prices, as required to meet the needs of customers.
---------------------------------------------------------------------------
\9\ See Exchange Rule 1101A, Terms of Option Contracts, as
proposed to be amended.
---------------------------------------------------------------------------
Under Phlx Rule 1033A, Meaning of Premium Bids and Offers, bids and
offers in index options are to be expressed in terms of dollars and
decimal equivalents of dollars per unit of the index (e.g., a bid of
5.50 would represent a bid of $5.50 per unit). The minimum tick size
for series trading below $3 will be 0.05 and for series trading at or
above $3 the minimum tick will be 0.10; provided, however, that if
options on either component of an Alpha Pair have a minimum tick size
of 0.01, options on the Alpha Index will also have a minimum tick size
of 0.01.\10\
---------------------------------------------------------------------------
\10\ See Exchange Rule 1034, Minimum Increments, as proposed to
be amended.
---------------------------------------------------------------------------
Pursuant to Rule 1047A(c), trading in Alpha Index options may be
halted with the approval of an Options Exchange Official, whenever
trading on the primary market in one of the Alpha Pair components is
halted or suspended. Additionally, trading shall be halted whenever an
Options Exchange Official deems such action appropriate in the
interests of a fair and orderly market and to protect investors. Rule
1047(c) is being amended to provide that the Exchange will also halt
trading in the Alpha Index option whenever trading is halted in an
option overlying one or both of the components of the Alpha Pair.\11\
Finally, if Nasdaq should cease calculation of the Alpha Index due to a
corporate event (such as a merger) affecting one or more components of
the Alpha Pair, the Exchange will halt trading in the option and all
open contracts will be immediately settled at the last Alpha Index
price to be disseminated. Re-openings are conducted pursuant to Rule
1047(d), which is being amended so that it clearly applies to Alpha
Indexes in addition to stock indexes.
---------------------------------------------------------------------------
\11\ See Exchange Rule 1047A, Trading Rotations, Halts or
Reopenings.
---------------------------------------------------------------------------
Rule 1092, Obvious Errors and Catastrophic Errors, is being amended
to provide that Alpha Index option trades on the Exchange will be
nullified pursuant to Section (c)(iv)(C) of that rule if the trade
occurred during a trading halt on the primary market in either
component security of the Alpha Index. The word ``percent'' is added to
the previous clause applicable to stock index options to correct an
inadvertent omission in the existing rule text.
The Phlx will trade consecutive and cycle month series pursuant to
Phlx Rule 1101A. Specifically, there will be at least two expiration
months from the March, June, September, December cycle plus two
additional near-term months so that the three nearest term months will
always be available. The trading hours for options on the Alpha Indexes
will be from 9:30 AM to 4:15 PM (Philadelphia Time).\12\ Alpha Index
options are index options that are available for FLEX trading.\13\
---------------------------------------------------------------------------
\12\ See Exchange Rules 1101A, Terms of Option Contracts,
Commentary .01, and 101, Hours of Business.
\13\ See Exchange Rule 1079, FLEX Index, Equity and Currency
Options, as proposed to be amended. The Exchange is proposing that
separate position limits apply to FLEX Alpha Index options at the
same levels applicable to non-FLEX Alpha Index options.
---------------------------------------------------------------------------
[[Page 81322]]
Exercise and Settlement
Options on any Alpha Index will expire on the Saturday following
the third Friday of the expiration month. Trading in the expiring
contract month will normally cease at 4:15 PM (Philadelphia Time) on
the last day of trading. Exercise will result in delivery of cash on
the business day following expiration. Alpha Index options will be
A.M.-settled. The exercise settlement value will be based upon the
opening prices of the individual stock or ETF from the primary listed
market on the last trading day prior to expiration (usually a Friday).
The exercise settlement amount of an Alpha Index option will be
equal to the difference between the exercise settlement value and the
exercise price of the option, multiplied by $100. When the last trading
day is moved because of Exchange holidays, the last trading day for
expiring options will be the day immediately preceding the last
regularly-scheduled trading day.
Clearing
Alpha Index options are ``Strategy Based Options'' that will be
cleared by the Options Clearing Corporation.
Surveillance
The surveillance for opening price manipulation will be in place
for the launch of options on Alpha Indexes and other existing
surveillance patterns will be utilized to monitor trading in options on
each Alpha Index. The Exchange represents that these surveillance
procedures are adequate to monitor the trading of options on Alpha
Indexes. For surveillance purposes, the Exchange will have complete
access to information regarding trading activity in the pertinent
underlying securities and options thereon.
Position Limits
The Exchange is proposing that the position limit for an option on
an Alpha Index shall be 60,000 contracts on the same side of the
market. For purposes of determining compliance with position limits,
positions in Alpha Index options will be aggregated with positions in
equity options on the underlying securities.\14\ All position limit
hedge exemptions will apply. Section (a) of Commentary .01 to Rule
1001A, Position Limits, is being amended by the addition of clause
(iii) providing that each Alpha Index option position to be exempted
under the index hedge exemption must be hedged by a position in each of
the component securities underlying the Alpha Index.
---------------------------------------------------------------------------
\14\ See Exchange Rule 1001A, Position Limits, as proposed to be
amended.
---------------------------------------------------------------------------
Margin
The Exchange will set customer margin levels for Alpha Index
options at the level of the higher of the margin required for options
on the Target Component or the margin required for the Benchmark
Component.\15\
---------------------------------------------------------------------------
\15\ See Exchange Rule 721, Proper and Adequate Margin, as
proposed to be amended.
---------------------------------------------------------------------------
Exchange Rules Applicable
Except as modified herein, the Exchange Rules 1000A-1107A, Rules
Applicable to Trading of Options on Indices, will be applicable to
Alpha Index options. The Exchange is proposing minor amendments to
reflect trading of Alpha Index options which are not narrow-based or
broad-based stock index options, which the Exchange currently trades,
but rather strategy-based securities index options based upon an index
whose construction and calculation differs from that of stock index
options.
Systems Capacity
Additionally, the Exchange affirms that it possesses the necessary
systems capacity to support new series that would result from the
introduction of options on Alpha Indexes. The Exchange also has been
informed that OPRA has the capacity to support such new series.
Customer Protection
Exchange rules designed to protect public customers trading in
options would apply to Alpha Index options. Phlx Rule 1026 is designed
to ensure that options, including Alpha Index options are sold only to
customers capable of evaluating and bearing the risks associated with
trading in the instruments. Phlx Rule 1024, applicable to the conduct
of accounts, Phlx Rule 1025 relating to the supervision of accounts,
Phlx Rule 1028 relating to confirmations, and Phlx Rule 1029 relating
to delivery of options disclosure documents also would apply to trading
in Alpha Index options.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \16\ in general, and furthers the objectives of Section
6(b)(5) of the Act \17\ 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, in that it will permit trading in options based on Alpha
Indexes pursuant to rules designed to prevent fraudulent and
manipulative acts and practices and to promote just and equitable
principles of trade, and thereby will provide investors with the
ability to invest in options based on an additional index.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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 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 e-mail to [email protected]. Please include
File Number SR-Phlx-2010-176 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 81323]]
All submissions should refer to File Number SR-Phlx-2010-176. 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 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
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.\18\ 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-2010-176 and should be
submitted on or before January 18, 2011.
---------------------------------------------------------------------------
\18\ The text of the proposed rule change is available on the
Commission's Web site at www.sec.gov.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32382 Filed 12-23-10; 8:45 am]
BILLING CODE 8011-01-P