[Federal Register Volume 76, Number 85 (Tuesday, May 3, 2011)]
[Notices]
[Pages 24951-24954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10653]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64348; File No. SR-Phlx-2011-58]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing of Proposed Rule Change To Increase the Position Limit for
Options on the Standard and Poor's[supreg] Depositary Receipts
(SPDRs[supreg])
April 27, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on April 18, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the self-regulatory organization. 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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[[Page 24952]]
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 amend Phlx
Rule 1001 (Position Limits) to increase the position limit for options
on the Standard and Poor's Depositary Receipts (``SPDRs[supreg]'').\3\
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\3\ ``SPDRs[supreg]'', ``Standard & Poor's[supreg]'',
``S&P[supreg]'', ``S&P 500[supreg]'', ``Standard & Poor's 500'', and
``500'' are trademarks of The McGraw-Hill Companies, Inc.
SPDRs[supreg], also sometimes referred to colloquially as
``spiders'', are exchange traded funds (``ETFs'') based on the S&P
500[supreg] Index. Each share of the traditional SPDRs[supreg] ETF
(SPDRs[supreg] Trust Series 1) holds a stake in the 500 stocks
represented by the S&P 500[supreg], SPDRs[supreg], and options
thereon, are generally used by large institutions and traders as
bets on the overall direction of the market. They are also used by
individual retail investors who believe in passive management (index
investing).
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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 self-regulatory 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 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 proposal is to amend Rule 1001 to increase the
position limit applicable to options on SPDRs[supreg], which are
trading under the symbol SPY, from 300,000 to 900,000 contracts on the
same side of the market.\4\
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\4\ By virtue of Rule 1002, which is not amended by this filing,
exercise limits on options on SPDRs[supreg] would be similar to
position limits established in Rule 1001.
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The Exchange began trading options on SPDRs[supreg] on the
Exchange's electronic trading platform for options, Phlx XL, on January
10, 2005. That year, the position limit for these options was increased
to the current limit of 300,000 contracts on the same size of the
market, and has remained unchanged.\5\ However, institutional and
retail traders have greatly increased their demand for options on
SPDRs[supreg] for hedging and trading purposes, such that these options
have experienced an explosive gain in popularity and have been the most
actively traded options for the last two years. For example, options on
SPDRs[supreg] (SPY), the most actively traded options in the U.S. in
terms of volume, traded a total of 33,341,698 contracts across all
exchanges from March 1, 2011 through March 16, 2011. In contrast, over
the same time period options on the Nasdaq-100 Index[supreg] Tracking
Stock (``QQQ \SM\''),\6\ the third most actively traded options, traded
a total of 8,730,718 contracts (less than 26.2% of the volume of
options on SPDRs[supreg]).
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\5\ See Securities Exchange Act Release No. 51071 (January 21,
2005), 70 FR 4911 (January 31, 2005) (SR-Phlx-2005-05) (approval
order increasing position and exercise limits for options on
SPDRs[supreg] from 75,000 to 300,000 contracts on the same side of
the market) (the ``last position increase order''). See also
Securities Exchange Act Release Nos. 51043 (January 14, 2005), 70 FR
3402 (January 24, 2005) (SR-Amex-2005-06) (approval order); 51041
(January 14, 2005), 70 FR 3408 (January 24, 2005) (SR-CBOE-2005-06)
(approval order); and 51042 (January 14, 2005), 70 FR 3412 (January
24, 2005) (SR-ISE-2005-05) (approval order).
\6\ QQQ \SM\ options were formerly traded under the ticker
symbol QQQQ \SM\. QQQ \SM\, Nasdaq-100[supreg], Nasdaq-100
Index[supreg], Nasdaq[supreg], Nasdaq-100 Index Tracking Stock \SM\,
and are trademarks or service marks of The Nasdaq Stock Market, Inc.
(``Nasdaq'').
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Currently, SPY options have a position limit of only 300,000
contracts on the same side on the market while the significantly
lesser-volume QQQSM options, which are comparable to SPY
options, have a position limit of 900,000 contracts on the same side of
the market. The Exchange believes that SPY options should, like options
on QQQSM, have a position limit of 900,000 contacts. Given
the increase in volume and continuous unprecedented demand for trading
options on SPDRs[supreg], the Exchange believes that the current
position limit of 300,000 contracts \7\ is entirely too low and
inadequate and is a deterrent to the optimal use of the product for
hedging and trading purposes. There are multiple reasons to increase
the position limit for SPY options.
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\7\ Rule 1001.
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First, traders have informed the Exchange that the current SPY
option position limit of 300,000 contracts, which has remained flat for
more than five years despite the tremendous trading volume increase, is
no longer sufficient for optimal trading and hedging purposes. SPY
options are, as noted, used by large institutions and traders as a
means to invest in or hedge the overall direction of the market.
Second, options on SPDRs[supreg] are 1/10th the size of options on the
S&P 500[supreg] Index, traded under the symbol SPX. Thus, a position
limit of 300,000 contracts in options on SPDRs[supreg] is equivalent to
a 30,000 contract position limit in options on SPX.\8\ Traders who
trade options on SPDRs[supreg] to hedge positions in SPX options (and
the SPDRs[supreg] ETF based on SPX, SPDRs[supreg] Trust Series 1) have
indicated on several occasions that the current position limit for
options on SPDRs[supreg] is simply too restrictive,\9\ which may
adversely affect their (and the Exchange's) ability to provide
liquidity in this product. And third, the products that are perhaps
most comparable to options on SPDRs[supreg], namely options on
QQQSM, are subject to a 900,000 contract position limit on
the same side of the market.\10\ This has, in light of the huge run-up
in SPY option trading making them the number one nationally-ranked
option in terms of volume, resulted in a skewed and unacceptable SPY
option position limit. Specifically, the position limit for options on
SPDRs[supreg] at 300,000 contracts is but 33% of the position limit for
the less active options on QQQSM at 900,000 contracts.\11\
The Exchange proposes that options on SPDRs[supreg] similarly be
subject to a position limit of 900,000 contracts.\12\
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\8\ Chicago Board Options Exchange, which lists and trades SPX
options, has established that there is no position limit on SPX
options. See CBOE Rule 24.4 and Securities Exchange Act Release No.
44994 (October 26, 2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-
2001-22) (order approving permanent elimination of SPX options
position limit).
\9\ See supra note 3.
\10\ See Rule 1001 and Securities Exchange Act Release No. 51322
(March 4, 2005), 70 FR 12260 (March 11, 2005) (SR-Phlx-2005-17)
(notice of filing and immediate effectiveness).
\11\ Similarly to options on SPDRs[supreg] (SPY) being 1/10th
the size of options on the related index S&P 500[supreg]Index (SPX),
so options on the Nasdaq-100 Index[supreg] Tracking Stock
(QQQSM) are 1/10th the size of options on the related
index NASDAQ-100 Index (NDX). The position limit for
QQQSM options and its related index NDX have a comparable
relationship to that of SPY options and SPX. That is, the position
limit for options on QQQSM is 900,000 contracts and there
is no positions limit for NDX options. See supra note 9 and
Securities Exchange Act Release No. 52650 (October 21, 2005), 70 FR
62147 (October 28, 2005) (SR-CBOE-2001-41) (order approving
elimination of NDX options position limit).
\12\ The position limit for IWM options on yet another large ETF
entitled iShares Russell 2000 Index Fund, (which options have
significantly less trading volume than the number one ranked SPY
options, as also the QQQSM options) are set at 500,000
contracts.
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The volume and notional value of options on SPDRs[supreg] and
QQQSM, as well as the volume and market capitalizations of
their underlying ETFs, are set forth below:
[[Page 24953]]
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Option notional Current options
Option nat'l rank Option symbol Name of Option ADV 2010 value * December position limit
2010 underlying ETF 31, 2010 position limit
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1................. SPY............... SPDR Trust Series 3,625,904 $177,823,76 300,000
1. contracts. million. contracts.
4................. QQQ............... Powershares QQQ 963,502 contracts $27,141,91 900,000
Trust. million. contracts.
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* Notional value is calculated as follows: OI x Close x 100; where OI = underlying security's open interest (in
contracts), Close = closing price of underlying security on 12/31/2010.
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ETF market
ETF nat'l rank 2010 Name of ETF ETF ADV 2010 capitalization ETF avg dollar
December 31, 2010 volume
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1..................... ..................... SPDR Trust Series 1.. 210,232,241 shares.. $90,280.71 million.
3..................... Powershares QQQ Trust 85,602,200 shares.... $23,564.8 million... $3,593 million .
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The options reporting requirement would continue unabated. Thus,
the Exchange would require that, just like for options on
QQQSM, each member or member organization that maintains a
position in SPDRs[supreg] options on the same side of the market, for
its own account or for the account of a customer, must report certain
information. This information would include, but would not be limited
to, the option position, whether such position is hedged and if so, a
description of the hedge and if applicable, the collateral used to
carry the position. Exchange specialists and Registered Options Traders
(``ROTs'') \13\ would continue to be exempt from this reporting
requirement as specialist and ROT information can be accessed through
the Exchange's market surveillance systems. In addition, the general
reporting requirement for customer accounts that maintain an aggregate
position of 200 or more option contracts (``large positions'') would
remain at this level for options on SPDRs[supreg].\14\
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\13\ For discussion regarding specialists and ROTs, see Rules
1020 and 1014(b)(ii), respectively.
\14\ For reporting requirements, see Rule 1003.
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The Exchange believes that position and exercise limits, at their
current levels, no longer serve their stated purpose. There has been a
steadfast and significant increase over the last decade in the overall
volume of exchange-traded options; position limits, however, have not
kept up with the volume. Part of this volume is attributable to a
corresponding increase in the number of overall market participants,
which has, in turn, brought about additional depth and increased
liquidity in exchange-traded options.\15\
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\15\ The Commission has previously observed that: Since the
inception of standardized options trading, the options exchanges
have had rules imposing limits on the aggregate number of options
contracts that a member or customer could hold or exercise. These
rules are intended to prevent the establishment of options positions
that can be used or might create incentives to manipulate or disrupt
the underlying market so as to benefit the options position. In
particular, position and exercise limits are designed to minimize
the potential for mini-manipulations and for corners or squeezes of
the underlying market. In addition such limits serve to reduce the
possibility for disruption of the options market itself, especially
in illiquid options classes. See Securities Exchange Act Release No.
39489 (December 24, 1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-
11) (order approving).
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As the anniversary of listed options trading approaches its
fortieth year, the Exchange believes that the existing surveillance
procedures and reporting requirements at Phlx, other options exchanges,
and at the several clearing firms are capable of properly identifying
unusual and/or illegal trading activity. In addition, routine oversight
inspections of the Exchange's regulatory programs by the Commission
have not uncovered any material inconsistencies or shortcomings in the
manner in which the Exchange's market surveillance is conducted. These
procedures utilize daily monitoring of market movements via automated
surveillance techniques to identify unusual activity in both options
and underlying stocks.\16\
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\16\ These procedures have been effective for the surveillance
of SPY options trading and will continue to be employed.
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Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\17\ Options positions are
part of any reportable positions and, thus, cannot be legally hidden.
Moreover, the previously noted Rule 1003 requirement that members file
reports with the Exchange for any customer who held aggregate large
long or short positions of any single class for the previous day will
continue to serve as an important part of the Exchange's surveillance
efforts.
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\17\ 17 CFR 240.13d-1.
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The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that a member or its customer may try to maintain an
inordinately large unhedged position in an option, particularly on
SPDRs[supreg]. Current margin and risk-based haircut methodologies
serve to limit the size of positions maintained by any one account by
increasing the margin and/or capital that a member must maintain for a
large position held by itself or by its customer. It should also be
noted that the Exchange has the authority under Exchange Rule 722(c)(3)
to impose a higher margin requirement upon a member or member
organization when the Exchange determines a higher requirement is
warranted. In addition, the Commission's net capital rule, Rule 15c3-1
under the Act,\18\ imposes a capital charge on members to the extent of
any margin deficiency resulting from the higher margin requirement.
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\18\ 17 CFR 240.15c3-1.
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Finally, the Exchange believes that while position limit on options
on QQQsSM, which as noted are similar to options on
SPDRs[supreg], has been gradually expanded from 75,000 contracts to the
current level of 900,000 contracts in 2005, there have been no adverse
affects on the market as a result of this position limit increase.
Likewise, there have been no adverse affects on the market from
expanding the position limit for options on SPDRs[supreg] from 75,000
contracts to the current level of 300,000 contracts in 2005.
The Exchange believes that restrictive option position limits
prevent large customers, such as mutual funds and pension funds, from
using options to gain meaningful exposure to and hedging protection
through the use of options on SPDRs[supreg]. This can result in lost
liquidity in both the options market and the equity market. The
proposed position limit increase will remedy this situation to the
benefit of large as well as retail traders, investors, and public
customers. The Exchange believes that increasing position and exercise
limits for options on would lead to a more liquid and competitive
market environment for options on SPDRs[supreg] that would benefit
customers interested in this product.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b)
[[Page 24954]]
of the Act \19\ in general, and furthers the objectives of Section
6(b)(5) of the Act \20\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanisms of
a free and open market and a national market system. The Exchange is
proposing to expand the position limit on options on SPDRs[supreg]. The
Exchange believes that this proposal will be beneficial to large market
makers (which generally have the greatest potential and actual ability
to provide liquidity and depth in the product), as well as retail
traders, investors, and public customers.
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\19\ 15 U.S.C. 78f(b).
\20\ 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 45 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 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 No. SR-Phlx-2011-58 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2011-58. 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 such 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-2011-58 and should be submitted on or before May 24, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10653 Filed 5-2-11; 8:45 am]
BILLING CODE 8011-01-P