[Federal Register Volume 76, Number 35 (Tuesday, February 22, 2011)]
[Notices]
[Pages 9846-9849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-3801]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63914; File No. SR-Phlx-2011-15]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASDAQ OMX PHLX LLC to Expand the $2.50 Strike Price Program
February 15, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on February 2, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the
[[Page 9847]]
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\ 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 \3\ and Rule
19b-4 thereunder,\4\ proposes to amend Exchange Rule 1012, Series of
Options Open for Trading, to expand the $2.50 Strike Price Program.\5\
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\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
\5\ See Securities Exchange Act Release No. 33063 (October 18,
1993), 58 FR 54619 (October 18, 1993) (SR-Phlx-93-18) (a rule change
to list strike price intervals of $2.50 or greater for individual
stock options). See also Securities Exchange Act Release Nos. 52961
(December 15, 2005), 70 FR 76095 (December 15, 2005) (SR-Phlx-2005-
77) (a rule change to allow list options with $2.50 strike price
intervals for options with strike prices between $50 and $75); and
55338 (February 23, 2007), 72 FR 9371 (March 1, 2007) (SR-Phlx-2007-
04) (a rule change to list LEAPS at $2.50 strike price intervals).
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The text of the proposed rule change is available on the Exchange's
website at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, at the principal office of the Exchange, at the Commission's
Public Reference Room, and on the Commission's Web site at http://
www.sec.gov.
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 the
Statutory Basis for, the Proposed Rule Change
1.Purpose
The purpose of this proposed rule change is to expand the current
$2.50 Strike Price Program (``Program'') \6\ to permit the listing of
options with $2.50 strike price intervals for options with strike
prices between $50 and $100, provided the $2.50 strike price intervals
are no more than $10 from the closing price of the underlying stock in
the primary market.\7\ Additionally, the Exchange proposes to increase
the number of option classes on individual stocks for which the
intervals of strike prices will be $2.50 to 60 options classes.
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\6\ Initially adopted in 1995 as a pilot program, the options
exchanges at that time were permitted to list options with $2.50
strike price intervals up to $50 on a total of up to 100 option
classes. In 1998, the pilot program was expanded and permanently
approved to allow the options exchanges collectively to select up to
200 option classes on which to list options with $ 2.50 strike price
intervals up to $ 50. Of the current 200 options classes eligible
for the Program, 46 have been allocated to the Exchange. In
addition, each options exchange is permitted to list options with
$2.50 strike price intervals on any option class that another
options exchange selects under its Program. See Securities Exchange
Act Release Nos. 35993 (July 19, 1995), 60 FR 38073 (July 25, 1995)
(approving File Nos. SR-Phlx-95-08, SR-Amex-95-12, SR-PSE-95-07, SR-
CBOE-95-19, and SR-NYSE-95-12); and 40662 (November 12, 1998), 63 FR
64297 (November 19, 1998) (approving File Nos. SR-Amex-98-21, SR-
CBOE-98-29, SR-PCX-98-31, and SR-Phlx-98-26).
\7\ The term ``primary market'' is defined in Exchange Rule 1000
in respect of an underlying stock or exchange-traded fund share as
the principal market in which the underlying stock or exchange-
traded fund share is traded.
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Currently, Exchange Rule 1012 at Commentary .05 permits the listing
of options with $2.50 strike price intervals for options with strike
prices between $50 and $75.\8\ Specifically, the Exchange proposes to
amend Commentary .05 to Exchange Rule 1012 to amend the current text.
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\8\ Commentary .05 of Exchange Rule 1012 also permits strike
price intervals of $5.00 or greater where the strike price is
greater than $25 but less than $200; and $2.50 or greater where the
strike price is $25 or less and $10 or greater where the strike
price is $200 or more, except as provided otherwise in Rule 1012.
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For example, consider a hypothetical where Caterpillar, Inc.
(``CAT'') was trading at $81. With approximately one month remaining
until expiration, and with a front month at-the-money put option (the
80 strike) trading at approximately $1.30, the investor would be able
to purchase a $77.50 strike put at an estimated $.60 per contract.
Today, the next available strike of a one month put option is the 75
strike. While the 75 strike put would certainly trade at a lesser price
than the 80 strike put,\9\ the protection offered would only take
effect with a 7.40% decline in the market as opposed to a 4.30% decline
in the market. The additional choice would provide the investor an
additional to hedge exposure (the opportunity to hedge with a reduced
outlay) and thereby minimize risk if there were a decline in the stock
price of CAT.
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\9\ The 75 strike put would trade at $.30 in this example.
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Another example would be if an investor desired to sell call
options to hedge the exposure of an underlying stock position and
enhance yield. Consider a hypothetical where CAT was trading at $81 and
the second month (two months remaining) of a recently out-of-the-money
call option (the 85 strike) was trading at approximately $2.35. If the
investor where to sell the 85 call against an existing stock position,
the investor could yield a return of approximately 2.90% over a two
month period or an annualized return of 17.4%. By providing an
additional $2.50 strike interval above $75, the investor would have the
opportunity to sell the 82.50 strike instead of the 85 strike. If the
85 strike call were trading at $2.35, the 82.50 strike call would trade
at approximately 3.30. By selling the 82.50 strike call at 3.30 against
an existing stock position, the investor could yield a 4.07% return
over a two month period or an annualized 24.40% return. Therefore, an
additional choice of a $2.50 strike interval could afford varying
yields to the investor.
The Exchange believes that the Program has to date created
additional trading opportunities for investors, thereby benefiting the
marketplace. The existence of $2.50 strike prices with strike intervals
above $75 affords investors the ability to more closely tailor
investment strategies to the precise movement of the underlying
security and meet their investment, trading and risk management
requirements.
The Exchange is also proposing to increase the number of option
classes on individual stocks for which the intervals of strike prices
will be $2.50 to 60 options classes. Currently, the Exchange may select
up to 46 options classes on individual stocks for which the intervals
of strike prices will be $2.50. Initially adopted in 1995 as a pilot
program, the options exchanges at that time were permitted to list
options with $2.50 strike price intervals up to $50 on a total of up to
100 option classes.\10\ In 1998, the pilot program was expanded and
permanently approved to allow the options exchanges collectively to
select up to 200 option classes on which to list options with $2.50
strike price intervals
[[Page 9848]]
up to $50.\11\ Of the current 200 options classes eligible for the
Program, 46 have been allocated to the Exchange.\12\ In addition, each
options exchange is permitted to list options with $2.50 strike price
intervals on any option class that another options exchange selects
under its program.
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\10\ See Securities Exchange Act Release No. 35993 (July 19,
1995), 60 FR 38073 (July 25, 1995) (approving File Nos. SR-Phlx-95-
08, SR-Amex-95-12, SR-PSE-95-07, SR-CBOE-95-19, and SR-NYSE-95-12).
\11\ See Securities Exchange Act Release No. 40662 (November 12,
1998), 63 FR 64297 (November 19, 1998) (approving File Nos. SR-Amex-
98-21, SR-CBOE-98-29, SR-PCX-98-31, and SR-Phlx-98-26).
\12\ See Securities Exchange Act Release No. 40662 (November 12,
1998), 63 FR 64297 (November 19, 1998) (approving File Nos. SR-Amex-
98-21, SR-CBOE-98-29, SR-PCX-98-31, and SR-Phlx-98-26).
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Since 1998, the 200 options classes have not been expanded,
although increasingly more companies have completed initial public
offerings from 1998 through 2010. Additionally, significantly more
options classes are trading in 2010 as compared to 1998. The Exchange
proposes to increase its allocation from 46 to 60 \13\ options classes
to accommodate investor requests for $2.50 strikes in certain options
classes. The Exchange believes that offering additional options classes
would benefit investors.
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\13\ Currently, The Chicago Board Options Exchange, Incorporated
(``CBOE'') has an allocation of 60 options.
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Furthermore, the Exchange does not believe that this proposal would
have a negative impact on the marketplace. The Exchange would compare
this proposal with the $1 Strike Price expansion, wherein the Exchange
expanded its $1 Strike Price Program from 55 individual stocks to 150
individual stocks on which an option series may be listed at $1 strike
price intervals.\14\ The Exchange believes that this proposal, wherein
the Exchange is proposing to increase its allocation from 46 to 60
options classes is substantially less than the $1 Strike Price Program
increase and therefore would have less impact than that program, which
has not had any negative impact on the market in terms of proliferation
of quote volume or fragmentation.
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\14\ See Securities Exchange Act Release No. 62420 (June 30,
2010), 75 FR 39593 (July 9, 2010) (SR-Phlx 2010-72).
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With regard to the impact of this proposal on system capacity, the
Exchange has analyzed its capacity and represents that it and the
Options Price Reporting Authority have the necessary system capacity to
handle the potential additional traffic associated with the listing and
trading of classes on individual stocks in the $2.50 Strike Price
Program.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \15\ in general, and furthers the objectives of Section
6(b)(5) of the Act\16\ 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 the effect of the proposed expansion on the
marketplace would not result in a material proliferation of quote
volume or concerns with fragmentation. In addition, the Exchange
believes that it has the necessary system capacity to handle the
potential additional traffic associated with the listing and trading of
classes.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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Rather, the Exchange believes the $2.50 Strike Price Program
proposal would provide the investing public and other market
participants increased opportunities to better manage their risk
exposure. Accordingly, the Exchange believes that the proposal to
expand the Program to allow the listing of options with $2.50 strike
price intervals for options with strike prices between $50 and $100
should further benefit investors and the market by providing greater
trading opportunities for those underlying stocks that have low
volatility and thus trade in a narrow range.
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 Exchange consents, the Commission shall: (a) By order approve
or disapprove 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-2011-15 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-2011-15. 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 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-2011-15 and should be
submitted on or before March 15, 2011.
[[Page 9849]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-3801 Filed 2-18-11; 8:45 am]
BILLING CODE 8011-01-P