[Federal Register Volume 76, Number 52 (Thursday, March 17, 2011)]
[Notices]
[Pages 14702-14705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6172]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64075; File No. SR-Phlx-2011-28]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASDAQ OMX PHLX LLC To Expand the Number of Components in the
PHLX Oil Service Sector\SM\ Known as OSX \SM\, on Which Options Are
Listed and Traded
March 11, 2011.
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 March 2, 2011, 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, 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 expand the
number of components in the PHLX Oil Service Sector\SM\ (the ``Index''
or ``OSX\SM\''), on which options are listed and traded, and the Index
weighting methodology [sic].\3\ No other changes are made to the Index
or the options thereon.
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\3\ PHLX Oil Service Sector\SM\ may also be known as PHLX Oil
Service Sector\SM\ Index or PHLX Oil Service Index.
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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.
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 expand to thirty the number of
components in the PHLX Oil Service Sector\SM\ or OSX\SM\, on which
options are listed and traded, and change the Index weighting
methodology to modified capitalization-weighted.\4\ No other changes
are made to the Index or the options thereon.
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\4\ The Exchange notes that changing the weighting of the Index
from price-weighting to modified capitalization-weighting does not
by itself require a rule filing proposal because both weighting
methodologies are acceptable per the current generic index listing
standards found in Rule 1009A(b)(2). The weighting change is
included in this proposal only in conjunction with increasing the
number of Index components by more than the amount indicated in Rule
1009A(c)(2), which requires a rule filing proposal.
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OSX\SM\ options subsequent to this proposal will be identical to
OSX\SM\ options that are currently listed and trading except for the
number of components in and the weighting methodology of the underlying
Index; and will trade pursuant to similar contract specifications
(updated regarding components and weighting methodology).\5\ The only
post-proposal difference in OSX\SM\ options is that they will overly
[sic] an Index with thirty components (the current Index has fifteen
components) that will be modified capitalization-weighted (the current
Index is price-weighted).
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\5\ The contract specifications for OSX\SM\ options are
available at https://www.nasdaqtrader.com/micro.aspx?id=phlxsectorscontractspecs.
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Background
The Exchange currently has initial listing and maintenance listing
standards for options on indexes in Rule 1009A that are designed to
allow the Exchange to list options on narrow-based indexes \6\ and
broad based indexes\7\ pursuant to generic listing standards (the
``Index Listing Standards'').\8\ The PHLX Oil Service
[[Page 14703]]
Sector\SM\ is a narrow-based index and OSX\SM\ options overlying the
Index are listed and traded pursuant to Rule 1009A(b). OSX\SM\ options
were originally listed and began trading in 1997 pursuant to Exchange
approval.\9\
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\6\ A narrow-based index or industry index is defined as: An
index designed to be representative of a particular industry or a
group of related industries. The term ``narrow-based index''
includes indices the constituents of which are all headquartered
within a single country. Rule 1000A(b)(12).
\7\ A broad-based index or market index is defined as: An index
designed to be representative of a stock market as a whole or of a
range of companies in unrelated industries. Rule 1000A(b)(11).
\8\ Rule 1009A establishes generic listing standards for options
on narrow-based and broad-based indexes pursuant to Rule 19b-4(e) of
the Act. See Securities Exchange Act Release No. 40761 (December 8,
1998), 63 FR 70952 (December 22, 1998). The listing standards in
Rule 1009A are similar to those of other options exchanges such as,
for example, Chicago Board Options Exchange, Incorporated;
International Stock Exchange LLC; and The NASDAQ Stock Market LLC.
\9\ See Securities Exchange Act Release No. 38207 (January 27,
1997), 62 FR 5268 (February 4, 1997) (SR-Phlx-97-02) (notice of
filing and immediate effectiveness of proposal to list and trade
OSX\SM\ options on the Index). On October 21, 2008, in that OSX\SM\
options met the generic Index Listing Standards per Rule 1009A, the
Exchange filed Form 19b-4(e) regarding such options.
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The PHLX Oil Service Sector\SM\ is a price-weighted index composed
of fifteen companies that provide oil drilling and production services,
oil field equipment, support services and geophysical/reservoir
services. The Index provides exposure to the dynamic oil industry. The
Index is one of several narrow-based sector indexes on which options
are listed and traded on the Exchange.\10\ When investors want
information and investment opportunities specific to the oil industry
they very often turn to the Index and the OSX\SM\ options traded
thereon.\11\ The Index has served as an important market indicator and
OSX\SM\ options a viable trading and investing vehicle in respect of
the oil services sector [sic].\12\ Recognizing the market-leading
aspects of the Index, the Exchange is proposing a rule change to
increase to thirty the number of components in the Index \13\ so that
OSX\SM\ options may be listed and traded on this premiere index that
even more effectively reflects the oil services sector.
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\10\ Other sector indexes on which options are listed and traded
on the Exchange include: KBW Bank Index\SM\ (BKX\SM\); PHLX Gold/
Silver Sector\SM\ (XAU\SM\); PHLX Housing Sector\SM\ (HGX\SM\); PHLX
Utility Sector\SM\ (UTY\SM\); SIG Energy MLP Index\SM\ (SVO\TM\);
SIG Oil Exploration & Production Index\TM\ (EPX\SM\); PHLX
Semiconductor Sector\SM\ (SOX\SM\); and NASDAQ Internet Index\SM\
(QNET\SM\).
\11\ Other currently available investment products that evaluate
the oil industry, albeit differently from OSX\SM\, include the Oil
Services HOLDRs ETF (OIH), iShares Dow Jones U.S. Oil Equipment &
Services Index Fund (IEZ), SPDR S&P Oil & Gas Equip & Services ETF
(XES), and PowerShares Dynamic Oil Services Portfolio (PX).
\12\ During 2010, OSX\SM\ has traded an average of 22,774
contracts per month and has traded as much as 3,826 contracts in a
day (February 5, 2010). As of December 31, 2010, there were 11,228
contracts of open interest in OSX\SM\.
\13\ A listing of the component securities in the Index is
available at https://indexes.nasdaqomx.com/weighting.aspx?IndexSymbol=OSX&menuIndex=0 .
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The Exchange submits that in the proposed expanded form OSX\SM\
would continue to meet the relevant generic Index Listing Standards of
Rule 1009A for listing options. Specifically, all the index maintenance
requirements in subsection (c) of Rule 1009A applicable to options on
narrow-based indexes would be met with one exception.\14\ The singular
exception is the number of components.\15\ In particular, subsection
(c)(2) of Rule 1009 [sic] indicates that the total number of component
securities in the index may not increase or decrease by more than 33\1/
3\% from the total number of securities in the index at the time of its
initial listing; adding components to equal thirty is outside the
(c)(2) parameter, and is the reason why the Exchange is making the
current filing.
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\14\ The maintenance provisions in subsection (c) of Rule 1009A
state, in part, as applicable to OSX\SM\:
(1) The conditions stated in subparagraphs (b)(1), (3), (6),
(7), (8), (9), (10), (11) and (12), must continue to be satisfied,
provided that the conditions stated in subparagraph (b)(6) must be
satisfied only as to the first day of January and July in each year;
(2) The total number of component securities in the index may not
increase or decrease by more than 33\1/3\% from the number of
component securities in the index at the time of its initial
listing, and in no event may be less than nine component securities;
(3) Trading volume of each component security in the index must be
at least 500,000 shares for each of the last six months, except that
for each of the lowest weighted component securities in the index
that in the aggregate account for no more than 10% of the weight of
the index, trading volume must be at least 400,000 shares for each
of the last six months; (4) In a capitalization-weighted index, the
lesser of the five highest weighted component securities in the
index or the highest weighted component securities in the index that
in the aggregate represent at least 30% of the total number of
stocks in the index each have had an average monthly trading volume
of at least 1,000,000 shares over the past six months.
\15\ See supra note 4. While the Exchange will change the
weighting of the Index from price-weighting to modified
capitalization-weighting, both weighting methodologies are
acceptable per the current Index Listing Standards. Rule
1009A(b)(2).
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Index Design and Index Composition
Currently, the Index is calculated using a price-weighted index
methodology. The value of the Index equals the aggregate value of the
Index share weights, also known as the Index Shares, of each of the
Index Securities, which is fixed at 10,000,000 multiplied by each such
security's Last Sale Price,\16\ and divided by the divisor of the
Index. The divisor serves the purpose of scaling such aggregate value
to a lower order of magnitude which is more desirable for Index
reporting purposes. If trading in an Index security is halted on its
primary listing market, the most recent Last Sale Price for that
security is used for all index computations until trading on such
market resumes. Likewise, the most recent Last Sale Price is used if
trading in a security is halted on its primary listing market before
the market is open. The Index is ordinarily calculated without regard
to cash dividends on Index securities.
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\16\ For purposes of this document, Last Sale Price refers to
the following: For a security listed on NASDAQ, it is the last sale
price on NASDAQ, which normally would be the NASDAQ Official Closing
Price (NOCP) when NASDAQ is closed. For any NYSE-listed or NYSE AMEX
listed security, it is the last regular way trade reported on such
security's primary U.S. listing market. If a security does not trade
on its primary listing market on a given day, the most recent last
sale price from the primary listing market (adjusted for corporate
actions, if any) is used.
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The modified capitalization-weighted methodology is expected to
retain, in general, the economic attributes of capitalization
weighting, while providing enhanced diversification. To accomplish
this, NASDAQ OMX, which maintains the Index, rebalances the Index
quarterly and adjusts the weighting of Index components.
Index eligibility is limited to specific security types only. The
security types eligible for the Index include foreign or domestic
common stocks, ordinary shares, American Depository Receipts
(``ADRs''), shares of beneficial interest or limited partnership
interests, and tracking stocks. Security types not included in the
Index are closed-end funds, convertible debentures, exchange traded
funds, preferred stocks, rights, warrants, units and other derivative
securities.
As of December 31, 2010, the following were characteristics of the
Index using a modified capitalization-weighting methodology:
--The total weighted capitalization of all components of the Index was
$365.08 billion;
--Regarding component capitalization, (a) the highest weighted
capitalization of a component was $113.93 billion (Schlumberger N.V.),
(b) the lowest weighted capitalization of a component was $0.80 billion
(Global Industries, Ltd.), (c) the mean capitalization of the
components was $12.17 billion, and (d) the median capitalization of the
components was $4.77 billion;
--Regarding component price per share, (a) the highest price per share
of a component was $103.54 (Carbo Ceramics, Inc.), (b) the lowest price
per share of a component was $6.93 (Global Industries, Ltd.), (c) the
mean price per share of the components was $49.47, and (d) the median
price per share of the components was $47.92;
--Regarding component weightings, (a) the highest weighting of a
component was 8% (Schlumberger N.V., Halliburton Company, National
[[Page 14704]]
Oilwell Varco, Inc., Baker Hughes Incorporated, Transocean Ltd
(Switzerland)), (b) the lowest weighting of a component was 0.43%
(Global Industries, Ltd.), (c) the mean weighting of the components was
3.33%, (d) the median weighting of the components was 2.60%, and (e)
the total weighting of the top five highest weighted components was 40%
(Schlumberger N.V., Halliburton Company, National Oilwell Varco, Inc.,
Baker Hughes Incorporated, Transocean Ltd (Switzerland));
--Regarding component shares, (a) the most available shares of a
component was 1.36 billion shares (Schlumberger N.V.), (b) the least
available shares of a component was 0.02 billion shares (Carbo
Ceramics, Inc.), (c) the mean available shares of the components was
0.24 billion shares, and (d) the median available shares of the
components was 0.13 billion shares;
--Regarding the six-month average daily volumes (``ADVs'') of the
components, (a) The highest six-month ADV of a component was 14.61
million shares (Halliburton Company), (b) the lowest six-month ADV of a
component was 0.22 million shares (Bristow Group Inc.), (c) the mean
six-month ADV of the components was 3.05 million shares, (d) the median
six-month ADVs of the components was 1.40 million shares, (e) the
average of six-month ADVs of the five most heavily traded components
was 9.70 million shares (Halliburton Company, Weatherford
International, Ltd (Switzerland), Schlumberger N.V., Transocean Ltd
(Switzerland), Nabors Industries, Inc. New), and (f) 100% of the
components had a six-month ADV of at least 200,000; and
--Regarding option eligibility, (a) 100.00% of the components were
options eligible, as measured by weighting, and (b) 100.00% of the
components were options eligible, as measured by number.
Index Calculation and Index Maintenance
The Index is maintained by NASDAQ OMX and index levels are
calculated continuously, using the Last Sale Price for each component
stock in the Index. Index values are publicly disseminated at least
every fifteen seconds throughout the trading day through a major market
data vendor, namely NASDAQ OMX's index dissemination service. The
Exchange expects that such dissemination will continue through one or
more (NASDAQ OMX-owned or unrelated) major market data vendors.\17\
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\17\ Rule 1009A(b)(12) states that should an underlying index be
maintained by a broker-dealer, however, the index must be calculated
by a third party who is not a broker-dealer, and the broker-dealer
will have to erect a ``Chinese Wall'' around its personnel who have
access to information concerning changes in and adjustments to the
index.
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Appurtenant to review of the Index for purposes of rebalancing,
component securities are evaluated by NASDAQ OMX. In the event that an
Index component security no longer meets the requirements for continued
security eligibility, it will be replaced with a security that is not
currently in the Index that meets all of the initial security
eligibility criteria and additional criteria which follow. Securities
eligible for inclusion will be ranked ascending by market value,
current price and percentage price change over the previous six months.
The security with the highest overall ranking will be added to the
Index provided that the Index then meets the following criteria: No
single Index security is greater than 30% of the weight of the Index
and the top five Index securities are not greater than 55% of the
weight of the Index; and non-U.S. component securities that are not
subject to comprehensive surveillance agreements do not in the
aggregate represent more than 15% of the weight of the Index.\18\ In
the event that the highest-ranking security does not permit the Index
to meet the above criteria, the next highest-ranking security will be
selected and the Index criteria will again be applied to determine
eligibility. The process will continue until a qualifying replacement
security is selected.\19\ Component changes will be publicly announced.
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\18\ See Rule 1009A(b).
\19\ Moreover, changes in the price of an index security driven
by corporate events such as stock dividends, stock splits, certain
spin-offs, and rights issuances will be adjusted on the ex-date.
In the case of a special cash dividend, a determination will be
made on an individual basis whether to make a change to the price of
an index security in accordance with its Index dividend policy. If
it is determined that a change will be made, it will become
effective on the ex-date and advance notification will be made.
Ordinarily, whenever there is a change in the price of an index
security due to stock dividends, stock splits, spin-offs, rights
issuances, or special cash dividends, the divisor is adjusted to
ensure that there is no discontinuity in the value of the Index,
which might otherwise be caused by any such change.
If the change in total shares outstanding arising from other
corporate actions is greater than or equal to 10%, the change is
made as soon as practicable. Otherwise, if the change in total
shares outstanding is less than 10%, then all such changes are
accumulated and made effective at one time on a quarterly basis
after the close of trading on the third Friday in each of March,
June, September and December. The Index Shares are derived from the
security's total shares outstanding. Intra-quarter, the Index Shares
are adjusted by the same percentage amount as the amount that the
total shares outstanding have changed.
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In the event a class of index options listed on the Exchange fails
to satisfy the maintenance listing standards, the Exchange shall not
open for trading any additional series of options of that class unless
such failure is determined by the Exchange not to be significant and
the Commission concurs in that determination, or unless the continued
listing of that class of index options has been approved by the
Commission under Section 19(b)(2) of the Act.\20\
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\20\ 15 U.S.C. 78s(b)(2).
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The Exchange represents that, if the Index ceases to be maintained
or calculated, or if the Index values are not disseminated at least
every fifteen seconds by a widely available source, the Exchange will
promptly notify the Division of Trading and Markets of the Commission,
and the Exchange will not list any additional series for trading and
will limit all transactions in such options to closing transactions
only for the purpose of maintaining a fair and orderly market and
protecting investors.
Contract Specifications
The contract specifications for the proposed expanded Index options
(updated regarding components and weighting methodology) are, as
previously noted, identical to the current narrow-based Index options
that are currently listed and traded on the Exchange.\21\ Options on
the Index are European-style and A.M. cash-settled. The Exchange's
trading hours for index options (9:30 a.m. to 4 p.m. ET), will apply to
options on OSXSM.\22\ Exchange rules that are applicable to
the trading of options on indexes will continue to apply to the trading
of options on OSXSM.\23\
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\21\ See supra note 5.
\22\ See Rule 101.
\23\ For trading rules applicable to trading index options, see
Rules 1000A et seq. For trading rules applicable to trading options
generally, see Rules 1000 et seq.
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The strike price intervals for OSXSM options contracts
will remain the same as those currently in use: $1 or greater.\24\ The
minimum increment size for series trading below $3 will remain $0.05,
and for series trading at or above $3 will remain $0.10.\25\ The
Exchange's margin rules will be applicable.\26\ The Exchange will
continue to list options on OSXSM
[[Page 14705]]
in up to three months from the March, June, September, December cycle
plus two additional near-term months (that is, as many as five months
at all times).\27\ The trading of OSXSM options will
continue to be subject to the same rules that govern the trading of all
of the Exchange's index options, including sales practice rules, margin
requirements, and trading rules.
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\24\ See Commentary .03 to Phlx Rule 1101A. Rule 1101A generally
indicates that strike price intervals for index options may be
$5.00, $2.50 and $1.00.
\25\ See Phlx Rule 1034(a). However, the rule indicates that
certain products (e.g. IWM options and Alpha Index options) may
trade at $0.01 minimum increments.
\26\ See Phlx Rule 721 et seq.
\27\ See Phlx Rule 1101A(b).
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Surveillance and Capacity
The Exchange represents that it has an adequate surveillance
program in place for options traded on the Index and intends to apply
those same program procedures that it applies to the Exchange's current
OSXSM options and other index options. Additionally, the
Exchange is a member of the Intermarket Surveillance Group (``ISG'')
under the Intermarket Surveillance Group Agreement, dated June 20,
1994. ISG members generally work together to coordinate surveillance
and investigative information sharing in the stock and options markets.
In addition, the major futures exchanges are affiliated members of the
ISG, which allows for the sharing of surveillance information for
potential intermarket trading abuses.\28\
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\28\ A list of the current members and affiliate members of ISG
can be found at https://www.isgportal.org/isgPortal/public/members.htm.
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The Exchange represents that it has the necessary systems capacity
to continue to support listing and trading OSXSM options.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \29\ in general, and furthers the objectives of Section
6(b)(5) of the Act \30\ 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
believes that the proposal to expand the OSXSM index will
allow the Exchange to continue listing and trading options on this
premiere index that even more effectively reflects [sic] the oil
services sector.
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\29\ 15 U.S.C. 78f(b).
\30\ 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 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-2011-28 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-2011-28. 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 copying in
the Commission's Public Reference Room. 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-2011-28 and
should be submitted on or before April 7, 2011.
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\31\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6172 Filed 3-16-11; 8:45 am]
BILLING CODE 8011-01-P