[Federal Register Volume 76, Number 66 (Wednesday, April 6, 2011)]
[Notices]
[Pages 19167-19169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8124]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64160; File No. SR-NASDAQ-2011-041]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the NASDAQ Stock Market, LLC
To Expand the $2.50 Strike Price Program
March 31, 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 March 29, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``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.
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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 NASDAQ Stock Market LLC proposes to amend Chapter IV,
Supplementary Material to Section 6, Series of Options Open for
Trading, at .03, to expand the $2.50 Strike Price Program.\3\
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\3\ See Securities Exchange Act Release No. 57478 (March 12,
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (a proposal to participate in the $2.50 Strike
Price Program).
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The text of the proposed rule change is available on the Exchange's
Web site at http://www.nasdaq.cchwallstreet.com, at the principal
office of the Exchange, on the Commission's Web site at http://www.sec.gov, 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. 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 this proposed rule change is to expand the current
$2.50 Strike Price Program (``Program'') \4\ 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.\5\ Currently, Chapter IV, Section 6 at
Supplementary Material .03 permits the listing of options with $2.50
strike price intervals for options with strike prices between $50 and
$75. Specifically, the Exchange proposes to amend Commentary .03 to
Chapter IV, Section 6 to amend the current text.
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\4\ In 2007, NOM proposed to participate in the $2.50 Strike
Price Program. The $2.50 Strike Price Program allows the options
exchanges to list options in up to 200 classes at $2.50 strike price
intervals for strike prices greater than $25 but less than $75. See
Securities Exchange Act Release Nos. 40662 (November 12, 1998), 63
FR 64297 (November 19, 1998) (order approving File Nos. SR-Amex-98-
21; SR-CBOE-98-29; SR-PCX-98-31; and SR-Phlx-98-26) (``1998 Order'')
and 52893 (December 5, 2005), 70 FR 73488 (December 12, 2005) (order
approving File No. SR-Amex-2005-067). The 200 classes eligible for
the $2.50 Strike Price Program were allocated among the options
exchanges pursuant to a formula approved by the Commission as part
of the permanent approval of the program. Each options exchange may
list options with $2.50 strike price intervals on any options class
that another exchange selects as part of its program. NOM's rules
provide that NOM may list series at $2.50 strike price intervals in
any multiply traded option once another exchange has selected that
option to be a part of the program. See NOM Rule, Chapter IV,
Section 6, Supplementary Material .03(a). NOM participates in the
$2.50 Strike Price Program on the same terms and conditions as the
other options exchanges. See Securities Exchange Act Release No.
57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-
2007-004 and SR-NASDAQ-2007-080).
\5\ 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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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,\6\ the protection offered would only take
effect with a 7.40% decline in the
[[Page 19168]]
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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\6\ The 75 strike put would trade at $0.30 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 were 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.
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 \7\ in general, and furthers the objectives of Section
6(b)(5) of the Act \8\ 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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\7\ 15 U.S.C. 78f(b).
\8\ 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
Because the foregoing proposed rule change does not significantly
affect the protection of investors or the public interest, does not
impose any significant burden on competition, and, by its terms, does
not become operative for 30 days from the date on which it was filed,
or such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-
4(f)(6) thereunder.\10\
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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The Exchange has requested that the Commission waive the 30-day
operative delay. The Commission believes that waiver of the operative
delay is consistent with the protection of investors and the public
interest because the proposal is substantially similar to that of
another exchange that has been approved by the Commission.\11\
Therefore, the Commission designates the proposal operative upon
filing.\12\
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\11\ See Securities Exchange Act Release No. 64157 (March 31,
2011) (SR-Phlx-2011-15) (order approving expansion of $2.50 Strike
Price Program).
\12\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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-NASDAQ-2011-041 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-NASDAQ-2011-041. 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
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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-NASDAQ-2011-041 and should be submitted on or before
April 27, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8124 Filed 4-5-11; 8:45 am]
BILLING CODE 8011-01-P