
[Federal Register: May 28, 2010 (Volume 75, Number 103)]
[Notices]               
[Page 30078-30081]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28my10-143]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62151; File No. SR-Phlx-2010-72]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASDAQ OMX PHLX, Inc. to Make Changes to Expand the $1 Strike 
Program

May 21, 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 May 7, 2010, NASDAQ OMX PHLX, Inc. (``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 modify 
Commentary .05 to Phlx Rule 1012 (Series of Options Open for Trading) 
to expand the Exchange's $1 Strike Price Program (the ``$1 Strike 
Program'' or ``Program'') \3\ to allow the Exchange to select 150 
individual stocks on which options may be listed at $1 strike price 
intervals.
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    \3\ The $1 Strike Program was initially approved on June 11, 
2003 as pilot, and was then extended several times until June 5, 
2008. See Securities Exchange Act Release Nos. 48013 (June 11, 
2003), 68 FR 35933 (June 17, 2003) (SR-Phlx-2002-55) (approval of 
pilot program); 49801 (June 3, 2004), 69 FR 32652 (June 10, 2004) 
(SR-Phlx-2004-38); 51768 (May 31, 2005), 70 FR 33250 (June 7, 2005) 
(SR-Phlx-2005-35); 53938 (June 5, 2006), 71 FR 34178 (June 13, 2006) 
(SR-Phlx-2006-36); and 55666 (April 25, 2007), 72 FR 23879 (May 1, 
2007) (SR-Phlx-2007-29). The program was subsequently expanded and 
made permanent in 2008. See Securities Exchange Act Release No. 
57111 (January 8, 2008), 73 FR 2297 (January 14, 2008) (SR-Phlx-
2008-01). The program was last expanded in 2009. See Securities 
Exchange Act Release No. 59590 (March 17, 2009), 74 FR 12412 (March 
24, 2009) (SR-Phlx-2009-21). The $1 Strike Program is found in 
Commentary .05 to Rule 1012.
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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.

[[Page 30079]]

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 modify Commentary 
.05 to Phlx Rule 1012 to allow the Exchange to select 150 individual 
stocks on which options may be listed at $1 strike price intervals.
    Currently, the $1 Strike Program allows Phlx to select a total of 
55 individual stocks on which option series may be listed at $1 strike 
price intervals. In order to be eligible for selection into the 
Program, the underlying stock must close below $50 in its primary 
market on the previous trading day. If selected for the Program, the 
Exchange may list strike prices at $1 intervals from $3 to $50, but no 
$1 strike price may be listed that is greater than $5 from the 
underlying stock's closing price in its primary market on the previous 
day. The Exchange may also list $1 strikes on any other option class 
designated by another securities exchange that employs a similar 
Program under their respective rules.
    The restrictions in the current $1 Strike Program remain and are 
not proposed to be modified by this filing. The Exchange may not list 
$1 strike intervals on any issue where the strike price is greater than 
$50. The Exchange may not list long-term option series (``LEAPS'') \4\ 
at $1 strike price intervals for any class selected for the Program, 
except as specified in subparagraph (C) of Commentary .05.\5\ The 
Exchange is also restricted from listing series with $1 intervals 
within $0.50 of an existing strike price in the same series, except 
that strike prices of $2, $3, and $4 shall be permitted within $0.50 of 
an existing strike price for classes also selected to participate in 
the $0.50 Strike Program.\6\
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    \4\ LEAPS are long-term options that generally have up to 
thirty-nine months from the time they are listed until expiration. 
Commentary .03 to Rule 1012. Long-term FLEX options and index 
options are considered separately in Rules 1079(a)(6) and 
1101A(b)(iii), respectively.
    \5\ Subsection (C) of Commentary .05 states that: The Exchange 
may list $1 strike prices up to $5 in LEAPS(R) in up to 200 option 
classes on individual stocks. See Securities Exchange Act Release 
No. 61277 (January 4, 2010), 75 FR 1442 (January 11, 2009) (SR-Phlx-
2009-108)(notice of filing and immediate effectiveness).
    \6\ Regarding the $0.50 Strike Program, which allows $0.50 
strike price intervals for options on stocks trading at or below 
$3.00, see Commentary .05(a)(ii) to Rule 1012 and Securities 
Exchange Act Release No. 60694 (September 18, 2009), 74 FR 49048 
(September 25, 2009) (SR-Phlx-2009-65)(order approving). See also 
Securities Exchange Act Release No. 61630 (March 2, 2010), 75 FR 
11211 (March 10, 2010) (SR-Phlx-2010-26) (notice of filing and 
immediate effectiveness allowing concurrent listing of $3.50 and $4 
strikes for classes that participate in both the $0.50 Strike 
Program and the $1 Strike Program).
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    The $1 Strike Program has been extremely successful since it was 
initiated as a pilot program in 2003, with no substantive problems 
attributed to the Program or listing and trading options at $1 strike 
intervals. During the time that the $1 Strike Program was a pilot, the 
Exchange submitted three pilot reports to the Commission in which the 
Exchange discussed, among other things, the strength and efficacy of 
the Program based upon the steady increase in volume and open interest 
of options traded on the Exchange at $1 strike price intervals; and 
that the Program had not and, in the future, should not create capacity 
problems for the Phlx or the Options Price Reporting Authority 
(``OPRA'') systems.\7\ This has not changed. Moreover, the number of $1 
strike options traded on the Exchange has continued to increase since 
the inception of the Program such that these options are now among some 
of the most popular products traded on the Exchange.
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    \7\ See Securities Exchange Act Release Nos. 49801 (June 3, 
2004), 69 FR 32652 (June 10, 2004) (SR-Phlx-2004-38); 51768 (May 31, 
2005), 70 FR 33250 (June 7, 2005) (SR-Phlx-2005-35); 53938 (June 5, 
2006), 71 FR 34178 (June 13, 2006) (SR-Phlx-2006-36); and 55666 
(April 25, 2007), 72 FR 23879 (May 1, 2007) (SR-Phlx-2007-29).
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    There are now approximately 326 $1 strike price option classes 
listed (and traded) across all options exchanges including Phlx; 55 of 
which are classes chosen by Phlx for the $1 Strike Program. The 
Exchange has received repeated requests from its members to list more 
issues at $1 strike intervals, that is, to expand the $1 Strike 
Program. However, the Exchange is constrained from doing so because it 
has reached the limit of 55 individual stocks on which option series 
may be listed at $1 strike price intervals per Commentary .05 to Rule 
1012. It is for this reason that the Exchange proposes to expand the 
Program to allow Phlx to select a total of 150 individual stocks on 
which option series may be listed at $1 strike price intervals. The 
proposal would expand $1 strike offerings to market participants (e.g. 
traders and retail investors) and thereby enhance their ability to 
tailor investing and hedging strategies and opportunities in a volatile 
market place. The $1 Strike Program (including the existing 
restrictions such as not listing any series that would result in strike 
prices being $0.50 apart) would otherwise remain unchanged.
    Currently, there are more than 2,000 options trading on issues 
priced below $50 (generally, the ``low cost options'') that are outside 
the $1 Strike Program. These include high volume options such as, for 
example, Winstream Corp, The Mosaic Company, and General Growth PPTYS 
Inc. that traded 26,013 contracts, 9,826 contracts, and 20,107 
contracts (23-day average volume), respectively. Because of the 
numerical limitation on how many issues may be chosen by the Exchange 
to be in the $1 Strike Program, however, these low cost options must 
trade at $2.50 or wider strike price increments.
    The wide strike price increments for low cost options, when 
compared to the price of underlying issues, often lead to significant 
negative impact on investors. As an example:
     Sanofi Aventis (SNY), which has recently traded at a low 
of about $33 per share, is not currently in the $1 Strike Program. This 
means that options on Sanofi Aventis are offered at strike price 
intervals of $2.50. If an investor desired to protect 100 shares of 
Sanofi Aventis in the event of a 10% drop in the SNY share price for an 
intermediate time period, the investor ideally would want the ability 
to choose between buying a September 30 SNY put option, September 29 
put option, or September 28 put option. Today, however, at $2.50 strike 
price intervals the investor would only have the choice of buying 
September 30 put options offered at $1.65 or September 25 puts offered 
at $0.45 (approximate numbers). Having the ability (choice) to buy 28 
strike or 29 strike puts could significantly lower the investor's 
monetary outlay to purchase the desired insurance premium. This is 
because, as opposed to September 30 puts priced at $1.65, September 29 
puts would be priced at approximately $1.10 and September 28 puts would 
be priced at approximately $0.90, which would potentially reduce the 
hedging cost to the investor by about a third. Clearly, options on 
Sanofi Aventis priced at $1 intervals could significantly improve the 
menu of hedging choices to the benefit of an investor in this issue.
     Tenaris S A (TS), which has recently traded at about $38 
per share, is not currently in the $1 Strike Program. As such, strike 
intervals for TS are mostly in $5 (as well as $2.50) increments. If an 
investor sought to enhance his yield from owning 100 shares of Tenaris 
S A, the investor could sell a call option with a strike price 
approximately 10% higher than the current underlying issue price. 
Ideally, the investor could choose between the September 45 calls, the 
September 44 calls, or the September 43 calls. Not being in the $1 
Strike Program, however, the September 44 and

[[Page 30080]]

September 43 call strikes would not be available. And, like the Sanofi 
Aventis example, the lack of the September 44 and September 43 strikes 
would limit the investor's choices to maximize returns or execute the 
simplest of strategies.
    By expanding the $1 Strike Program, such investors would be able to 
better enhance returns and manage risk. The Exchange feels that, having 
received requests to expand the Program and in light of the disparity 
between non $1 strike prices and stock prices underlying low-cost 
options, expanding the Program as requested would be greatly beneficial 
to investors and the financial community.
    As stated in the Commission order that initially approved Phlx's 
Program and in subsequent Program extension and expansion approval 
orders and filings (the ``prior orders''),\8\ the Exchange believes 
that $1 strike price intervals provide investors with significantly 
greater flexibility in the trading of equity options that overlie lower 
price stocks by allowing investors to establish equity options 
positions that are better tailored to meet their investment, trading 
and risk management objectives. These prior orders recognized, as we 
have noted pursuant to this proposal, that member firms representing 
customers have repeatedly requested that Phlx seek to expand the 
Program in terms of the number of classes on which option series may be 
listed at $1 strike price intervals. In addition, market conditions 
have led to an increase in the number of securities trading below $50, 
further warranting the proposed comparatively modest expansion of the 
$1 Strike Program.\9\
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    \8\ See supra note 3.
    \9\ See, c.f., Securities Exchange Act Release No. 59590 (March 
17, 2009), 74 FR 12412 (March 24, 2009) (SR-Phlx-2009-21) (more than 
five-fold increase in the number of individual stocks on which 
options may be listed at $1 intervals).
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    The Exchange notes that, in addition to options classes that are 
trading pursuant to the $1 strike programs of options exchanges, there 
are also options trading at $1 strike intervals on approximately 282 
Exchange Traded Fund Shares (``ETFs''),\10\ ETF options trading at $1 
intervals has not, however, negatively impacted the system capacity of 
the Exchange or OPRA.
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    \10\ Options on ETFs have been trading for about a decade. See 
Securities Exchange Act Release Nos. 34- (July 1, 1998), 63 FR 37426 
(July 10, 1998) (SR-AMEX-96-44) (approval order regarding, among 
other things, $1 strike price intervals for ETFs); and 44055 (March 
8, 2001), 66 FR 15310 (March 16, 2001) (SR-Phlx-01-32) (notice of 
filing and immediate effectiveness regarding, among other things, $1 
strike price intervals for ETFs). See also Commentary .05 to Rule 
1012(a)(iv) allowing $1 strike price intervals for ETF options where 
the strike price is $200 or less.
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    With regard to the impact of this proposal on system capacity, Phlx 
has analyzed its capacity and represents that it and OPRA have the 
necessary systems capacity to handle the potential additional traffic 
associated with the listing and trading of an expanded number of series 
in the $1 Strike Program.
    The Exchange believes that the $1 Strike Program has provided 
investors with greater trading opportunities and flexibility and the 
ability to more closely tailor their investment and risk management 
strategies and decisions to the movement of the underlying security. 
Furthermore, the Exchange has not detected any material proliferation 
of illiquid options series resulting from the narrower strike price 
intervals. For these reasons, the Exchange requests an expansion of the 
current Program and the opportunity to provide investors with 
additional strikes for investment, trading, and risk management 
purposes.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ 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 expanding the current $ 1 Strike 
Program will result in a continuing benefit to investors by giving them 
more flexibility to closely tailor their investment decisions in 
greater number of securities.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 35 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 will: (a) By order approve 
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 rule-comments@sec.gov. Please include 
File Number SR-Phlx-2010-72 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-2010-72. 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

[[Page 30081]]

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-2010-72 and should be submitted on 
or before June 18, 2010.

    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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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12871 Filed 5-27-10; 8:45 am]
BILLING CODE 8010-01-P

