
[Federal Register Volume 76, Number 25 (Monday, February 7, 2011)]
[Notices]
[Pages 6642-6644]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2568]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63809; File No. SR-NASDAQ-2011-018]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by The NASDAQ Stock Market LLC 
Regarding the Listing of Option Series with $1 Strike Prices

February 1, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 6643]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on January 31, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by NASDAQ. 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

    NASDAQ is filing with the Commission a proposal for the NASDAQ 
Options Market (``NOM'' or ``Exchange'') to amend Chapter IV, 
Supplementary Material .02 to Section 6 (Series of Options Contracts 
Open for Trading) to improve the operation of the $1 Strike Price 
Program (the ``$1 Strike Program'' or ``Program'').\3\
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    \3\ The $1 Strike Program was initially approved as a pilot on 
March 12, 2008. 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) (order approving). The program was subsequently 
made permanent and expanded. See Securities Exchange Act Release No. 
58093 (July 3, 2008), 73 FR 39756 (July 10, 2008) (SR-NASDAQ-2008-
057) (notice of filing and immediate effectiveness). The program was 
last expanded in 2010. See Securities Exchange Act Release No. 62451 
(July 6, 2010), 75 FR 40001 (July 13, 2010) (SR-NASDAQ-2010-083) 
(notice of filing and immediate effectiveness). The $1 Strike 
Program is in Chapter IV, Section 6.
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    The text of the proposed rule change is available from NASDAQ's Web 
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal 
office, 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, NASDAQ 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. NASDAQ 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 improve the 
operation of the $1 Strike Program.
    Currently, the $1 Strike Program only allows the listing of new $1 
strikes within $5 of the previous day's closing price. In certain 
circumstances this has led to situations where there are no at-the-
money $1 strikes for a day, despite significant demand. For instance, 
on November 15, 2010, the underlying shares of Isilon Systems Inc. 
opened at $33.83. It had closed the previous trading day at $26.29. 
Options were available in $1 intervals up to $31, but because of the 
restriction to only listing within $5 of the previous close, the 
following strikes were not permitted to be added during the day: $32, 
$33, $34, $36, $37 and $38.
    The Exchange proposes that $1 interval strike prices be allowed to 
be added immediately within $5 of the official opening price in the 
primary listing market. Thus, on any day, $1 Strike Program strikes may 
be added within $5 of either the opening price or the previous day's 
closing price.
    On occasion, the price movement in the underlying security has been 
so great that listing within $5 of either the previous day's closing 
price or the day's opening price will leave a gap in the continuity of 
strike prices. For instance, if an issue closes at $14 one day, and the 
next day opens above $27, the $21 and $22 strikes will be more than $5 
from either benchmark. The Exchange proposes that any such 
discontinuity be avoided by allowing the listing of all $1 Strike 
Program strikes between the closing price and the opening price.
    Additionally, issues that are in the $1 Strike Program may 
currently have $2.50 interval strike prices added that are more than $5 
from the underlying price or are more than a nine months to expiration 
(long-term options series). In such cases, the listing of a $2.50 
interval strike may lead to discontinuities in strike prices and also a 
lack of parallel strikes in different expiration months of the same 
issue. For instance, under the current rules, the Exchange may list a 
$12.50 strike in a $1 Strike Program issue where the underlying price 
is $24. This allowance was provided to avoid too large of an interval 
between the standard strike prices of $10 and $15. The unintended 
consequence, however, is that if the underlying price should decline to 
$16, the Exchange would not be able to list a $12 or $13 strike. If the 
underlying stayed near this level at expiration, a new expiration month 
would have the $12 and $13 strike but not the $12.50, leading to a 
disparity in strike intervals in different months of the same option 
class. This has also led to investor confusion, as they regularly 
request the addition of inappropriate strikes so as to roll a position 
from one month to another at the same strike level.
    To avoid this problem, the Exchange may not list series with $2.50 
intervals (e.g., $12.50, $17.50) below $50 for any issue included 
within the $1 Strike Program, including long term option series. At 
each standard $5 increment strike more than $5 from the price of the 
underlying security, the Exchange proposes to list the strike $2 above 
the standard strike for each interval above the price of the underlying 
security, and $2 below the standard strike, for each interval below the 
price of the underlying security, provided it meets the Options Listing 
Procedures Plan (``OLPP'') provisions in Chapter IV, Supplementary 
Material .06 to Section 6.\4\ For instance, if the underlying security 
was trading at $19, the Exchange could list, for each month, the 
following strikes: $3, $5, $8, $10, $13, $14, $15, $16, $17, $18, $19, 
$20, $21, $22, $23, $24, $25, $27, $30, $32, $35, and $37.
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    \4\ Chapter IV, Supplementary Material .06 to Section 6 codifies 
the limitation on strike price ranges outlined in the OLPP, which, 
except in limited circumstances, prohibits options series with an 
exercise price more than 100% above or below the price of the 
underlying security if that price is $20 or less. If the price of 
the underlying security is greater than $20, the Exchange shall not 
list new options series with an exercise price more than 50% above 
or below the price of the underlying security.
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    Instead of $2.50 strikes for long-term options, the Exchange 
proposes to list one long-term $1 Strike option series strike in the 
interval between each standard $5 strike, with the $1 Strike being $2 
above the standard strike price for each interval above the price of 
the underlying security, and $2 below the standard strike price, for 
each interval below the price of the underlying security. In addition, 
the Exchange may list the long-term $1 strike which is $2 above the 
standard strike just below the underlying price at the time of listing, 
and may add additional long term options series strikes as the price of 
the underlying security moves, consistent with the OLPP. For instance, 
if the underlying is trading at $21.25, long-term strikes could be 
listed at $15, $18, $20, $22, $25, $27, and $30. If the underlying 
subsequently moved to $22, the $32 strike could be added. If the

[[Page 6644]]

underlying moved to $19.75, the $13, $10, $8, and $5 strikes could be 
added.
    The Exchange also proposes that additional long-term option strikes 
may not be listed within $1 of an existing strike until less than nine 
months to expiration.
    Finally, the Exchange represents that it has the necessary systems 
capacity to support the small increase in new options series that will 
result from the proposed changes to the $1 Strike Program.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \5\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \6\ 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. 
In particular, the proposed rule change seeks to reduce investor 
confusion and address issues that have arisen in the operation of the 
$1 Strike Program by providing a consistent application of strike price 
intervals for issues in the $1 Strike Program.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is 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

    Written comments were neither solicited nor 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 \7\ and Rule 19b-
4(f)(6) thereunder.\8\
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 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 
Commission has waived the five-day prefiling requirement in this 
case.
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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.\9\ 
Therefore, the Commission designates the proposal operative upon 
filing.\10\
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    \9\ See Securities Exchange Act Release No. 63773 (January 25, 
2011) (SR-NYSEAmex-2010-109). See also Securities Exchange Act 
Release No. 63770 (January 25, 2011) (SR-NYSEArca-2010-106).
    \10\ 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 rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2011-018 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-2011-018. 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-
NASDAQ-2011-018 and should be submitted on or before February 28, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2568 Filed 2-4-11; 8:45 am]
BILLING CODE 8011-01-P


