
[Federal Register Volume 76, Number 121 (Thursday, June 23, 2011)]
[Notices]
[Pages 36942-36943]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15640]



[[Page 36942]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64695; File No. SR-Phlx-2011-58]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Granting Approval of Proposed Rule Change To Increase the Position 
Limit for Options on the Standard and Poor's[supreg] Depositary 
Receipts (SPDRs[supreg])

June 17, 2011.

I. Introduction

    On April 18, 2011, NASDAQ OMX PHLX LLC (``Exchange'' or ``Phlx'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
increase the position and exercise limits for options on Standard and 
Poor's Depositary Receipts (``SPDRs[supreg]'' or ``SPY''). The proposed 
rule change was published for comment in the Federal Register on May 3, 
2011.\3\ The Commission received one comment letter in response to the 
proposal.\4\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64348 (April 27, 
2011), 76 FR 24951 (``Notice'').
    \4\ See letter from Janet L. McGinness, SVP-Legal & Corporate 
Secretary, Legal & Government Affairs, NYSE Euronext, to Ms. 
Elizabeth M. Murphy, Secretary, Commission, dated May 24, 2011 (NYSE 
Letter). The comment letter was submitted by NYSE Euronext on behalf 
of its subsidiary options exchanges, NYSE Amex LLC (``NYSE Amex'') 
and NYSE Arca Inc. (``NYSE Arca'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend Phlx Rule 1001 to increase the 
position limit applicable to options on SPDRs[supreg], which trade 
under the symbol SPY, from 300,000 to 900,000 contracts on the same 
side of the market. The Exchange notes that options on Nasdaq-100 
Index[supreg] Tracking Stock (``QQQSM'') \5\--to which, Phlx 
believes, SPY options are most comparable for these purposes--have a 
position limit of 900,000 contracts.
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    \5\ QQQ\SM\, Nasdaq-100[supreg], Nasdaq-100 Index[supreg], 
Nasdaq[supreg], and Nasdaq-100 Index Tracking StockSM, 
are trademarks or service marks of The Nasdaq Stock Market, Inc.
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    In particular, Phlx represents that options on SPY traded a total 
of 33,341,698 contracts across all exchanges from March 1, 2011 through 
March 16, 2011. In contrast, over the same time period options on the 
QQQ traded a total of 8,730,718 contracts (less than 26.2% of the 
volume of options on SPY.) The Phlx further represents that, for 2010, 
options on SPY had an average daily trading volume of 3.63 million 
contracts, while options on QQQs had an average daily trading volume of 
963,502. In addition, the option notional value \6\ of SPY options on 
December 31, 2010, was $177,823.76 million, while the optional notional 
value of QQQ options on the same date was $27,141.91 million.
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    \6\ Phlx describes notional value in this instance as the 
product of OI x Close x 100, where OI is the underlying security's 
open interest (in contracts) and Close is the closing price of the 
underlying security on December 31, 2011.
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    With regard to the underlying ETFs, Phlx represents that, for 2010, 
the SPY had an average daily trading volume of 210,232,241 shares with 
an average dollar volume of $20,794 million, while the QQQ had an 
average daily trading volume of 85,602,200 shares with an average 
dollar volume of $3,593 million. In addition, the market capitalization 
of the SPY was $90,280.71 million on December 31, 2010, while the 
market capitalization of the QQQ on that date was $23,564.8 million.
    Phlx argues that the current position limit of 300,000 contracts 
for SPY options prevents large customers, such as mutual funds and 
pension funds, from using these options to gain meaningful exposure and 
hedging protection, which it believes can result in lost liquidity in 
both the options market and the equity market. In addition, the 
Exchange believes that increasing the limit to 900,000 contracts would 
lead to a more liquid and competitive market environment for options on 
SPDRs[reg] that would benefit customers interested in this product.
    Phlx adds that traders who trade SPY options to hedge positions in 
SPY and in SPX options \7\ have indicated that the current position 
limit is too restrictive, and the Exchange believes that this may 
adversely affect traders' (and the Exchange's) ability to provide 
liquidity in this product.
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    \7\ See also NYSE Euronext Letter, supra note 4, stating that 
SPX options are considered by many to be economically equivalent to 
SPY options.
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    In addition, Phlx states that its reporting requirements\8\ and 
surveillance procedures,\9\ as well as the reporting requirements and 
surveillance procedures other markets and of clearing firms, are 
capable of properly identifying unusual and/or illegal trading 
activity.
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    \8\ Phlx represents that, as with options on QQQs, each member 
or member organization of the Exchange that maintains a position in 
SPY options on the same side of the market, for its own account or 
for the account of a customer, would be required, pursuant to Phlx 
Rule 1003, to report certain information, including, but not limited 
to, the size of the option position, whether the position is hedged, 
and, if so, a description of the hedge and, if applicable, the 
collateral used to carry the position. The requirement applies to 
positions in excess of 10,000 contracts on the same side of the 
market. In addition, Phlx states, the general reporting requirement 
for customer accounts that maintain an aggregate position of 200 or 
more option contracts would remain at this level for SPY options.
    \9\ The Exchange states that these procedures utilize daily 
monitoring of market movements via automated surveillance techniques 
to identify unusual activity in both options and underlying stocks.
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III. Discussion and Commission's Findings

    The Commission received one comment letter on the proposed rule 
change, from NYSE Euronext, on behalf of the NYSE Amex and NYSE Arca 
options exchanges.\10\ The comment letter supported the proposal, and 
expressed agreement with several of the statements made by Phlx 
therein.
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    \10\ See supra note 4.
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    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \11\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\12\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\13\ 
which requires, among other things, that the Exchange's rules be 
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, 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.
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    \11\ 15 U.S.C. 78f.
    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    Position and exercise limits serve as a regulatory tool designed to 
address manipulative schemes and adverse market impact surrounding the 
use of options. Since the inception of standardized options trading, 
the options exchanges have had rules limiting the aggregate number of 
options contracts that a member or customer may hold or exercise.\14\ 
These position and exercise limits are intended to prevent the 
establishment of options positions that can be used or might create 
incentives to manipulate the underlying market so as to benefit the

[[Page 36943]]

options position.\15\ In particular, position and exercise limits are 
designed to minimize the potential for mini-manipulations and for 
corners or squeezes of the underlying market.\16\ In addition, such 
limits serve to reduce the possibility for disruption of the options 
market itself, especially in illiquid classes.\17\ As discussed below, 
over time, the Commission has approved options exchanges' proposals to 
increase these limits for options products overlying certain ETFs where 
there is considerable liquidity in both the underlying cash markets and 
the options markets.
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    \14\ See, e.g., Securities Exchange Act Release No. 45236 
(January 4, 2002), 67 FR 1378 (January 10, 2002) (SR-Amex-2001-42).
    \15\ See, e.g., Securities Exchange Act Release No. 47346 
(February 11, 2003), 68 FR 8316 (February 20, 2003) (SR-CBOE-2002-
26).
    \16\ Id.
    \17\ Id.
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    The Commission believes that it is reasonable for the Exchange to 
increase position limits for options on SPY to 900,000 contracts (the 
same level currently applicable to the QQQ options). As in the case of 
the markets for QQQ options and for the underlying ETF, the markets for 
standardized options on SPY and the SPY itself have substantial trading 
volume and liquidity. Indeed, Phlx cites statistics \18\ showing that, 
while options on SPY and options on QQQ both are in the top ranks of 
equity options in terms of trading volume, SPY options exceeded QQQ 
options by a significant margin--both in terms of the total volume 
traded for a sample period in March of this year, and in terms of 
average daily volume for the year 2010. Similarly, the Exchange cites 
statistics regarding the underlying ETFs, showing that SPY exceeded QQQ 
significantly in average daily trading volume and average dollar volume 
for the year.
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    \18\ See supra Section II.
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    The Commission believes that increasing position limits on the 
highly liquid SPY options to the same level currently applicable to the 
QQQ options represents the next step of a measured approach to position 
limits on these options, which have increased steadily over a number of 
years to their current levels.\19\ Further, the Commission expects that 
the Exchange will continue to monitor trading in the SPY options for 
the purpose of discovering and sanctioning manipulative acts and 
practices, and to reassess the position and exercise limits, if and 
when appropriate, in light of its findings.\20\
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    \19\ The Commission's incremental approach to approving changes 
in position and exercise limits is well-established. Equity option 
position limits have been gradually expanded from 1,000 in 1973 to 
maximum levels of 250,000 contracts for most of the largest and most 
actively-traded standardized equity options, with higher limits 
allowed for certain ETF options--QQQ (900,000), SPY (300,000), IWM 
(500,000) and DIA (300,000). In 1999, the Commission approved 
exchange proposals to raise position and exercise limits on 
standardized equity options to a range of between 13,500 and 75,000 
contracts. See Securities Exchange Act Release No. 40875 (December 
31, 1998), 64 FR 1842 (January 12, 1999) (SR-CBOE-98-25; SR-Amex-98-
22; SR-PCX-98-33; SR-Phlx-98-36). In 2003, the Commission approved 
an increase in the position and exercise limits for options on DIA 
to the current 300,000 contracts. See Securities Exchange Act 
Release Nos. 47346 (February 11, 2003), 68 FR 8316 (February 20, 
2003) (SR-CBOE-2002-26) and 57852 (May 22, 2008), 73 FR 31162 (May 
30, 2008) (SR-Amex-2008-41). Similarly, in 2005, the Commission 
approved an increase in the position and exercise limits for options 
on SPY to 300,000 contracts. See Securities Exchange Act Release 
Nos. 51041 (January 14, 2005), 70 FR 3408 (January 24, 2005) (SR-
CBOE-2005-06) and 51043 (January 14, 2005), 70 FR 3402 (January 24, 
2005) (SR-Amex-2005-06). Since 2001, the Commission has twice 
approved increases in position and exercise limits for options on 
QQQ. Initially, the Commission approved an increase to 300,000 
contracts, and later, pursuant to a pilot program that commenced in 
March 2005 and was adopted by all of the options exchanges, 
increased position and exercise limits for options on the QQQQ to 
the current 900,000. See Securities Exchange Act Release Nos. 45309 
(January 18, 2002), 67 FR 3757 (January 25, 2002) (SR-CBOE-2001-44) 
and 45236 (January 4, 2002), 67 FR 1378 (January 10, 2002) (SR-Amex-
2001-42). Another pilot program, which commenced in 2007 and was 
adopted by all of the options exchanges, increased the position and 
exercise limits for IWM options to the current 500,000 contracts. 
Both of these pilots, which also raised standardized equity option 
position limits to the current range of between 25,000 and 250,000 
contracts, were permanently approved by the Commission in 2008. See 
Securities Exchange Act Release Nos. 57352 (February 19, 2008), 73 
FR 10076 (February 25, 2008) (SR-CBOE-2008-07) and 57415 (March 3, 
2008), 73 FR 12479 (March 7, 2008) (SR-Amex-2008-16).
    \20\ Phlx states that its reporting requirements and 
surveillance procedures, as well as the reporting requirements and 
surveillance procedures other markets and of clearing firms, are 
capable of properly identifying unusual and/or illegal trading 
activity.
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    Accordingly, as stated above, given the measure of liquidity for 
SPY, the Commission believes that increasing position limits in the SPY 
options to 900,000 contracts is consistent with Section 6(b)(5) of the 
Act,\21\ which requires that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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.
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    \21\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-Phlx-2011-58) be, and it 
hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(1).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-15640 Filed 6-22-11; 8:45 am]
BILLING CODE 8011-01-P


