
[Federal Register Volume 76, Number 148 (Tuesday, August 2, 2011)]
[Notices]
[Pages 46337-46340]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19451]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64977; File No. SR-BX-2011-044]


Self-Regulatory Organizations; NASDAQ OMX BX; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Increase the 
Position Limit for Options on the SPDR[supreg]

July 27, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on July 13, 2011, NASDAQ OMX BX (the ``Exchange'') filed with the 
Securities and Exchange Commission (the ``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the Exchange. The Exchange has designated the proposed rule 
change as constituting a non-controversial rule change under Rule 19b-
4(f)(6) under the Act,\3\ which renders the proposal effective upon 
filing with the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Chapter III, Section 7 (Position 
Limits) of the Rules of the Boston Options Exchange Group, LLC 
(``BOX'') to increase the position limit for options on the Standard 
and Poor's Depositary Receipts (``SPDRs[supreg] '').\4\
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    \4\ ``SPDRs[supreg] '', ``Standard & Poor's[supreg] '', 
``S&P[supreg] '', ``S&P 500[supreg] '', ``Standard & Poor's 500'', 
and ``500'' are trademarks of The McGraw-Hill Companies, Inc. 
SPDRs[supreg], also sometimes referred to colloquially as 
``spiders'', are exchange traded funds (``ETFs'') based on the S&P 
500[supreg] Index. Each share of the traditional SPDRs[supreg] ETF 
(SPDRs[supreg] Trust Series 1) holds a stake in the 500 stocks 
represented by the S&P 500[supreg], SPDRs[supreg], and options 
thereon, are generally used by large institutions and traders as 
bets on the overall direction of the market. They are also used by 
individual retail investors who believe in passive management (index 
investing).
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    Although the proposed rule change would not amend the text of 
Chapter III, Section 9 of the BOX Rules (Exercise Limits), the proposed 
change would have the effect of increasing the exercise limits for 
options on SPDRs[reg]. Chapter III, Section 9 of the BOX Rules 
establishes exercise limits that are similar to the position limits in 
Chapter III, Section 7 of the BOX Rules.\5\
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    \5\ Index options position limits are established in Chapter 
XIV, Sections 5 and 6 of the BOX Rules and index options exercise 
limits are established in Chapter XIV, Section 8 of the BOX Rules, 
and have a relationship similar to that of Chapter III, Section 9 
and Chapter III, Section 7 of the BOX Rules.
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    The text of the proposed rule change is available at the Exchange's 
Web site at http://www.nyse.com, on the Commission's Web site at http://www.sec.gov, at the Exchange's principal office, 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 amend Supplementary Material .02 
to Chapter III, Section 7 of the BOX Rules to increase the position 
limit applicable to options on SPDRs[supreg], which are trading under 
the symbol SPY, from 300,000 to 900,000 contracts on the same side of 
the market.\6\ This proposal is similar to a rule change recently 
proposed by the NASDAQ OMX PHLX, Inc. (``PHLX'').\7\
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    \6\ By virtue of Chapter III, Section 9 of the BOX Rules, which 
is not amended by this filing, exercise limits on options on 
SPDRs[supreg] would be similar to position limits established in 
Chapter III, Section 7 of the BOX Rules.
    \7\ See Securities Exchange Act Release No. 64348 (April 27, 
2011), 76 FR 24951 (May 3, 2011) (SR-Phlx-2011-58). See also 
Securities Exchange Act Release No. 64695 (June, 17, 2011), 76 FR 
36942 (June 23, 2011) (SR-Phlx-2011-58).
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    BOX began trading options on SPDRs[supreg] on January 10, 2005. 
That year, the position limit for these options was increased to the 
current limit of 300,000 contracts on the same side of the market, and 
has remained unchanged.\8\

[[Page 46338]]

However, institutional and retail traders have greatly increased their 
demand for options on SPDRs[supreg] for hedging and trading purposes, 
such that these options have experienced an explosive gain in 
popularity and have been the most actively traded options for the last 
two years. For example, options on SPDRs[supreg] (SPY), the most 
actively traded options in the U.S. in terms of volume, 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 
Nasdaq-100 Index[supreg] Tracking Stock (``QQQ\SM\''),\9\ the third 
most actively traded options, traded a total of 8,730,718 contracts 
(less than 26.2% of the volume of options on SPDRs[supreg]).
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    \8\ See Securities Exchange Act Release No. 51069 (January 21, 
2005), 70 FR 5260 (February 1, 2005) (SR-BSE-2005-05) (approval 
order increasing position and exercise limits for options on 
SPDRs[supreg] from 75,000 to 300,000 contracts on the same side of 
the market) (the ``last position increase order''). See also 
Securities Exchange Act Release Nos. 51071 (January 21, 2005), 70 FR 
4911 (January 31, 2005) (SR-Phlx-2005-05) (approval order); 51043 
(January 14, 2005), 70 FR 3402 (January 24, 2005) (SR-Amex-2005-06) 
(approval order); 51041 (January 14, 2005), 70 FR 3408 (January 24, 
2005) (SR-CBOE-2005-06) (approval order); and 51042 (January 14, 
2005), 70 FR 3412 (January 24, 2005) (SR-ISE-2005-05) (approval 
order).
    \9\ QQQ\SM\ options were formerly traded under the ticker symbol 
QQQQ\SM\. QQQ\SM\, Nasdaq-100[supreg], Nasdaq-100 Index[supreg], 
Nasdaq[supreg], Nasdaq-100 Index Tracking Stock\SM\, and are 
trademarks or service marks of The Nasdaq Stock Market, Inc. 
(``Nasdaq'').
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    Currently, SPY options have a position limit of only 300,000 
contracts on the same side on the market while the significantly 
lesser-volume QQQ\SM\ options, which are comparable to SPY options, 
have a position limit of 900,000 contracts on the same side of the 
market. BOX believes that SPY options should, like options on QQQ\SM\, 
have a position limit of 900,000 contacts. Given the increase in volume 
and continuous unprecedented demand for trading options on 
SPDRs[supreg], BOX believes that the current position limit of 300,000 
contracts \10\ is entirely too low and inadequate and is a deterrent to 
the optimal use of the product for hedging and trading purposes. There 
are multiple reasons to increase the position limit for SPY options.
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    \10\ Supplementary Material .02 to Chapter III, Section 7 of the 
BOX Rules.
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    First, traders generally believe that the current SPY option 
position limit of 300,000 contracts, which has remained the same for 
more than five years despite the tremendous trading volume increase, is 
no longer sufficient for optimal trading and hedging purposes. SPY 
options are, as noted, used by large institutions and traders as a 
means to invest in or hedge the overall direction of the market. 
Second, options on SPDRs[supreg] are 1/10th the size of options on the 
S&P 500[supreg] Index, traded under the symbol SPX. Thus, a position 
limit of 300,000 contracts in options on SPDRs[supreg] is equivalent to 
a 30,000 contract position limit in options on SPX.\11\ Traders who 
trade options on SPDRs[supreg] to hedge positions in SPX options (and 
the SPDRs[supreg] ETF based on SPX, SPDRs[supreg] Trust Series 1) have 
indicated that the current position limit for options on SPDRs[supreg] 
is simply too restrictive,\12\ which may adversely affect their (and 
BOX's) ability to provide liquidity in this product. And third, the 
products that are perhaps most comparable to options on SPDRs[supreg], 
namely options on QQQ\SM\, are subject to a 900,000 contract position 
limit on the same side of the market.\13\ This has, in light of the 
huge run-up in SPY option trading making them the number one nationally 
ranked option in terms of volume, resulted in a skewed and unacceptable 
SPY option position limit. Specifically, the position limit for options 
on SPDRs[supreg] at 300,000 contracts is but 33% of the position limit 
for the less active options on QQQ\SM\ at 900,000 contracts.\14\ The 
Exchange proposes that options on SPDRs[supreg] similarly be subject to 
a position limit of 900,000 contracts.\15\
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    \11\ Chicago Board Options Exchange, which lists and trades SPX 
options, has established that there is no position limit on SPX 
options. See CBOE Rule 24.4 and Securities Exchange Act Release No. 
44994 (October 26, 2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-
2001-22) (order approving permanent elimination of SPX options 
position limit).
    \12\ See supra note 4.
    \13\ See Supplementary Material .02 to Chapter III, Section 7 of 
the BOX Rules and Securities Exchange Act Release No. 51317 (March 
3, 2005), 70 FR 12254 (March 11, 2005) (SR-BSE-2005-10) (notice of 
filing and immediate effectiveness).
    \14\ Similarly to options on SPDRs[supreg] (SPY) being 1/10th 
the size of options on the related index S&P 500[supreg]Index (SPX), 
so options on the Nasdaq-100 Index[supreg] Tracking Stock (QQQ\SM\) 
are 1/10th the size of options on the related index NASDAQ-100 Index 
(NDX). The position limit for QQQ\SM\ options and its related index 
NDX have a comparable relationship to that of SPY options and SPX. 
That is, the position limit for options on QQQ\SM\ is 900,000 
contracts and there is no positions limit for NDX options. See supra 
note 7 [sic] and Securities Exchange Act Release No. 52650 (October 
21, 2005), 70 FR 62147 (October 28, 2005 (SR-CBOE-2001-41) (order 
approving elimination of NDX options position limit).
    \15\ The position limit for IWM options on yet another large ETF 
entitled iShares Russell 2000 Index Fund, (which options have 
significantly less trading volume than the number one ranked SPY 
options, as also the QQQ\SM\ options) are set at 500,000 contracts.
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    The options reporting requirement would continue unabated. Thus, 
the Exchange would require that, just like for options on QQQ\SM\, each 
Options Participant that maintains a position in SPDRs[supreg] options 
on the same side of the market, for its own account or for the account 
of a customer, must report certain information. This information would 
include, but would not be limited to, the option position, whether such 
position is hedged and if so, a description of the hedge and if 
applicable, the collateral used to carry the position. In addition, the 
general reporting requirement for customer accounts that maintain an 
aggregate position of 200 or more option contracts (``large 
positions'') would remain at this level for options on 
SPDRs[supreg].\16\
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    \16\ For reporting requirements, see Chapter III, Section 10 of 
the BOX Rules.
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    BOX believes that position and exercise limits, at their current 
levels, no longer serve their stated purpose. There has been a 
steadfast and significant increase over the last decade in the overall 
volume of exchange-traded options; position limits, however, have not 
kept up with the volume. Part of this volume is attributable to a 
corresponding increase in the number of overall market participants, 
which has, in turn, brought about additional depth and increased 
liquidity in exchange-traded options.\17\
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    \17\ The Commission has previously observed that: Since the 
inception of standardized options trading, the options exchanges 
have had rules imposing limits on the aggregate number of options 
contracts that a member or customer could hold or exercise. These 
rules are intended to prevent the establishment of options positions 
that can be used or might create incentives to manipulate or disrupt 
the underlying market so as to benefit the options position. In 
particular, position and exercise limits are designed to minimize 
the potential for mini-manipulations and for corners or squeezes of 
the underlying market. In addition such limits serve to reduce the 
possibility for disruption of the options market itself, especially 
in illiquid options classes. See Securities Exchange Act Release No. 
39489 (December 24, 1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-
11) (order approving).
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    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Exchange, other options exchanges, and at 
the several clearing firms are capable of properly identifying unusual 
and/or illegal trading activity. These procedures utilize daily 
monitoring of market movements via automated surveillance techniques to 
identify unusual activity in both options and underlying stocks.\18\
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    \18\ These procedures have been effective for the surveillance 
of SPY options trading and will continue to be employed.
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    Furthermore, large stock holdings must be disclosed to the 
Commission by way of Schedules 13D or 13G.\19\ Options positions are 
part of any reportable positions and, thus, cannot be legally hidden. 
Moreover, the previously noted reporting requirement in Chapter III, 
Section 10 of the BOX Rules that Options Participants file reports with 
the Exchange for any customer who held aggregate large long or short 
positions of any single class for the previous day will continue to 
serve as an important part of the Exchange's surveillance efforts.
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    \19\ 17 CFR 240.13d-1.
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    BOX believes that the current financial requirements imposed by the 
Exchange and by the Commission

[[Page 46339]]

adequately address concerns that an Options Participant or its customer 
may try to maintain an inordinately large unhedged position in an 
option, particularly on SPDRs[supreg]. Current margin and risk-based 
haircut methodologies serve to limit the size of positions maintained 
by any one account by increasing the margin and/or capital that an 
Options Participant must maintain for a large position held by itself 
or by its customer. It should also be noted that the Exchange has the 
authority under Chapter XIII, Section 4(b) of the BOX Rules to impose a 
higher margin requirement upon a BOX Options Participant when the 
Exchange determines a higher requirement is warranted. In addition, the 
Commission's net capital rule, Rule 15c3-1 under the Act,\20\ imposes a 
capital charge on Participants to the extent of any margin deficiency 
resulting from the higher margin requirement.
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    \20\ 17 CFR 240.15c3-1.
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    BOX believes that the position limit increase [sic] on options on 
QQQs\SM\, which as noted are similar to options on SPDRs[supreg] have 
been gradually increased from 75,000 contracts in 2005 to the current 
level of 900,000 contracts, and there has been no adverse affects on 
the market as a result of this increase. Likewise, there have been no 
adverse affects on the market from the expansion of the position limit 
for options on SPDRs[supreg] from 75,000 contracts to the current level 
of 300,000 contracts.
    BOX believes that restrictive option position limits prevent large 
customers, such as mutual funds and pension funds, from using options 
to gain meaningful exposure to and hedging protection through the use 
of options on SPDRs[supreg]. This can result in lost liquidity in both 
the options market and the equity market. The proposed position limit 
increase will remedy this situation to the benefit of large as well as 
retail traders, investors, and public customers. BOX believes that 
increasing position and exercise limits for options on SPDRs[supreg] 
would lead to a more liquid and competitive market environment for 
these options and would benefit customers interested in this product.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\21\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\22\ 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 is proposing to expand the position limit on options on 
SPDRs[supreg]. The Exchange believes that this proposal will be 
beneficial to large market makers (which generally have the greatest 
potential and actual ability to provide liquidity and depth in the 
product), as well as retail traders, investors, and public customers.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 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

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, provided that the self-regulatory 
organization has given the Commission written notice of its intent to 
file 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 proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \23\ and Rule 19b-
4(f)(6) (iii) thereunder.\24\
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \25\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\26\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has 
requested that the Commission waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, 
because increasing position and exercise limits for SPY options would 
lead to a more liquid and competitive market environment that would 
benefit customers interested in this product. Additionally, it would 
allow the Exchange to seamlessly continue to offer traders and the 
investing public the ability to use this product as an effective 
hedging and trading vehicle. Lastly, it will enable the Exchange's 
position and exercise limits for SPDR[reg] options to be consistent 
with those of other exchanges that have already adopted the higher 
position and exercise limits. Therefore, the Commission designates the 
proposal operative upon filing.\27\
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    \25\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires that a self-regulatory organization submit to the 
Commission written notice of its 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 filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Commission notes that the Exchange has satisfied 
this requirement.
    \26\ 17 CFR 240.19b-4(f)(6)(iii).
    \27\ 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 such 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-BX-2011-044 on the subject line.

[[Page 46340]]

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-BX-2011-044. 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 such 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 No. SR-BX-2011-044 and should be 
submitted on or before August 23, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19451 Filed 8-1-11; 8:45 am]
BILLING CODE 8011-01-P


