
[Federal Register Volume 77, Number 157 (Tuesday, August 14, 2012)]
[Notices]
[Pages 48570-48572]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19859]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67617; File No. SR-NASDAQ-2012-058]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change Relating to the Listing and Trading of 
Alpha Index-Linked Securities

August 8, 2012.

I. Introduction

    On June 11, 2012, The NASDAQ Stock Market LLC (``Exchange'' or 
``NASDAQ'') 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 list and trade Alpha Index-Linked Securities. 
The proposed rule change was published for comment in the Federal 
Register on June 27, 2012.\3\ The Commission received no comments on 
the proposed rule change. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67229 (June 21, 
2012), 77 FR 38347 (``Notice'').
---------------------------------------------------------------------------

II. Description

    The Exchange proposes to add Rule 5712 to provide for the listing 
and trading of Alpha Index-Linked Securities, which are Equity Index-
Linked Securities \4\ linked, on an unleveraged basis, to the following 
Alpha Indexes: GOOG vs. SPY (GOOSY) and AAPL vs. SPY (AVSPY) (together, 
``Specified Alpha Indexes''). By this filing, the Exchange proposes to 
list and trade only Alpha Index-Linked Securities linked to the 
Specified Alpha Indexes.\5\
---------------------------------------------------------------------------

    \4\ Currently, Exchange Rule 5710 provides for the listing and 
trading of Equity Index-Linked Securities, which are securities that 
provide for the payment at maturity of a cash amount based on the 
performance of an underlying equity index or indexes. See Exchange 
Rule 5710. In particular, Exchange Rule 5710(k)(i)(A) provides for 
the listing and trading, pursuant to Rule 19b-4(e) under the Act, of 
Equity Index-Linked Securities with respect to which the underlying 
indexes have at least 10 component securities and either: (1) Have 
been reviewed and approved for the trading of options or other 
derivatives by the Commission under Section 19(b)(2) of the Act and 
rules thereunder, and the conditions set forth in the Commission's 
approval order, including comprehensive surveillance sharing 
agreements for non-U.S. stocks, continue to be satisfied; or (2) 
meet the specific index criteria set forth in Exchange Rule 
5710(k)(i)(A)(2). Each Alpha Index contains only two component 
securities, and therefore Alpha Index-Linked Securities are 
ineligible for listing and trading pursuant to Exchange Rule 
5710(k)(i)(A).
    \5\ See Notice, supra note 3 at n.4. Accordingly, unlike 
Exchange Rule 5710, new Exchange Rule 5712 is not a generic listing 
standard.
---------------------------------------------------------------------------

    Alpha Indexes are relative performance based equity indexes 
maintained by The NASDAQ OMX Group.\6\ Alpha Indexes measure relative 
total returns \7\ of one stock or one exchange-traded fund (``ETF'') 
share versus another ETF share (each such combination of two components 
is referred to as an ``Alpha Pair''). The first component identified in 
an Alpha Pair (``Target Component'') is measured against the second 
component identified in the Alpha Pair (``Benchmark Component''). To 
calculate an Alpha Index, NASDAQ measures the total return performance 
of the Target Component relative to the total return performance of the 
Benchmark Component, based upon prices of transactions on the primary 
listing exchange of each component.\8\ Further information about the 
calculation of Alpha Indexes, including the calculation of the daily 
total returns of Target Components and Benchmark Components, is 
available in the Notice.\9\
---------------------------------------------------------------------------

    \6\ The Commission has previously approved the listing and 
trading of options on certain Alpha Indexes (``Alpha Index 
Options'') on NASDAQ OMX PHLX LLC (``PHLX''). See Securities 
Exchange Act Release Nos. 63860 (February 7, 2011), 76 FR 7888 
(February 11, 2011) (SR-Phlx-2010-176) and 65149 (August 17, 2011), 
76 FR 52729 (August 23, 2011) (SR-Phlx-2011-89).
    \7\ The total return measures performance (rate of return) of 
price appreciation plus dividends over any given evaluation period.
    \8\ Daily total return values and Alpha Index values will be 
updated based upon prices of each reported transaction in the 
primary listing market.
    \9\ See supra note 3.
---------------------------------------------------------------------------

Listing of Alpha Index-Linked Securities

    New Exchange Rule 5712 permits the listing and trading of Alpha 
Index-Linked Securities linked to the Specified Alpha Indexes if the 
Target Component and Benchmark Component meet certain criteria. Alpha 
Index-Linked Securities listed and traded

[[Page 48571]]

under new Exchange Rule 5712 must meet the requirements of Exchange 
Rule 5710(a)-(j).\10\ At the initial listing of an Alpha Index-Linked 
Security, options on both components of the Alpha Index must be listed 
and traded on the NASDAQ Options Market and must meet the requirements 
of Chapter IV, Section 3 (Criteria for Underlying Securities) of the 
NASDAQ Options Market rules.\11\ Additionally, the Target Component's 
and the Benchmark Component's trading volume (in all markets in which 
the components are traded) must have each averaged at least 2,250,000 
shares per day in the preceding twelve months.\12\ Further, no Alpha 
Index-Linked Security will be listed unless and until options overlying 
each of the Alpha Index components have been listed and traded on a 
national securities exchange with an average daily options trading 
volume during the three previous months of at least 10,000 
contracts.\13\ Moreover, to be eligible for listing, the value of the 
Alpha Index underlying an Alpha Index-Linked Security must be 
disseminated at least once every second over the NASDAQ OMX Global 
Index Data Service (``GIDS'').\14\
---------------------------------------------------------------------------

    \10\ According to the Exchange, effectively, the only provision 
of Exchange Rule 5710 that will not apply to Alpha Index-Linked 
Securities is subsection (k), which specifies the criteria for 
listing and trading Linked Securities under Rule 19b-4(e) under the 
Act, as well as certain continued listing and delisting criteria. 
Pursuant to new Exchange Rule 5712(a), all other provisions of 
Exchange Rule 5710 applicable to Equity Index-Linked Securities 
eligible for listing and trading pursuant to Rule 19b-4(e) will 
apply to Alpha Index-Linked Securities.
    \11\ See new Exchange Rule 5712(a)(ii).
    \12\ See id.
    \13\ See id.
    \14\ See id. GIDS is the NASDAQ OMX global index data feed 
service, offering real-time updates, daily summary messages, and 
access to widely followed indexes and ETFs. See email from Carla 
Behnfeldt, Associate General Counsel, Exchange, to Christopher Chow, 
Special Counsel, Commission, and Yue Ding, Attorney-Adviser, 
Commission, dated August 3, 2012 (``Nasdaq email''). GIDS provides 
investment professionals with the daily and historical information 
needed to track or trade NASDAQ OMX indexes, listed ETFs, or third-
party partner indexes and ETFs. See id.
---------------------------------------------------------------------------

    Following the initial listing of an Alpha Index-Linked Security, 
options on both components of the Alpha Index must continue to meet the 
continued listing standards set forth in Chapter IV, Section 4 
(Withdrawal of Approval of Underlying Securities) of the NASDAQ Options 
Market rules.\15\ Additionally, the Target Component's and the 
Benchmark Component's trading volume (in all markets in which the 
components are traded) must have each averaged at least 2,000,000 
shares per day in the preceding twelve months.\16\ Further, options on 
each component of the Alpha Index must continue to meet the options 
average daily volume standard set forth in Exchange Rule 
5712(a)(ii).\17\
---------------------------------------------------------------------------

    \15\ See new Exchange Rule 5712(b).
    \16\ See id.
    \17\ See id.
---------------------------------------------------------------------------

Delisting of Alpha Index-Linked Securities

    New Exchange Rule 5712(c) governs the delisting and removal of 
Alpha Index-Linked Securities and provides commencement of such 
proceedings--unless the Commission has approved the continued trading--
with respect to any Alpha Index-Linked Security where: (1) The 
aggregate market value or principal amount of the Alpha Index-Linked 
Securities publicly held is less than $400,000; (2) the value of the 
underlying Alpha Index is no longer calculated or widely disseminated 
on at least a one second basis, provided, however, that if the official 
index value does not change during some or all of the period when 
trading is occurring on NASDAQ, then the last calculated official index 
value must remain available throughout NASDAQ trading hours; (3) such 
other event occurs or condition exists which, in the opinion of NASDAQ, 
makes further dealings on NASDAQ inadvisable; (4) any of the standards 
set forth in Exchange Rule 5712(b) are not continuously maintained; or 
(5) an underlying Alpha Index fails to satisfy the maintenance 
standards or conditions for such index as set forth by the Commission 
in its order under Section 19(b)(2) of the Act approving the index for 
the trading of options or other derivatives.\18\
---------------------------------------------------------------------------

    \18\ See new Exchange Rule 5712(c). In the case of a corporate 
event that eliminates one of the underlying components of an Alpha 
Pair, NASDAQ will cease calculation of the Alpha Index for that 
Alpha Pair and commence delisting or removal proceedings for the 
overlying Alpha Index-Linked Securities pursuant to Exchange Rule 
5712(c). See Notice, supra note 3, 77 FR at 38348.
---------------------------------------------------------------------------

Trading Rules and Procedures

    Trading in Alpha Index-Linked Securities will be governed by the 
same trading rules and procedures that apply to other Equity Index-
Linked Securities listed pursuant to Exchange Rule 5710. Pursuant to 
Exchange Rule 5710(i), FINRA will implement on behalf of NASDAQ written 
surveillance procedures for Alpha Index-Linked Securities. The Exchange 
states that surveillance will be in place for the launch of Alpha 
Index-Linked Securities.\19\ Pursuant to Exchange Rule 5710(j), Alpha 
Index-Linked Securities will be treated as equity instruments and, for 
purposes of fee determination, shall be deemed and treated as Other 
Securities.
---------------------------------------------------------------------------

    \19\ See id. at 38349.
---------------------------------------------------------------------------

    Pursuant to Exchange Rule 5710(h), if the value of an Alpha Index 
is not being disseminated as required, the Exchange may halt trading 
during the day on which such interruption occurs and will halt trading 
no later than the beginning of trading following the trading day when 
the interruption commenced if such interruption persists at that time.

III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \20\ and the rules and regulations thereunder applicable to a 
national securities exchange.\21\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\22\ 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. The 
Commission notes that Alpha Index-Linked Securities linked to the 
Specified Alpha Indexes must comply with the requirements of new 
Exchange Rule 5712 to be listed and traded on the Exchange.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f.
    \21\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission further finds that the proposed rule change is 
consistent with Section 11A(a)(1)(C)(iii) of the Act,\23\ which sets 
forth Congress's finding that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure the availability to brokers, dealers, and 
investors of information with respect to quotations for, and 
transactions in, securities. Quotation and last-sale information for 
the Alpha Index-Linked Securities will be disseminated via UTP Level 1, 
NASDAQ Basic, NASDAQ Level 2 and NASDAQ TotalView[supreg].\24\ To be 
eligible for listing, the value of all Alpha Indexes underlying Alpha 
Index-Linked Securities must be disseminated

[[Page 48572]]

at least once every second over GIDS.\25\ Information regarding market 
price and trading volume of the Alpha Index-Linked Securities will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic devices, and the 
previous day's closing prices and trading volume information for the 
Alpha Index-Linked Securities will be published daily in the financial 
section of newspapers.\26\ The Commission also notes that information 
concerning the components of the Specified Alpha Indexes is widely 
available.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \24\ See Nasdaq email, supra note 14.
    \25\ See new Exchange Rule 5712(a)(ii).
    \26\ See Nasdaq email, supra note 14.
---------------------------------------------------------------------------

    In addition, the Exchange will commence delisting or removal 
proceedings if the value of the underlying Alpha Index is no longer 
calculated or widely disseminated on at least a one second basis, 
provided, however, that if the official index value does not change 
during some or all of the period when trading is occurring on NASDAQ, 
then the last calculated official index value must remain available 
throughout NASDAQ trading hours.\27\ Further, pursuant to Exchange Rule 
5710(h), if the value of an Alpha Index is not being disseminated as 
required, the Exchange may halt trading during the day on which such 
interruption occurs, and will halt trading no later than the beginning 
of trading following the trading day when the interruption commenced if 
the interruption persists at that time.\28\
---------------------------------------------------------------------------

    \27\ See new Exchange Rule 5712(c)(ii).
    \28\ The Commission notes that Exchange Rules 4120 and 4121 also 
govern trading halts on the Exchange.
---------------------------------------------------------------------------

    The Commission believes that the listing standards for Alpha Index-
Linked Securities should minimize the potential for manipulation. 
Specifically, for initial listing, the Target Component's and the 
Benchmark Component's trading volume--in all markets in which the 
components are traded--must have each averaged at least 2,250,000 
shares each day in the preceding twelve months.\29\ Further, options 
overlying each of the components must have been listed and traded on a 
national securities exchange with an average daily trading volume of at 
least 10,000 contracts during the three previous months.\30\ Following 
the initial listing, each component's trading volume (in all markets in 
which the components are traded) must have averaged at least 2,000,000 
shares each day in the preceding twelve months.\31\ Options overlying 
each of the components must maintain an average daily trading volume of 
at least 10,000 contracts over the three previous months.\32\ Moreover, 
the Exchange will commence delisting or removal proceedings with 
respect to any Alpha Index-Linked Security if the aggregate market 
value or principal amount of the Alpha Index-Linked Security publicly 
held is less than $400,000.\33\
---------------------------------------------------------------------------

    \29\ See new Exchange Rule 5712(a)(ii).
    \30\ See id.
    \31\ See new Exchange Rule 5712(b).
    \32\ See id.
    \33\ See new Exchange Rule 5712(c)(i). The Commission also notes 
that Alpha Index-Linked Securities must have a minimum public 
distribution of 1,000,000 trading units, unless they are traded in 
$1,000 denominations or are redeemable at the option of the holders 
on at least a weekly basis. See Exchange Rule 5710(a), incorporating 
Exchange Rule 5730(a)(1)(C).
---------------------------------------------------------------------------

    In support of this proposal, the Exchange has made representations, 
including:
    (1) The Exchange deems Alpha Index-Linked Securities to be equity 
securities, and therefore trading in Alpha Index-Linked Securities will 
be subject to the Exchange's existing rules governing the trading of 
equity securities.\34\
---------------------------------------------------------------------------

    \34\ See Notice, supra note 3, 77 FR at 38349.
---------------------------------------------------------------------------

    (2) The Exchange has appropriate rules to facilitate transactions 
in the Alpha Index-Linked Securities during all trading sessions.\35\
---------------------------------------------------------------------------

    \35\ See Nasdaq email, supra note 14.
---------------------------------------------------------------------------

    (3) Trading of Alpha Index-Linked Securities will be subject to 
surveillance procedures, and such procedures are adequate to properly 
monitor trading in the Alpha Index-Linked Securities and to deter and 
detect violations of Exchange rules and applicable federal securities 
laws.\36\
---------------------------------------------------------------------------

    \36\ See Notice, supra note 3, 77 FR at 38349.
---------------------------------------------------------------------------

    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an information circular of the special characteristics 
and risks associated with trading the Alpha Index-Linked 
Securities.\37\ Specifically, the information circular will discuss the 
following: (a) Nasdaq Rule 2310, which imposes suitability obligations 
on Nasdaq members with respect to recommending transactions in the 
Alpha Index-Linked Securities to customers; (b) that Nasdaq members 
should be mindful of applicable prospectus delivery requirements under 
the federal securities laws with respect to transactions in Alpha-Index 
Linked Securities; and (c) trading information.\38\
---------------------------------------------------------------------------

    \37\ See Nasdaq email, supra note 14.
    \38\ See id.
---------------------------------------------------------------------------

    (5) The Exchange may obtain information via the Intermarket 
Surveillance Group (``ISG'') from other exchanges that are members of 
ISG or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement.\39\ Target Components, Benchmark 
Components, and options on the Target and Benchmark Components are 
traded on exchanges that are ISG members.\40\
---------------------------------------------------------------------------

    \39\ See Notice, supra note 3, 77 FR at 38349.
    \40\ See id.
---------------------------------------------------------------------------

    This approval order is based on all of the Exchange's 
representations and description of Alpha Index-Linked Securities, 
including those set forth above and in the Notice.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\41\ that the proposed rule change (SR-NASDAQ-2012-058) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
---------------------------------------------------------------------------

    \42\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19859 Filed 8-13-12; 8:45 am]
BILLING CODE 8011-01-P


