
[Federal Register Volume 84, Number 52 (Monday, March 18, 2019)]
[Notices]
[Pages 9851-9854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-04946]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85295; File No. SR-CBOE-2019-015]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Allow $1 Strike Price Intervals 
Above $200 on Options on the QQQ and IWM Exchange-Traded Funds

March 12, 2019.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on March 6, 2019, Cboe Exchange, Inc. (the ``Exchange'') 
filed with the Securities and Exchange Commission (the ``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to allow for $1 strike prices above $200 on additional options on Units 
of certain exchange-traded fund (``ETF'') products. The text of the 
proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 5.5. Series of Option Contracts Open for Trading
    (a)-(e) (No change).
    . . .Interpretations and Policies:
    .01-.07 (No change).
    .08
    (a) Notwithstanding Interpretation and Policy .01 above, and except 
for options on Units covered under Interpretation and Policies .06 and 
.07 above, the interval between strike prices of series of options on 
Units, as defined under Interpretation and Policy .06 to Rule 5.3, will 
be $1 or greater where the strike price is $200 or less and $5.00 or 
greater where the strike price is greater than $200. For options on 
Units that are used to calculate a volatility index, the Exchange may 
open for trading $0.50 strike price intervals as provided for in 
Interpretation and Policy .19 to this Rule 5.5.
    (b) Notwithstanding Interpretation and Policy .01 and 
Interpretation and Policy .08(a) above, the interval between strike 
prices of series of options on Units of the Standard & Poor's 
Depository Receipts Trust (``SPY''), iShares S&P 500 Index ETF 
(``IVV''), PowerShares QQQ Trust (``QQQ''), iShares Russell 2000 Index 
Fund (``IWM''), and The DIAMONDS Trust (``DIA'') will be $1 or greater.
    .09-.23 (No change)
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, 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

[[Page 9852]]

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 Exchange proposes to amend Interpretation and Policy .08(b) to 
Rule 5.5 to allow for the interval between strike prices of series of 
options on Units of QQQ and IWM to be $1 or greater where the strike 
price is greater than $200.
    Currently, Interpretation and Policy .08(b) to Rule 5.5 allows for 
the interval between strike prices of series of options on Units of 
SPY, IVV, and DIA to be $1 or greater where the strike price is greater 
than $200. Under Rule 5.5 Interpretation and Policy .08(a), the 
interval between strike prices of series of options on all other Units 
is currently $5.00 or greater where the strike price is greater than 
$200. Specifically, the Exchange proposes to modify the interval 
setting regime to allow $1 strike price intervals where the strike 
price is above $200 for IWM and QQQ options. The Exchange believes that 
the proposed rule change would make QQQ and IWM options easier for 
investors and traders to use and more tailored to their investment 
needs.
    The QQQ and IWM are designed to provide investors different ways to 
efficiently gain exposure to the equity markets and execute risk 
management, hedging, asset allocation and income generation strategies. 
The QQQ is a Unit investment trust designed to closely track the price 
and performance of a the Nasdaq-100 Index (``NDX''), which represents 
the largest and most active non-financial domestic and international 
issues listed on The Nasdaq Stock Market based on market 
capitalization. Likewise, the IWM is an index ETF designed to closely 
track the price and performance of the Russell 2000 Index (``RUT''), 
which represents the small capitalization sector of the U.S. equity 
market. In general, QQQ and IWM options provide investors with the 
benefit of trading broader markets in a manageably sized contract.
    The value of QQQ is designed to approximate 1/40 the value of the 
underlying NDX. For example, if the NDX price level is 1400, QQQ strike 
prices generally would be expected to be priced around $35. The value 
of IWM is designed to approximate 1/10 the value of the underlying RUT. 
In the past year, the NDX has climbed above a price level of 7500, and 
the RUT climbed to a price level of approximately 1700 \4\ (both prior 
to the December 2018 market-wide decline). As the value of the 
underlying ETF (and the index the ETF tracks) and resulting strike 
prices for each option continues to appreciate, the Exchange has 
received Trading Permit Holder (``TPH'') requests to list additional 
strike prices ($1 increments) in QQQ and IWM options above $200. The 
QQQ is among the most actively traded ETFs on the market. It is widely 
quoted as an indicator of technology stock prices and investor 
confidence in the technology and telecommunication market spaces, a 
significant indicator of overall economic health. Similarly, IWM is 
among the most actively traded ETFs on the market and provides 
investors with an investment tool to gain exposure to small U.S. public 
companies. Industry-wide trade volume in QQQ more than doubled from 
2017 to 2018. As a result, QQQ options and IWM options have grown to 
become two of the largest options contracts in terms of trading volume. 
Investors use these products to diversify their portfolios and benefit 
from market trends.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 72990 (September 4, 
2014), 79 FR 53799 (September 10, 2014) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change Relating to the 
Strike Setting Regimes for SPY and DIA Options) (SR-CBOE-2014-068) 
(noting that at the time Interpretation and Policy .08 to Rule 5.5 
was amended to modify the interval setting regimes for SPY and DIA 
to allow $1 strike price intervals above $200, the price levels for 
their respective underlying ETFs hovered around 2000 and 1700, 
comparable to the current NDX and RUT price levels).
---------------------------------------------------------------------------

    Accordingly, the Exchange believes that offering a wider base of 
QQQ and IWM options affords traders and investors important hedging and 
trading opportunities, particularly in the midst of current price 
trends. The Exchange believes that not having the proposed $1 strike 
price intervals above $200 in QQQ and IWM significantly constricts 
investors' hedging and trading possibilities. The Exchange therefore 
believes that by having smaller strike intervals in QQQ and IWM, 
investors would have more efficient hedging and trading opportunities 
due to the lower $1 interval ascension. The proposed $1 intervals above 
the $200 strike price, will result in having at-the-money series based 
upon the underlying ETFs moving less than 1%. The Exchange believes 
that the proposed strike setting regime is in line with the slower 
movements of broad-based indices. Considering the fact that $1 
intervals already exist below the $200 price point and that both QQQ 
and IWM have consistently inclined in price toward the $200 level, the 
Exchange believes that continuing to maintain the current $200 level 
(above which intervals increase 500% to $5), may have a negative effect 
on investing, trading and hedging opportunities, and volume. The 
Exchange believes that the investing, trading, and hedging 
opportunities available with QQQ and IWM options far outweighs any 
potential negative impact of allowing QQQ and IWM options to trade in 
more finely tailored intervals above the $200 price point.
    The proposed strike setting regime would permit strikes to be set 
to more closely reflect the increasing values in the underlying indices 
and allow investors and traders to roll open positions from a lower 
strike to a higher strike in conjunction with the price movements of 
the underlying ETFs. Under the current rule, where the next higher 
available series would be $5 away above a $200 strike price, the 
ability to roll such positions is effectively negated. Accordingly, to 
move a position from a $200 strike to a $205 strike under the current 
rule, an investor would need for the underlying product to move 2.5%, 
and would not be able to execute a roll up until such a large movement 
occurred. As stated, the NDX and RUT have experienced continued, steady 
growth. The Exchange believes that with the proposed rule change, the 
investor would be in a significantly safer position of being able to 
roll his open options position from a $200 to a $201 strike price, 
which is only a 0.5% move for the underlying. As a result, the proposed 
rule change will allow the Exchange to better respond to customer 
demand for QQQ and IWM strike prices more precisely aligned with the 
smaller, longer-term incremental increases in respective underlying 
ETFs. The Exchange believes that the proposed rule change, like the 
other strike price programs currently offered by the Exchange, will 
benefit investors by providing investors the flexibility to more 
closely tailor their investment and hedging decisions using QQQ and IWM 
options. Moreover, by allowing series of QQQ and IWM options to be 
listed in $1 intervals between strike prices over $200, the proposal 
will moderately augment the potential total number of options series 
available on the Exchange. However, the Exchange believes it and the 
Options Price Reporting Authority (``OPRA'') have the necessary systems 
capacity to handle any potential additional traffic associated with 
this proposed rule change. The Exchange also believes that TPHs will 
not have a capacity issue due to the proposed rule change. In addition, 
the Exchange represents that it

[[Page 9853]]

does not believe that this expansion will cause fragmentation of 
liquidity, but rather, believes that finer strike intervals will serve 
to increase liquidity available as well as price efficiency by 
providing more trading opportunities for all market participants.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\5\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \6\ requirements that the rules of an exchange 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 regulating, clearing, 
settling, processing information with respect to, and 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.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the proposed rule change to Interpretation and 
Policy .08(b) to Rule 5.5 will allow investors to more easily use QQQ 
and IWM options. Moreover, the proposed rule change would allow 
investors to better trade and hedge positions in QQQ and IWM options 
where the strike price is greater than $200, and ensure that investors 
in both options are not at a disadvantage simply because of the strike 
price.
    The Exchange believes the proposed rule change is consistent with 
Section 6(b)(1) of the Act, which provides that the Exchange be 
organized and have the capacity to be able to carry out the purposes of 
the Act and the rules and regulations thereunder, and the rules of the 
Exchange. The rule change proposal allows the Exchange to respond to 
customer demand to allow QQQ and IWM options to trade in $1 intervals 
above a $200 strike price. The Exchange does not believe that the 
proposed rule would create additional capacity issues or affect market 
functionality.
    As noted above, ETF options trade in wider $5 intervals above a 
$200 strike price, whereby options at or below a $200 strike price 
trade in $1 intervals. This creates a situation where contracts on the 
same option class effectively may not be able to execute certain 
strategies such as, for example, rolling to a higher strike price, 
simply because of the $200 strike price above which options intervals 
increase by 500%. This proposal remedies the situation by establishing 
an exception to the current ETF interval regime for QQQ and IWM options 
to allow such options to trade in $1 or greater intervals at all strike 
prices.
    The Exchange believes that the proposed rule change, like other 
strike price programs currently offered by the Exchange, will benefit 
investors by giving them increased flexibility to more closely tailor 
their investment and hedging decisions. Moreover, the proposed rule 
change is consistent with changes adopted by other exchanges.\7\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 72664 (July 24, 
2014), 79 FR 44231 (July 30, 2014) (Notice of Filing of Proposed 
Rule Change, as Modified by Amendment No. 1, Relating to SPY and DIA 
Options) (SR-Phlx-2014-46).
---------------------------------------------------------------------------

    With regard to the impact of this proposal on system capacity, the 
Exchange believes it and OPRA have the necessary systems capacity to 
handle any potential additional traffic associated with this proposed 
rule change. The Exchange believes that its members will not have a 
capacity issue as a result of this proposal.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change to 
Interpretation and Policy .08(b) to Rule 5.5 will impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. Rather, the Exchange believes that the proposed 
rule change will result in additional investment options and 
opportunities to achieve the investment and trading objectives of 
market participants seeking efficient trading and hedging vehicles, to 
the benefit of investors, market participants, and the marketplace in 
general. Specifically, the Exchange believes that QQQ and IWM options 
investors and traders will significantly benefit from the availability 
of finer strike price intervals above a $200 price point. In addition, 
the interval setting regime the Exchange proposes to apply to QQQ and 
IWM options is currently applied to SPY, IVV, and DIA options, which 
are similarly popular and widely traded ETF products and track indexes 
at similarly high price levels. Thus, the proposed strike setting 
regime for QQQ and IWM options will allow options on the most actively 
traded ETFs with index levels at corresponding price levels to trade 
pursuant to the same strike setting regime. This will permit investors 
to employ similar investment and hedging strategies for each of these 
options.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove 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 email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2019-015 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2019-015. This file 
number should be included on the subject line if email 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 website (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

[[Page 9854]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website 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 
10:00 a.m. and 3:00 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. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2019-015 and should be 
submitted on or before April 8, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-04946 Filed 3-15-19; 8:45 am]
BILLING CODE 8011-01-P


