[Federal Register Volume 84, Number 107 (Tuesday, June 4, 2019)]
[Notices]
[Pages 25872-25875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11543]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85953; File No. SR-Phlx-2019-22]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Allow $1 or 
Greater Strike Price Intervals for Options on QQQ and IWM

May 29, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 17, 2019, Nasdaq PHLX LLC (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the Exchange. The Exchange filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to allow $1 or greater strike price intervals 
for options on certain Exchange-Traded Fund (``ETF'') Shares, as 
described below.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, 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 proposed rule change is to amend the Exchange's 
rules to allow $1 or greater strike price intervals for options listed 
on the PowerShares QQQ Trust (``QQQ'') and the iShares Russell 2000 
Index Fund (``IWM''), consistent with recent changes proposed by Cboe 
Exchange,

[[Page 25873]]

Inc. (``CBOE'') and approved by the Commission.\5\
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    \5\ See Securities Exchange Act Release No. 85754 (April 30, 
2019), 84 FR 19823 (May 6, 2019) (SR-CBOE-2019-015).
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    Currently, Commentary .05(a)(iv)(C) to Rule 1012 allows for the 
interval between strike prices of series of options on SPY, IVV, and 
DIA to be $1 or greater where the strike price is greater than $200. 
QQQ and IWM options, however, currently trade on the Exchange with $1 
intervals up to a strike price of $200 pursuant to Commentary 
.05(a)(iv)(A) to Rule 1012. Above $200, these options classes trade 
with significantly wider $5 strike price intervals. The Exchange now 
proposes to modify Commentary .05(a)(iv)(C) to Rule 1012 to allow $1 
strike price intervals where the strike price is above $200 for QQQ and 
IWM options, in effect matching the strike setting regime for these 
products below $200 and also for options on SPY, IVV, and DIA. 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.
    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. 
QQQ is a unit investment trust designed to closely track the price and 
performance of 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, 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, NDX has climbed above a price level of 7500 and RUT 
climbed to a price level of approximately 1700 (both prior to the 
December 2018 market-wide decline). The prices for QQQ and IWM options 
have correspondingly increased within the same time period.\6\ As the 
value of the underlying ETF (and the index the ETF tracks) and 
resulting strike prices for each option appreciates, investor and 
member demands to list additional strike prices ($1 increments) in QQQ 
and IWM options above $200 continue to increase. QQQ is among the most 
actively traded ETFs on the market. It is widely quoted as an indicator 
of technology stock price 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. 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.
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    \6\ For example, by the end of August 2018, QQQ was trading at 
more than $185 per share and IWM was trading at more than $170 per 
share.
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    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 options 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 intervals. 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 discussed above, 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/her open options position from a $200 to a $201 
strike price, which is only a 0.5% move for the underlying. The 
Exchange believes that the proposed rule change will benefit investors 
by providing them the flexibility to more closely tailor their 
investment and hedging decisions using QQQ and IWM options.
    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 that it and the Options Price 
Reporting Authority (``OPRA'') have the necessary system capacity to 
handle any potential additional traffic associated with this rule 
change. The Exchange also believes that members will not have a 
capacity issue due to the proposed rule change. In addition, the 
Exchange represents that it does not believe 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 that its proposal is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\8\ 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 to

[[Page 25874]]

Commentary .05(a)(iv)(C) to Rule 1012 will allow investors to more 
easily and effectively 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.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Exchange also believes the proposed rule change is consistent 
with Section 6(b)(1) of the Act,\9\ 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.
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    \9\ 15 U.S.C. 78f(b)(1).
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    As noted above, QQQ and IWM options currently trade in wider $5 
intervals above a $200 strike price, whereas the same products at or 
below a $200 strike price trade in $1 intervals. This creates a 
situation where contracts on the same options 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 allowing QQQ and IWM options to trade in $1 or greater 
intervals at all strike prices.
    The Exchange believes that the proposed rule change will benefit 
investors by giving them increased flexibility to more closely tailor 
their investment and hedging decisions. Moreover, the proposal is 
consistent with changes adopted by CBOE and approved by the 
Commission.\10\
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    \10\ See supra note 5.
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    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. As discussed above, the Exchange further 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 will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. To the contrary, the proposed 
rule change is a competitive response to a recent CBOE filing approved 
by the Commission.\11\ The Exchange believes that the proposed rule 
change is essential to ensure fair competition between markets, and 
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.
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    \11\ See supra note 5.
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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 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 \12\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule19b-4(f)(6)(iii) 
requires a self-regulatory organization to give 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 date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \14\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \15\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. The Exchange 
states that waiver of this requirement will ensure fair competition 
among the exchanges by allowing the Exchange to set the interval 
between strike prices of series of options on ETF shares of QQQ and IWM 
in a manner consistent with another exchange. Further, the Exchange 
states that because the proposed rule change is based on the rules of 
another exchange,\16\ it does not introduce any new or novel regulatory 
issues. For these reasons, the Commission believes that waiving the 30-
day operative delay is consistent with the protection of investors and 
the public interest. Accordingly, the Commission hereby waives the 
operative delay and designates the proposed rule change operative upon 
filing.\17\
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    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ See supra note 5.
    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission also 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
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-Phlx-2019-22 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-Phlx-2019-22. 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

[[Page 25875]]

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 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-Phlx-2019-22 and should be submitted on 
or before June 25, 2019.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-11543 Filed 6-3-19; 8:45 am]
BILLING CODE 8011-01-P


