[Federal Register Volume 74, Number 210 (Monday, November 2, 2009)]
[Notices]
[Pages 56682-56684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-26253]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60874; File No. SR-NASDAQ-2009-091]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to the Expansion and Extension of the Exchange's Penny Pilot 
Program

October 23, 2009.
    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 October 16, 2009, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by Nasdaq. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing a proposal for the NASDAQ Options Market (``NOM'' 
or ``Exchange'') amend its Chapter VI, Section 5 to: (1) Extend through 
December 31, 2010, the Penny Pilot in options classes in certain issues 
(``Pilot Program'' or ``Pilot''); (2) expand the number of issues 
included in the Pilot Program; and (3) replace, on a semi-annual basis, 
any Pilot Program issues that have been delisted.\3\
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    \3\ See Securities Exchange Act Release No. 57579 (March 28, 
2008), 73 FR 18587 (April 4, 2008) (SR-NASDAQ-2008-026) (notice of 
filing and immediate effectiveness establishing Penny Pilot). See 
also Securities Exchange Act Release No. 60212 (July 1, 2009), 74 FR 
33000 (July 9, 2009) (SR-NASDAQ-2009-061) (notice of filing and 
immediate effectiveness extending Penny Pilot through October 31, 
2009).
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    The Exchange requests that the Commission waive the 30-day 
operative delay period contained in Exchange Act Rule 19b-
4(f)(6)(iii).\4\
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    \4\ 17 CFR 240.19b-4(f)(6)(iii).
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    The text of the proposed rule change is available from Nasdaq's Web 
site at http://nasdaq.cchwallstreet.com, at Nasdaq'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, Nasdaq 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. Nasdaq 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: Extend the time period of the 
Pilot Program, which is currently scheduled to expire on October 31, 
2009, through December 31, 2010; expand the number of issues included 
in the Pilot Program; and enable the Exchange to replace, on a semi-
annual basis, any Pilot Program issues that have been delisted.
Top 300
    NASDAQ proposes to add the top 300 most actively traded multiply 
listed options classes that are not yet included in the Pilot Program 
(the ``Top 300''). The Exchange proposes to determine the identity of 
the Top 300 based on national average daily volume (``ADV'') in the 
prior six calendar months preceding their addition to the Pilot 
Program, except that the month immediately preceding their addition to 
the Pilot Program would not be utilized for purposes of the 
analysis.\5\ In determining the identity of the Top 300, the Exchange 
will exclude options classes with high premiums. Pursuant to Chapter 
VI, Section 5(a)(3), the Pilot Program issues will be announced to the 
Exchange's membership via an Options Trader Alert (``OTA'') posted by 
the Exchange on its Web site.\6\ This will bring the total number of 
options classes traded pursuant to the Pilot Program to 363. NASDAQ 
represents that the Exchange has the necessary system

[[Page 56683]]

capacity to support any additional series listed as part of the Pilot 
Program.
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    \5\ The Exchange will not include options classes in which the 
issuer of the underlying security is subject to an announced merger 
or is in the process of being acquired by another company, or if the 
issuer is in bankruptcy. For purposes of assessing ADV, the Exchange 
will use data compiled and disseminated by The Options Clearing 
Corporation (``OCC'').
    \6\ The Exchange shall also identify the classes to be added to 
the Pilot Program, per each phase, in a filing with the Commission. 
The Exchange proposes to clarify in its Chapter VI Section 5 that a 
list of options in the Penny Pilot shall be communicated to 
membership via an Options Trader Alert (``OTA'') posted on the 
Exchange's Web site; and that certain options, such as for example 
the QQQQs, will be traded in penny increments regardless of price. 
This is similar to Phlx Rule 1034(a)(i)(B).
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    NASDAQ believes that it is appropriate to exclude high priced 
underlying securities, as the benefit to the public from including such 
issues is minimal because of the high price of ``at-the-money'' 
options.\7\ The Exchange believes an appropriate threshold for 
designation as ``high priced'' at the time of selection of new issues 
to be included in the Pilot is $200 per share or a calculated index 
value of 200. At $200 per share strike prices are in $10 increments, 
and at a calculated index value of 200 strike prices are in $5 
increments,\8\ so the at-the-money strike is more likely to carry an 
intrinsic value of $3 or more, and thus not trade in a penny increment. 
With a greater distance between strikes, there are generally fewer 
series that are actively traded. The determination of whether a 
security is trading above $200 or above a calculated index value of 200 
shall be based on the price at the close of trading on the Expiration 
Friday prior to being added to the Pilot.
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    \7\ For instance, as of August 12, 2009, the near term at-the-
money call in GOOG (August 460 Calls) was trading at $6.50 with the 
underlying at $459.84. The lowest strike price September call 
trading below $3 (with the underlying at the same price) was the 
September 500 Call.
    \8\ Regarding strike price increments for non-index options, see 
Chapter IV, Section 6(d). Regarding strike price increments for 
index options, see Chapter XIV, Section 11(c).
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Phased Implementation
    The Exchange proposes to phase-in the additional classes to the 
Pilot Program over four successive quarters. Specifically, the Exchange 
proposes to add 75 classes in November 2009, February 2010, May 2010, 
and August 2010. In order to reduce operational confusion and provide 
for appropriate time to update databases, the Exchange proposes to add 
the eligible issues to the Pilot Program effective for trading on the 
Monday ten days after Expiration Friday. Thus, the quarterly additions 
would be effective on November 2, 2009; February 1, 2010; May 3, 2010; 
and August 2, 2010. For purposes of identifying the issues to be added 
per quarter, the Exchange shall use data from the prior six calendar 
months preceding the implementation month, except that the month 
immediately preceding their addition to the Pilot Program would not be 
utilized for purposes of the analysis.\9\
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    \9\ The issues to be added on November 2, 2009, will be based on 
the most actively traded multiply listed issues for the six month 
period from April 1, 2009, through September 30, 2009. The issues to 
be added on February 1, 2010, will be based on the most actively 
traded multiply listed issues for the six month period from July 1, 
2009, through December 31, 2009. The issues to be added on May 3, 
2010, will be based on the most actively traded multiply listed 
issues for the six month period from October 1, 2009, through March 
31, 2010. And the issues to be added on August 2, 2010, will be 
based on the most actively traded multiply listed issues for the six 
month period from January 1, 2010, through June 30, 2010.
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Delistings
    Additionally, the Exchange proposes that any Pilot Program issues 
that have been delisted may be replaced on a semi-annual basis by the 
next most actively traded multiply listed options classes that are not 
yet included in the Pilot, based on trading activity in the previous 
six months. The replacement issues would be added to the Pilot on the 
second trading day following January 1, 2010, and July 1, 2010.\10\ The 
Exchange will employ the same parameters in respect of prospective 
replacement issues as approved and applicable under the Pilot Program, 
including excluding high-priced underlying securities.
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    \10\ The replacement issues will be announced to the Exchange's 
membership via an OTA posted on the Exchange's Web site.
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Reports
    The Exchange agrees to submit semi-annual reports to the Commission 
that will include sample data and analysis of information collected 
from April 1 through September 30, and from October 1 through March 31, 
for each year, for the ten most active and twenty least active options 
classes added to the Pilot Program.\11\ As the Pilot Program matures 
and expands, the Exchange believes that this proposed sampling approach 
provides an appropriate means by which to monitor and assess the Pilot 
Program's impact. The Exchange will also identify, for comparison 
purposes, a control group consisting of the ten least active options 
classes from the existing 63 Pilot Program classes. This report will 
include, but is not limited to: (1) Data and analysis on the number of 
quotations generated for options included in the report; (2) an 
assessment of the quotation spreads for the options included in the 
report; (3) an assessment of the impact of the Pilot Program on the 
capacity of NASDAQ's automated systems; (4) data reflecting the size 
and depth of markets, and (5) any capacity problems or other problems 
that arose related to the operation of the Pilot Program and how the 
Exchange addressed them.
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    \11\ The Exchange will continue to provide data concerning the 
existing 63 Pilot Program classes.
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    The Exchange believes the benefits to public customers and other 
market participants who will be able to express their true prices to 
buy and sell options have been demonstrated to outweigh the increase in 
quote traffic.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \13\ 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 
believes that the Pilot Program promotes just and equitable principles 
of trade by enabling public customers and other market participants to 
express their true prices to buy and sell options.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
any burden on competition that is 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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \14\ and Rule 19b-4(f)(6) thereunder.\15\ 
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, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6)(iii) thereunder.\17\
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    \14\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires the Exchange to give the Commission written 
notice of the Exchange's intent to file the proposed rule change 
along with a brief description and the 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 pre-filing requirement.

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[[Page 56684]]

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of the filing.\18\ 
However, pursuant to Rule 19b-4(f)(6)(iii),\19\ the Commission may 
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 notes that 
the proposed rule change is substantially similar to a proposal 
submitted by another options exchange that was recently approved by the 
Commission and also incorporates a change to the initial expansion date 
filed by the other exchange. The Exchange further states that waiving 
the 30-day operative delay will allow the Pilot Program to continue 
uninterrupted and allow Nasdaq to adopt the same expansion schedule as 
other exchanges. For these reasons, the Commission designates the 
proposal to be operative upon filing with the Commission.
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    \18\ 17 CFR 240.19b-4(f)(6).
    \19\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes waiving the 30-day operative delay \20\ is 
consistent with the protection of investors and the public interest 
because such waiver will allow Nasdaq to implement the 75 additional 
classes on November 2, 2009 and permit the Pilot Program to continue 
uninterrupted, consistent with other exchanges.\21\ For these reasons, 
the Commission designates the proposal to be operative upon filing with 
the Commission.
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    \20\ For the 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. 
78(c)(f).
    \21\ See Securities Exchange Act Release Nos. 60711 (September 
23, 2009), 74 FR 49419 (September 28, 2009) (SR-NYSEArca-2009-44); 
and 60833 (October 16, 2009), 74 FR 54617 (October 22, 2009) (SR-
NYSEArca-2009-91).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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 [email protected]. Please include 
File Number SR-NASDAQ-2009-091 on the subject line.

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-NASDAQ-2009-091. 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 inspection 
and copying 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-NASDAQ-2009-091 and should be 
submitted on or before November 23, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-26253 Filed 10-30-09; 8:45 am]
BILLING CODE 8011-01-P