[Federal Register Volume 74, Number 220 (Tuesday, November 17, 2009)]
[Notices]
[Pages 59277-59279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-27465]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60952; File No. SR-NASDAQ-2009-099]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Strike Price Intervals of $0.50 for Options on Stocks 
Trading at or Below $3.00 on the NASDAQ Options Market

November 6, 2009.
    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 November 3, 2009, The NASDAQ Stock Market LLC (``Nasdaq'') 
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 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'') to modify the Supplementary Material of Chapter IV, 
Section 6 of the Exchange's rules, in order to establish strike price 
intervals of $0.50, beginning at $1, for certain options classes whose 
underlying security closed at or below $3 in its primary market on the 
previous trading day.
    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, the self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to expand the ability of 
investors to hedge risks associated with stocks trading at or under $3. 
Currently, Supplementary Material .01 to Chapter IV, Section 6 provides 
that the interval of strike prices of series of options on individual 
stocks may be $2.50 or greater where the strike price is $25 or less. 
Additionally, Supplementary Material .02 to Section 6 allows the 
Exchange to establish $1 strike price intervals (the ``$1 Strike 
Program'') on options classes overlying no more than fifty-five 
individual stocks designated by the Exchange. In order to be eligible 
for selection into the $1 Strike Program, the underlying stock must 
close below $50 in its primary market on the previous trading day. If 
selected for the $1 Strike Program, the Exchange may list strike prices 
at $1 intervals from $1 to $50, but no $1 strike price may be listed 
that is greater than $5 from the underlying stock's closing price in 
its primary market on the previous day. The Exchange may also list $1 
strikes on any other option class designated by another securities 
exchange that employs a similar $1 Strike Program to its own rules.\3\ 
The Exchange is restricted from listing any series that would result in 
strike prices being within $0.50 of an existing $2.50 strike price.
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    \3\ The Exchange may not list long-term option series 
(``LEAPS'') at $1 strike price intervals for any class selected for 
the Program.
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    The Exchange is now proposing to add new section .05 to the 
Supplementary Material to Chapter IV, Section 6, to establish strike 
prices of $1, $1.50, $2, $2.50, $3 and $3.50 for certain stocks that 
trade at or under $3.00.\4\ The listing of these strike prices will be 
limited to options classes whose underlying security closed at or below 
$3 in its primary market on the previous trading day, and which have 
national average daily volume that equals or exceeds 1,000 contracts 
per day as determined by The Options Clearing Corporation during the 
preceding three calendar months. The listing of $0.50 strike prices 
would be limited to options classes overlying no more than 5 individual 
stocks (the ``$0.50 Strike Program'') as specifically designated by the 
Exchange. The Exchange would also be able to list $0.50 strike prices 
on any other option classes if those classes were specifically 
designated by other securities exchanges that employed a similar $0.50 
Strike Program under their respective rules.
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    \4\ The Exchange recently amended Chapter IV, Section 4 
(Securities Traded on NOM) of its options rules to eliminate the $3 
market price per share requirement for continued approval for an 
underlying security. The amendment eliminated the prohibition 
against listing additional series or options on an underlying 
security at any time when the price per share of such underlying 
security is less than $3. See Securities Exchange Act Release No. 
59485 (March 2, 2009), 74 FR 10324 (March 10, 2009) (SR-Nasdaq-2009-
16).
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    Currently, the Exchange may list options on stocks trading at $3 at 
strike prices of $1, $2, $3, $4, $5, $6, $7 and $8 if they are 
designated to participate in the $1 Strike Program.\5\ If these stocks 
have not been selected for the Exchange's $1 Strike Program, the 
Exchange may list strike prices of $2.50, $5, $7.50 and so forth as 
provided in Supplementary Material .01, but not strike prices of $1, 
$2, $3, $4, $6, $7 and $8.\6\
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    \5\ Additionally, market participants may be able to trade $2.50 
strikes on the same option at another exchange, if that exchange has 
elected not to select the stock for participation in its own similar 
$1 Strike Program.
    \6\ Again, market participants may also be able to trade the 
option at $1 strike price intervals on other exchanges, if those 
exchanges have selected the stock for participation in their own 
similar $1 Strike Program.
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    The Exchange is now proposing to amend the Article IV, Chapter 6 
Supplementary Material by adding new section .05 to list strike prices 
on options on a number of qualifying stocks that trade at or under 
$3.00, not simply those stocks also participating in the $1 Strike 
Program, in finer intervals of $0.50, beginning at $1 up to $3.50. 
Thus, a qualifying stock trading at $3 would have option strike prices 
established not just at $2.50, $5.00, $7.50 and so forth (for stocks 
not in the Exchange's $1 Strike Program) or just at $1, $2, $3, $4, $5, 
$6, $7 and $8 (for stocks designated to participate in the $1 Strike 
Program), but rather at strike

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prices established at $1, $1.50, $2, $2.50, $3 and $3.50.\7\
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    \7\ The option on the qualifying stock could also have strike 
prices set at $5, $7.50 and so forth at $2.50 intervals (pursuant to 
Commentary .05(a)(ii) to Phlx Rule 1012) or, if it has been selected 
for the $1 Strike Program, at $4, $5, $6, $7 and $8.
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    The Exchange believes that current market conditions demonstrate 
the appropriateness of the new strike prices. Recently the number of 
securities trading below $3.00 has increased dramatically.\8\ Unless 
the underlying stock has been selected for the $1 Strike Program, there 
is only one possible in-the-money call (at $2.50) to be traded if an 
underlying stock trades at $3.00. Similarly, unless the underlying 
stock has been selected for the $1 Strike Program, only one out-of-the-
money strike price choice within 100% of a stock price of $3 is 
available if an investor wants to purchase out-of-the-money calls. 
Stated otherwise, a purchaser would need over a 100% move in the 
underlying stock price in order to have a call option at any strike 
price other than the $5 strike price become in-the-money. If the stock 
is selected for the $1 Strike Program, the available strike price 
choices are somewhat broader, but are still greatly limited by the 
proximity of the $3 stock price to zero, and the very large percent 
gain or loss in the underlying stock price, relative to a higher priced 
stock, that would be required in order for strikes set at $1 or away 
from the stock price to become in-the-money and serve their intended 
hedging purpose.
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    \8\ As of October 20, 2009, stocks trading at or below $3 
include CIT Group Inc., E-trade Financial Corp. and Evergreen Solar 
Inc. Options overlying these stocks trade on NOM.
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    As a practical matter, a low-priced stock by its very nature 
requires narrow strike price intervals in order for investors to have 
any real ability to hedge the risks associated with such a security or 
execute other related options trading strategies. The current 
restriction on strike price intervals, which prohibits intervals of 
less than $2.50 (or $1 for stocks in the $1 Strike Program) for options 
on stocks trading at or below $3, could have a negative effect on 
investors. The Exchange believes that the proposed $0.50 strike price 
intervals would provide investors with greater flexibility in the 
trading of equity options that overlie lower priced stocks by allowing 
investors to establish equity option positions that are better tailored 
to meet their investment objectives. The proposed new strike prices 
would enable investors to more closely tailor their investment 
strategies and decisions to the movement of the underlying security. As 
the price of stocks decline below $3 or even $2, the availability of 
options with strike prices at intervals of $0.50 could provide 
investors with opportunities and strategies to minimize losses 
associated with owning a stock declining in price.
    With regard to the impact on system capacity, the Exchange has 
analyzed its capacity and represents that it and the Options Price 
Reporting Authority have the necessary systems capacity to handle the 
additional traffic associated with the listing and trading of an 
expanded number of series as proposed by this filing.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ 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, by expanding the ability of investors to hedge risks 
associated with stocks trading at or under $3. The proposal should 
create greater trading and hedging opportunities and flexibility, and 
provide customers with the ability to more closely tailor investment 
strategies to the price movement of the underlying stocks, trading in 
many of which is highly liquid.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 foregoing 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 after the date of the filing, or such 
shorter time as the Commission may designate, if consistent with the 
protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give 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 Exchange has satisfied this requirement.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay to permit the Exchange to compete effectively with 
other exchanges that have implemented similar rules permitting $0.50 
strike price intervals for certain options classes.\13\ The Commission 
finds that waiver of the operative delay is consistent with the 
protection of investors and the public interest and designates the 
proposal operative upon filing.\14\
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    \13\ See, e.g., Securities Exchange Act Release No. 60694 
(September 18, 2009), 74 FR 49048 (September 25, 2009) (SR-Phlx-
2009-65) (order approving a $0.50 strike program substantially the 
same as the $0.50 Strike Program proposed by Nasdaq).
    \14\ 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 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-2009-099 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-2009-099. This

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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 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; 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 Number SR-NASDAQ-2009-099 and should 
be submitted on or before December 8, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27465 Filed 11-16-09; 8:45 am]
BILLING CODE 8011-01-P