[Federal Register Volume 76, Number 66 (Wednesday, April 6, 2011)]
[Notices]
[Pages 19167-19169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8124]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64160; File No. SR-NASDAQ-2011-041]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the NASDAQ Stock Market, LLC 
To Expand the $2.50 Strike Price Program

March 31, 2011.
    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 March 29, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``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 
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

    The NASDAQ Stock Market LLC proposes to amend Chapter IV, 
Supplementary Material to Section 6, Series of Options Open for 
Trading, at .03, to expand the $2.50 Strike Price Program.\3\
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    \3\ See Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (a proposal to participate in the $2.50 Strike 
Price Program).
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, at the principal 
office of the Exchange, on the Commission's Web site at http://www.sec.gov, 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. 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 this proposed rule change is to expand the current 
$2.50 Strike Price Program (``Program'') \4\ to permit the listing of 
options with $2.50 strike price intervals for options with strike 
prices between $50 and $100, provided the $2.50 strike price intervals 
are no more than $10 from the closing price of the underlying stock in 
the primary market.\5\ Currently, Chapter IV, Section 6 at 
Supplementary Material .03 permits the listing of options with $2.50 
strike price intervals for options with strike prices between $50 and 
$75. Specifically, the Exchange proposes to amend Commentary .03 to 
Chapter IV, Section 6 to amend the current text.
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    \4\ In 2007, NOM proposed to participate in the $2.50 Strike 
Price Program. The $2.50 Strike Price Program allows the options 
exchanges to list options in up to 200 classes at $2.50 strike price 
intervals for strike prices greater than $25 but less than $75. See 
Securities Exchange Act Release Nos. 40662 (November 12, 1998), 63 
FR 64297 (November 19, 1998) (order approving File Nos. SR-Amex-98-
21; SR-CBOE-98-29; SR-PCX-98-31; and SR-Phlx-98-26) (``1998 Order'') 
and 52893 (December 5, 2005), 70 FR 73488 (December 12, 2005) (order 
approving File No. SR-Amex-2005-067). The 200 classes eligible for 
the $2.50 Strike Price Program were allocated among the options 
exchanges pursuant to a formula approved by the Commission as part 
of the permanent approval of the program. Each options exchange may 
list options with $2.50 strike price intervals on any options class 
that another exchange selects as part of its program. NOM's rules 
provide that NOM may list series at $2.50 strike price intervals in 
any multiply traded option once another exchange has selected that 
option to be a part of the program. See NOM Rule, Chapter IV, 
Section 6, Supplementary Material .03(a). NOM participates in the 
$2.50 Strike Price Program on the same terms and conditions as the 
other options exchanges. See Securities Exchange Act Release No. 
57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-
2007-004 and SR-NASDAQ-2007-080).
    \5\ The term ``primary market'' is defined in Exchange Rule 1000 
in respect of an underlying stock or exchange-traded fund share as 
the principal market in which the underlying stock or exchange-
traded fund share is traded.
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    For example, consider a hypothetical where Caterpillar, Inc. 
(``CAT'') was trading at $81. With approximately one month remaining 
until expiration, and with a front month at-the-money put option (the 
80 strike) trading at approximately $1.30, the investor would be able 
to purchase a $77.50 strike put at an estimated $.60 per contract. 
Today, the next available strike of a one month put option is the 75 
strike. While the 75 strike put would certainly trade at a lesser price 
than the 80 strike put,\6\ the protection offered would only take 
effect with a 7.40% decline in the

[[Page 19168]]

market as opposed to a 4.30% decline in the market. The additional 
choice would provide the investor an additional to hedge exposure (the 
opportunity to hedge with a reduced outlay) and thereby minimize risk 
if there were a decline in the stock price of CAT.
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    \6\ The 75 strike put would trade at $0.30 in this example.
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    Another example would be if an investor desired to sell call 
options to hedge the exposure of an underlying stock position and 
enhance yield. Consider a hypothetical where CAT was trading at $81 and 
the second month (two months remaining) of a recently out-of-the-money 
call option (the 85 strike) was trading at approximately $2.35. If the 
investor were to sell the 85 call against an existing stock position, 
the investor could yield a return of approximately 2.90% over a two 
month period or an annualized return of 17.4%. By providing an 
additional $2.50 strike interval above $75, the investor would have the 
opportunity to sell the 82.50 strike instead of the 85 strike. If the 
85 strike call were trading at $2.35, the 82.50 strike call would trade 
at approximately 3.30. By selling the 82.50 strike call at 3.30 against 
an existing stock position, the investor could yield a 4.07% return 
over a two month period or an annualized 24.40% return. Therefore, an 
additional choice of a $2.50 strike interval could afford varying 
yields to the investor.
    The Exchange believes that the Program has to date created 
additional trading opportunities for investors, thereby benefiting the 
marketplace. The existence of $2.50 strike prices with strike intervals 
above $75 affords investors the ability to more closely tailor 
investment strategies to the precise movement of the underlying 
security and meet their investment, trading and risk management 
requirements.
    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it and the 
Options Price Reporting Authority have the necessary system capacity to 
handle the potential additional traffic associated with the listing and 
trading of classes on individual stocks in the $2.50 Strike Price 
Program.
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. 
The Exchange believes that the effect of the proposed expansion on the 
marketplace would not result in a material proliferation of quote 
volume or concerns with fragmentation. In addition, the Exchange 
believes that it has the necessary system capacity to handle the 
potential additional traffic associated with the listing and trading of 
classes.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    Rather, the Exchange believes the $2.50 Strike Price Program 
proposal would provide the investing public and other market 
participants increased opportunities to better manage their risk 
exposure. Accordingly, the Exchange believes that the proposal to 
expand the Program to allow the listing of options with $2.50 strike 
price intervals for options with strike prices between $50 and $100 
should further benefit investors and the market by providing greater 
trading opportunities for those underlying stocks that have low 
volatility and thus trade in a narrow range.

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 significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not 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 \9\ and Rule 19b-
4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). 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 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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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission believes that waiver of the operative 
delay is consistent with the protection of investors and the public 
interest because the proposal is substantially similar to that of 
another exchange that has been approved by the Commission.\11\ 
Therefore, the Commission designates the proposal operative upon 
filing.\12\
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    \11\ See Securities Exchange Act Release No. 64157 (March 31, 
2011) (SR-Phlx-2011-15) (order approving expansion of $2.50 Strike 
Price Program).
    \12\ 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 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.

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-2011-041 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-2011-041. 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

[[Page 19169]]

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 Web site 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 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-2011-041 and should be submitted on or before 
April 27, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8124 Filed 4-5-11; 8:45 am]
BILLING CODE 8011-01-P