[Federal Register Volume 76, Number 113 (Monday, June 13, 2011)]
[Notices]
[Pages 34281-34284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-14518]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64616; File No. SR-NASDAQ-2011-077]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt a Risk Monitor 
Mechanism

 June 7, 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 June 1, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III 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 with the Securities and Exchange Commission 
(``Commission'') a proposal for the NASDAQ Options Market (``NOM'') to 
amend Chapter VI, Trading Systems, to adopt new Section 19, Risk 
Monitor Mechanism, to provide a risk monitor mechanism for all NOM 
Participants.\3\
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    \3\ The term ``Options Participant'' or ``Participant'' means a 
firm or organization that is registered with the Exchange pursuant 
to Chapter II of the NOM Rules for purposes of participating in 
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or 
``Nasdaq Options Market Maker.''
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    This change is scheduled to be implemented on NOM on or about 
August 1, 2011; the Exchange will announce the implementation schedule 
by Options Trader Alert, once the rollout schedule is finalized.
    The text of the proposed rule change is available at 
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 proposed rule change is to reflect in NOM's 
rules that Participants will be able to establish new risk control 
parameters. Specifically, NASDAQ proposes to adopt new Chapter VI, 
Section 19, Risk Monitor Mechanism, which is very similar to NASDAQ OMX 
PHLX (``PHLX'') Rule 1093 (as explained in detail below) and is 
intended to bring this aspect of PHLX's technological functionality to 
NOM. The Risk Monitor Mechanism provides protection from the risk of 
multiple executions across multiple series of an option. The risk to 
Participants is not limited to a single series in an option; 
Participants have exposure in all series of a particular option, 
requiring them to offset or hedge their overall position in an option.
    In particular, the Risk Monitor Mechanism will be useful for Market 
Makers,\4\ who are required to continuously quote in assigned options. 
Quoting across many series in an option creates the possibility of 
``rapid fire'' executions that can create large, unintended principal 
positions that expose the Market Maker to unnecessary market risk. The 
Risk Monitor Mechanism is intended to assist such Participants in 
managing their market risk.
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    \4\ Unlike the PHLX Risk Monitor Mechanism, the NOM Risk Monitor 
Mechanism will be available to all Participants, not just Market 
Makers.
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    Though the Risk Monitor Mechanism will be most useful to Market 
Makers, the Exchange proposes to offer the functionality to all 
participant types. There are other firms that trade on a proprietary 
basis and provide liquidity to the Exchange; these firms could 
potentially benefit, similarly to Market Makers, from the Risk Monitor 
Mechanism. The Exchange believes that the Risk Monitor Mechanism should 
help liquidity providers generally, market makers and other 
participants alike, in managing risk and providing deep and liquid 
markets to investors.
    Pursuant to new Section 19(a), the Risk Monitor Mechanism operates 
by the System maintaining a counting program for each Participant, 
which counts the number of contracts traded in an option by each 
Participant within a specified time period, not to exceed 15 seconds, 
established by each Participant (the ``specified time period''). The 
specified time period will commence for an option when a transaction 
occurs in any series in such option. Furthermore, the System engages 
the Risk Monitor Mechanism in a particular option when the counting 
program has determined that a Participant has traded a Specified 
Engagement Size (as defined below) established by such Participant 
during the specified time period. When such Participant has traded the 
Specified Engagement Size during the specified time period, the Risk 
Monitor Mechanism automatically removes such Participant's orders in 
all series of the particular option.
    As provided in proposed subparagraph (b)(ii), the Specified 
Engagement Size is determined by the following: (A) For each series in 
an option, the counting program will determine the percentage that the 
number of contracts executed in that series represents relative to the 
Participant's total size at all price levels in that series (``series 
percentage''); (B) The counting program will determine the sum of the 
series percentages in the option issue (``issue percentage''); (C) Once 
the counting program determines that the issue percentage equals or 
exceeds a percentage established by the Participant (``Specified 
Percentage''), the number of executed contracts in the option issue 
equals the Specified Engagement Size. For example, if a Participant is 
quoting in four series of a particular option issue, and sets its 
Specified Percentage at 100%, the Specified Engagement Size would be 
determined as follows:

[[Page 34282]]



                                                    Example I
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                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
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Series 1........................................................             100              40              40
Series 2........................................................              50              20              40
Series 3........................................................             200              20              10
Series 4........................................................             150              15              10
                                                                 -----------------------------------------------
    Total.......................................................             500              95             100
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    In this example, the Specified Engagement Size is 95 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 100%.

                                                   Example II
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                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100               0               0
Series 2........................................................              50               0               0
Series 3........................................................             200               0               0
Series 4........................................................             150             150             100
                                                                 -----------------------------------------------
    Total.......................................................             500             150             100
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    In this example, the Specified Engagement Size is 150 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 100%.
    If a Participant is quoting in four series of a particular option, 
and sets its Specified Percentage at 200%, the Specified Engagement 
Size would be determined as follows:

                                                   Example III
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                                                                                     Number of
                             Series                                    Size          contracts      Percentage
                                                                                     executed
----------------------------------------------------------------------------------------------------------------
Series 1........................................................             100              80              80
Series 2........................................................              50              40              80
Series 3........................................................             200              40              20
Series 4........................................................             150              30              20
                                                                 -----------------------------------------------
    Total.......................................................             500             190             200
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    In this example, the Specified Engagement Size is 190 contracts, 
which is the aggregate number of contracts executed among all series 
during the specified time period that represents an issue percentage 
equal to the Specified Percentage of 200%.
    The Specified Engagement Size will be automatically offset by a 
number of contracts that are executed on the opposite side of the 
market in the same option issue during the specified time period (the 
``Net Offset Specified Engagement Size''). Long call positions will 
only be offset by short call positions, and long put positions will 
only be offset by short put positions. For example, a Participant that 
buys calls and also sells calls in the same option during the specified 
time period would have a Net Offset Specified Engagement Size as 
follows:

                                                   Example IV
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                                                                                      Net offset
                   Series                         Size       Buy call    Sell call       size       Percentage
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Series 1....................................          100           60           20           40              40
Series 2....................................          100          100           60           40              40
Series 3....................................          200          150          130           20              10
Series 4....................................          150           75           60           15              10
                                             -------------------------------------------------------------------
    Total...................................          550          385          270          115             100
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[[Page 34283]]

    Here, the Net Offset Specified Engagement Size for each series is 
determined by offsetting the number of contracts executed on the 
opposite side of the market for each series during the specified time 
period. The Risk Monitor Mechanism shall be engaged once the Net Offset 
Specified Engagement Size is for a net number of contracts executed 
among all series in an option issue during the specified time period 
that represents an issue percentage equal to or greater than the 
Specified Percentage.
    As explained above, the Specified Engagement Size would be based on 
all price levels. For example, if a Participant is quoting in two 
series of a particular option, at several price levels in each, and 
sets its Specified Percentage at 90%, the Specified Engagement Size 
would be determined as follows:

                                                    Example V
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                                                                         Number of    Number of
                                                Series 1     Series 2    contracts    contracts
                 Price level                      size         size       executed     executed     Percentage
                                                                          series 1     series 2
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Level 1.....................................          100           50          100           50            32.5
Level 2.....................................          100           50          100           50            32.5
Level 3.....................................          150          100            0          100              25
Level 4.....................................          150          200            0            0  ..............
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    Total...................................          500          400          200          200  ..............
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Percentage..................................  ...........  ...........           40           50              90
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    In this example, the Specified Engagement Size is 400 contracts, 
which is the aggregate number of contracts executed among all series, 
at all price levels, during the specified time period that represents 
an issue percentage equal to the Specified Percentage of 90%. Although 
the Participant executed 40% and 50% of the aggregate size displayed in 
series 1 and series 2, respectively, 100% of the Participant's top 
price level was executed in both series.
    While the Risk Monitor Mechanism is a useful feature that serves an 
important risk management purpose, it operates consistent with the firm 
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation 
NMS. Specifically, proposed paragraph (c) provides that any marketable 
orders or quotes that are executable against a Participant's quotation 
that are received prior to the time the Risk Monitor Mechanism is 
engaged will be automatically executed at the price up to the 
Participant's size, regardless of whether such an execution results in 
executions in excess of the Participant's Specified Engagement Size. 
Accordingly, the Risk Monitor Mechanism cannot be used to circumvent a 
Participant's firm quote obligation.
    If a Participant is quoting in two series of a particular option, 
at several price levels in each, and sets its Specified Percentage at 
90%, one contra side order can result in executions in excess of the 
Specified Engagement Size. Specifically, if a market order to sell 500 
contracts is received in Series 1, the order will execute against all 
four levels that the Participant is quoting, as follows:

                                                   Example VI
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                                                                         Number of    Number of
                                                Series 1     Series 2    contracts    contracts
                 Price level                      size         size       executed     executed     Percentage
                                                                          series 1     series 2
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Level 1.....................................          100           50          100            0              20
Level 2.....................................          100           50          100            0              20
Level 3.....................................          150          100          150            0              25
Level 4.....................................          150          200          150            0              25
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    Total...................................          500          400          200            0  ..............
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Percentage..................................  ...........  ...........          100            0             100
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    Although the Participant's Specified Percentage is 90%, the contra 
side order executes in its entirety and the Risk Protection Mechanism 
is engaged after the resulting executions have surpassed the Specified 
Engagement Size.
    Proposed Section 19(d) further provides that the system will 
automatically reset the counting program and commence a new specified 
time period when:
    (i) A previous counting period has expired and a transaction occurs 
in any series in such option; or
    (ii) the Participant refreshes his/her quotation, in a series for 
which an order has been executed (thus commencing the specified time 
period) prior to the expiration of the specified time period.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \5\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \6\ 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

[[Page 34284]]

mechanisms 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 proposal is appropriate and reasonable, because it 
offers additional functionality for Participants to manage their risk.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 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 result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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 (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 e-mail to [email protected]. Please include 
File No. SR-NASDAQ-2011-077 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2011-077. 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 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 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 Number SR-
NASDAQ-2011-077 and should be submitted on or before July 5, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-14518 Filed 6-10-11; 8:45 am]
BILLING CODE 8011-01-P