[Federal Register Volume 76, Number 144 (Wednesday, July 27, 2011)]
[Notices]
[Pages 44969-44972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18926]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64945; File No. SR-NYSEArca-2011-47]
Self-Regulatory Organizations; NYSE Arca Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending Commentary
.06 to NYSE Arca Rule 6.8 To Increase Position Limits for Options on
the SPDR[supreg] S&P 500[supreg] Exchange-Traded Fund, Which List and
Trade Under the Option Symbol SPY, and To Update the Names and One
Trading Symbol for the Options Reflected Therein, Including SPY
July 21, 2011.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on July 11, 2011, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend Commentary .06 to NYSE Arca Rule 6.8
to increase position limits for options on the SPDR[supreg] S&P
500[supreg] exchange-traded fund (``SPY ETF''),\4\ which list and trade
under the option symbol SPY, and to update the names and one trading
symbol for the options reflected therein, including SPY. The text of
the proposed rule change is available at the Exchange's Web site at
http://www.nyse.com, on the Commission's Web site at http://www.sec.gov, at the Exchange's principal office, and at the
Commission's Public Reference Room.
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\4\ ``SPDR[supreg],'' ``Standard & Poor's[supreg],''
``S&P[supreg],'' ``S&P 500[supreg],'' and ``Standard & Poor's 500''
are registered trademarks of Standard & Poor's Financial Services
LLC. The SPDR S&P 500 ETF represents ownership in the SPDR S&P 500
Trust, a unit investment trust that generally corresponds to the
price and yield performance of the SPDR S&P 500 Index.
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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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposal is to amend Commentary .06 to NYSE Arca
Rule 6.8 to increase position limits for SPY options from 300,000 to
900,000 contracts on the same side of the market and to update the
names, and one trading symbol, for the options reflected therein,
including SPY.\5\ The Exchange is basing this proposal on a recently
[[Page 44970]]
approved rule change by NASDAQ OMX PHLX (``PHLX'').\6\
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\5\ By virtue of NYSE Arca Rule 6.9, which is not amended by
this filing, exercise limits on SPY options would be the same as
position limits for SPY options established in Commentary .06 to
NYSE Arca Rule 6.8.
\6\ See Securities Exchange Act Release No. 64695 (June 17,
2011), 76 FR 36942 (June 23, 2011) (SR-Phlx-2011-58). The Exchange
commented favorably on that PHLX proposal, noting that ``the
continued disparate treatment of SPY options, which have a position
limit and are traded on multiple exchanges, versus SPX options,
which have no position limit and are traded exclusively on CBOE [the
Chicago Board Options Exchange], only serves to thwart competition
and harm the marketplace,'' and that the ``PHLX's Proposal to
increase the position limits for SPY options is a step in the right
direction.'' See (http://www.sec.gov/comments/sr-phlx-2011-58/phlx201158-1.pdf).
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Background
Institutional and retail traders have greatly increased their
demand for SPY options for hedging and trading purposes, such that
these options have experienced an explosive gain in popularity and have
been the most actively traded options in the U.S. in terms of volume
for the last two years. For example, SPY options traded a total of
33,341,698 contracts across all exchanges from March 1, 2011 through
March 16, 2011. In contrast, over the same time period options on the
PowerShares QQQ TrustSM, Series 1 (``QQQ''SM),\7\ the third [sic] most
actively traded option, traded a total of 8,730,718 contracts (less
than 26.2% of the volume of SPY options).
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\7\ QQQ options were formerly known as options on the Nasdaq-100
Tracking Stock\SM\ (former option symbol QQQQ\SM\). NASDAQ, Nasdaq-
100 Index, Nasdaq-100 Index Tracking Stock and QQQ are trade/service
marks of The Nasdaq Stock Market, Inc. and have been licensed for
use by Invesco PowerShares Capital Management LLC.
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Currently, SPY options have a position limit of only 300,000
contracts on the same side of the market while QQQ options, which are
comparable to SPY options but exhibit significantly lower volume, have
a position limit of 900,000 contracts on the same side of the market.
The Exchange believes that SPY options should, like options on QQQ,
have a position limit of 900,000 contracts. Given the increase in
volume and continuous unprecedented demand for trading SPY options, the
Exchange believes that the current position limit of 300,000 contracts
is entirely too low and is a deterrent to the optimal use of the
product for hedging and trading purposes. There are multiple reasons to
increase the position limit for SPY options.
First, traders have informed the Exchange that the current SPY
option position limit of 300,000 contracts, which has remained flat for
more than five years despite the tremendous trading volume increase, is
no longer sufficient for optimal trading and hedging purposes. SPY
options are, as noted, used by large institutions and traders as a
means to invest in or hedge the overall direction of the market.
Second, SPY options are one-tenth the size of options on the S&P 500
Index, traded under the symbol SPX.\8\ Thus, a position limit of
300,000 contracts in SPY options is equivalent to a 30,000 contract
position limit in options on SPX. Traders who trade SPY options to
hedge positions in SPX options (and the SPY ETF) have indicated on
several occasions that the current position limit for SPY options is
simply too restrictive, which may adversely affect their (and the
Exchange's) ability to provide liquidity in this product. Finally, the
products that are perhaps most comparable to SPY options, namely
options on QQQ, are subject to a 900,000 contract position limit on the
same side of the market.\9\ This has, in light of the huge run-up in
SPY option trading making them the number one nationally-ranked option
in terms of volume, resulted in a skewed and unacceptable SPY option
position limit. Specifically, the position limit for SPY options at
300,000 contracts is but 33% of the position limit for the less active
options on QQQ at 900,000 contracts.\10\ The Exchange proposes that SPY
options similarly be subject to a position limit of 900,000 contracts.
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\8\ CBOE, which exclusively lists and trades SPX options, has
established that there are no position limits on SPX options. See
CBOE Rule 24.4 and Securities Exchange Act Release No. 44994
(October 26, 2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-
22).
\9\ See Commentary .06 to Rule 6.8 and Securities Exchange Act
Release No. 57417 (March 3, 2008), 73 FR 12788 (March 10, 2008) (SR-
NYSEArca-2008-26). See also Securities Exchange Act Release No.
51286 (March 1, 2005), 70 FR 11297 (March 8, 2005) (SR-PCX-2003-55).
\10\ Similarly to SPY options being one-tenth the size of
options on SPX, QQQ options are also one-tenth the size of options
on the related index NASDAQ-100 Index (option symbol NDX). The
position limit for QQQ options and its related index NDX have a
comparable relationship to that of SPY options and SPX. That is, the
position limit for options on QQQ is 900,000 contracts and there is
no position limit for NDX options.
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The volume and notional value of SPY options and QQQ options as
well as the volume and market capitalizations of their underlying ETFs,
are set forth below:
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Option notional
Name of value* as of Current options
Option national rank 2010 Option symbol underlying ETF Option ADV 2010 December 31, position limit
2010
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1............................ SPY SPDR S&P 500... 3,625,904 $177,823,76 300,000
contracts. million. contracts.
4............................ QQQ PowerShares QQQ 963,502 $27,141,91 900,000
Trust. contracts. million. contracts.
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ETF Market
ETF Nat'l rank 2010 Name of ETF ETF ADV 2010 capitalization ETF Average dollar
December 31, 2010 volume
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1............................... SPDR S&P 500...... 210,232,241 shares $90,280.71 million $ 20,794 million.
3............................... PowerShares....... 85,602,200 shares. $23,564.8 million. $3,593 million.
QQQ Trust.........
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* Notional value is calculated as follows: OI x Close x 100; where OI = underlying security's open interest (in
contracts), Close = closing price of underlying security on 12/31/2010.
The Exchange notes that the Large Option Position Reporting
requirement in NYSE Arca Rule 6.6 would continue to apply. Rule 6.6
requires OTP Holders to file a report with the Exchange with respect to
each account in which the OTP Holder has an interest; each account of a
partner, officer, director, trustee or employee of such OTP Holder; and
each customer account that has established an aggregate position
(whether long or short) that meets certain determined thresholds (e.g.,
200 or more option contracts if the underlying security is a stock or
Exchange-Traded Fund Share). Rule 6.6 also permits the Exchange to
impose a higher margin requirement upon the account of an OTP Holder
when it determines that the account maintains an under-hedged position.
Furthermore,
[[Page 44971]]
large stock holdings must be disclosed to the Commission by way of
Schedules 13D or 13G.\11\
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\11\ 17 CFR 240.13d-1
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Monitoring accounts maintaining large positions provides the
Exchange with the information necessary to determine whether to impose
additional margin and/or whether to assess capital charges upon an OTP
Holder carrying the account. In addition, the Commission's net capital
rule, Rule 15c3-1 under the Securities Exchange Act of 1934
(``Act''),\12\ imposes a capital charge on OTP Holders to the extent of
any margin deficiency resulting from the higher margin requirement,
which should serve as an additional form of protection.
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\12\ 17 CFR 240.15c3-1.
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The Exchange believes that position and exercise limits, at their
current levels, no longer serve their stated purpose. There has been a
steadfast and significant increase over the last decade in the overall
volume of exchange-traded options; position limits, however, have not
kept up with the volume. Part of this volume is attributable to a
corresponding increase in the number of overall market participants,
which has, in turn, brought about additional depth and increased
liquidity in exchange-traded options.\13\
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\13\ The Commission has previously observed that: ``Since the
inception of standardized options trading, the options exchanges
have had rules imposing limits on the aggregate number of options
contracts that a member or customer could hold or exercise. These
rules are intended to prevent the establishment of options positions
that can be used or might create incentives to manipulate or disrupt
the underlying market so as to benefit the options position. In
particular, position and exercise limits are designed to minimize
the potential for mini-manipulations and for corners or squeezes of
the underlying market. In addition such limits serve to reduce the
possibility for disruption of the options market itself, especially
in illiquid options classes.'' See Securities Exchange Act Release
No. 39489 (December 24, 1997), 63 FR 276, 278 (January 5, 1998) (SR-
CBOE-97-11) (footnote omitted).
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As the anniversary of listed options trading approaches its
fortieth year, the Exchange believes that the existing surveillance
procedures and reporting requirements at the Exchange, other options
exchanges, and at the several clearing firms are capable of properly
identifying unusual and/or illegal trading activity. In addition,
routine oversight inspections of the Exchange's regulatory programs by
the Commission have not uncovered any material inconsistencies or
shortcomings in the manner in which the Exchange's market surveillance
is conducted. These procedures utilize daily monitoring of market
movements via automated surveillance techniques to identify unusual
activity in both options and underlying stocks.\14\
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\14\ These procedures have been effective for the surveillance
of SPY options trading and will continue to be employed.
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Finally, the Exchange believes that while position limits on
options on QQQ, which as noted are similar to SPY options, has been
gradually expanded from 75,000 contracts to the current level of
900,000 contracts since 2005, there have been no adverse effects on the
market as a result of this position limit increase.\15\ Likewise, there
have been no adverse effects on the market from expanding the position
limit for SPY options from 75,000 contracts to the current level of
300,000 contracts in 2005.\16\
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\15\ See supra note 9.
\16\ See Securities Exchange Act Release No. 51044 (January 14,
2005), 70 FR 3415 (January 24, 2005) (SR-PCX-2005-05).
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The Exchange believes that restrictive option position limits
prevent large customers, such as mutual funds and pension funds, from
using options to gain meaningful exposure to and hedging protection
through the use of SPY options. This can result in lost liquidity in
both the options market and the equity market. The proposed position
limit increase would remedy this situation to the benefit of large as
well as retail traders, investors, and public customers. The Exchange
believes that increasing position and exercise limits for SPY options
would lead to a more liquid and competitive market environment for SPY
options that would benefit customers interested in this product.
Update to Names
The Exchange proposes non-substantive technical changes to update
the names and one trading symbol for the option products specifically
identified within Commentary .06 to NYSE Arca Rule 6.8. This change
would result in Commentary .06 reflecting the current names and symbols
by which these products trade in the marketplace as follows:
PowerShares QQQ Trust (``QQQQ'') changes to PowerShares QQQ TrustSM,
Series 1 (``QQQ''); Standard and Poor's Depository Receipts changes to
SPDR[reg] S&P 500[reg] ETF (``SPY''); and DIAMONDS changes to
SPDR[reg]Dow Jones Industrial AverageSM ETF Trust (DIA).
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) \17\ of
the Act, in general, and furthers the objectives of Section
6(b)(5),\18\ 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, 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 is proposing to expand
the position limits on SPY options. The Exchange believes that this
proposal would be beneficial to large market makers (which generally
have the greatest potential and actual ability to provide liquidity and
depth in the product), as well as retail traders, investors, and public
customers.
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\17\ 15 U.S.C. 78f(b).
\18\ 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 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 solicited or received with respect to the
proposed rule change.
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 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, provided that the self-regulatory
organization has given 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 proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-
4(f)(6)(iii) thereunder.\20\
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\19\ 15 U.S.C. 78s(b)(3)(A).
\20\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) \21\ normally
does not
[[Page 44972]]
become operative prior to 30 days after the date of the filing.
However, pursuant to Rule 19b-4(f)(6)(iii),\22\ the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has
requested that the Commission waive the 30-day operative delay so that
the proposal may become operative immediately upon filing. The
Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest,
because it will enable the Exchange to immediately compete with other
exchanges that have already adopted the higher position and exercise
limit for options on the SPY. Therefore, the Commission designates the
proposal operative upon filing.\23\
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\21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires that a self-regulatory organization submit to 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 filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Commission notes that the Exchange has satisfied
this requirement.
\22\ 17 CFR 240.19b-4(f)(6)(iii).
\23\ 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 such 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-NYSEArca-2011-47 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-NYSEArca-2011-47. 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 No. SR-
NYSEArca-2011-47 and should be submitted on or before August 17, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-18926 Filed 7-26-11; 8:45 am]
BILLING CODE 8011-01-P