[Federal Register Volume 77, Number 68 (Monday, April 9, 2012)]
[Notices]
[Pages 21120-21122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8428]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66725; File No. SR-NYSEArca-2012-26]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change to List and Trade Option Contracts Overlying 10 
Shares of a Security (``Mini-Options Contracts'') and Implementing Rule 
Text Necessary to Distinguish Mini-Options Contracts From Option 
Contracts Overlying 100 Shares of a Security (``Standard Contracts'')

April 3, 2012.
    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 March 23, 2012, 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 self-regulatory 
organization. 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 Exchange proposes to list and trade option contracts overlying 
10 shares of a security (``mini-options contracts'') and implement rule 
text necessary to distinguish mini-options contracts from option 
contracts overlying 100 shares of a security (``standard contracts''). 
The text of the proposed rule change is available at the Exchange, 
www.nyse.com, and 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to list and trade mini-options contracts 
and implement rule text necessary to distinguish mini-options contracts 
from standard contracts. Whereas standard contracts represent a 
deliverable of 100 shares of an underlying security, mini-options 
contracts would represent a deliverable of 10 shares. The Exchange 
proposes to list and trade mini-options contracts overlying 5 high 
priced securities for which the standard contract overlying the same 
security exhibits significant liquidity.\3\ The Exchange believes that 
investors would benefit from the availability of mini-options contracts 
by making options overlying high priced securities more readily 
available as an investing tool and at more affordable and realistic 
prices, most notably for the average retail investor.
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    \3\ The Exchange proposes that mini-options contracts would be 
listed in only five issues, specifically SPDR S&P 500 (SPY), Apple, 
Inc. (AAPL), SPDR Gold Trust (GLD), Google Inc. (GOOG), and 
Amazon.com Inc. (AMZN). These issues were selected because they are 
priced greater than $100 and are among the most actively traded 
issues, in that the standard contract exhibits average daily volume 
(``ADV'') over the previous three calendar months of at least 45,000 
contracts, excluding LEAPS and FLEX series. The Exchange notes that 
any expansion of the program would require that a subsequent 
proposed rule change be submitted with the Commission.
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    For example, with Apple Inc. (``AAPL'') trading at $605.85 on March 
21, 2012, ($60,585 for 100 shares underlying a standard contract), the 
605 level call expiring on March 23 is trading at $7.65. The cost of 
the standard contract overlying 100 shares would be $765, which is 
substantially higher in notional terms than the average equity option 
price of $250.89.\4\ Proportionately equivalent mini-options contracts 
on AAPL would provide investors with the ability to manage and hedge 
their portfolio risk on their underlying investment, at a price of $76 
per contract. In addition, investors who hold a position in AAPL at 
less than the round lot size would still be able to avail themselves of 
options to manage their portfolio risk. For example, the holder of 50 
shares of AAPL could write covered calls for five mini-options 
contracts. The table below demonstrates the proposed differences 
between a mini-options contracts and a standard contract with a strike 
price of $125 per share and a bid or offer of $3.20 per share:
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    \4\ A high priced underlying security may have relatively 
expensive options, because a low percentage move in the share price 
may mean a large movement in the options in terms of absolute 
dollars. Average non-FLEX equity option premium per contract January 
1-December 31, 2011. See http://www.theocc.com/webapps/monthly-volume-reports?reportClass=equity.

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                                     Standard               Mini
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Share Deliverable Upon          100 shares.......  10 shares
 Exercise.
Strike Price..................  125..............  12.5

[[Page 21121]]

 
Bid/Offer.....................  3.20.............  .32
Premium Multiplier............  100..............  100
    Total Value of Deliverable  12,500...........  1,250
    Total Value of Contract...  320..............  32
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    The Exchange notes that the Commission has approved an earlier 
proposal of NYSE Arca to list and trade option contracts overlying a 
number of shares other than 100.\5\ Moreover, the concept of listing 
and trading parallel options products of reduced values and sizes on 
the same underlying security is not novel. For example, parallel 
product pairs on a full-value and reduced-value basis are currently 
listed on the S&P 500 Index (``SPX'' and ``XSP,'' respectively), the 
Nasdaq 100 Index (``NDX'' and ``MNX,'' respectively) and the Russell 
2000 Index (``RUT'' and ``RMN,'' respectively).
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    \5\ See Securities Exchange Act Release No. 44025 (February 28, 
2001) 66 FR 13986 (March 8, 2001) (approving SR-PCX-01-12).
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    The Exchange believes that the proposal to list and trade mini-
options contracts would not lead to investor confusion. On the 
contrary, the Exchange's proposal is structured to easily convey strike 
prices and premiums to investors in the total amount of the investment 
(100 times the displayed premium) and the amount of the deliverable 
(100 times the strike price). The Exchange believes that the difference 
between the price of the 100 share standard contract and the 10 share 
mini-options contract would immediately alert investors that the 
contract is different, thereby avoiding inadvertent investment in the 
wrong contract. Additionally, the Exchange will designate mini-options 
contracts with a different trading symbols than their related standard 
contract.\6\ The Exchange believes that the clarity of this approach is 
appropriate and transparent, as supported by the recent Options 
Clearing Corporation (``OCC'') filing to amend its bylaws to 
accommodate such strike prices and premiums.\7\ Moreover, the Exchange 
believes that the terms of mini-options contracts are consistent with 
the terms of the Options Disclosure Document.
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    \6\ OCC Symbology is structured for contracts with other than 
100 shares to be designated with a numerical suffix to the standard 
trading symbol, i.e., AAPL8.
    \7\ See Securities Exchange Act Release No. 61485 (February 3, 
2010), 75 FR 6750 (February 10, 2010) (SR-OCC-2010-01).
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    The Exchange recognizes the need to differentiate mini-options 
contracts from standard options and therefore is proposing the 
following changes to its rules.
    The Exchange proposes to add Commentary .01 to Rule 6.3 (Option 
Contracts to Be Traded) to reflect that, in addition to option 
contracts with a unit of trading of 100, the Exchange may list option 
contracts overlying 10 shares of SPDR S&P 500 (SPY), Apple, Inc. 
(AAPL), SPDR Gold Trust (GLD), Google Inc. (GOOG), and Amazon.com Inc. 
(AMZN) for all expirations applicable to 100 share options in each 
class. The Exchange believes that these five securities are appropriate 
because they are high priced securities for which there is already 
significant options liquidity and therefore significant customer 
demand.
    The Exchange also proposes to add Commentary .14 to Rule 6.4 
(Series of Options Open for Trading) to list series of mini-options 
provided that (i) the underlying security has been designated as 
eligible under Rule 6.3 Commentary .01, (ii) no mini-options series 
will be listed with a strike price less than $10, and (iii) for each 
mini-options contract there is a corresponding option contract with a 
unit of trading of 100 overlying the same security, and that the 
underlying security is trading over $90 to list additional mini-options 
series. Commentary .14 would also delineate that strike prices for 
contracts overlying 10 shares shall be set at 1/100th of the value of 
the contract deliverable value. For example, an option contract to 
deliver 10 shares of stock at $125 per share has a total deliverable 
value of $1,250, and the strike price would be set at 12.50. The 
Exchange notes that this is consistent with the current determination 
of strike prices for standard contracts as well as options on the full 
and reduced-values of the indexes referenced above. Additionally, by 
restricting mini-options series to a strike price of $10 or greater and 
to a corresponding standard strike overlying 100 shares, the Exchange 
will limit the number of series and also maintain its application to 
high priced underlyings. Also, the Exchange proposes to not permit the 
listing of additional mini-options series if the underlying is trading 
at $90 or less to limit the number of strikes once the underlying is no 
longer a high priced security. The Exchange proposes a $90.01 minimum 
for continued qualification so that additional mini-options that 
correspond to standard strikes may be added even though the underlying 
has fallen slightly below the initial qualification standard. In 
addition, the underlying security must be trading above $90 for five 
consecutive days before the listing of mini-option contracts in a new 
expiration month. This restriction will allow the Exchange to list 
mini-option strikes without disruption when a new expiration month is 
added even if the underlying has had a minor decline in price.
    The Exchange also proposes to add Commentary .08 to Rule 6.8 
(Position Limits) to reflect that, for purposes of compliance with the 
Position Limits of Rules 6.8, ten mini-options contracts will equal one 
standard contract overlying 100 shares.
    The Exchange also proposes to add subsection (c) to Rule 6.71 
(Meaning of Premium Bids and Offers) to extend the explanation of bids 
and offers with respect to mini-options contracts and also remove 
references to Exchange-Traded Fund Shares, because other types of 
underlying securities have options traded on them.
    Finally, the Exchange proposes to add Commentary .03 to Rule 6.72, 
Trading Differentials, to allow quoting in penny increments in mini-
options contracts, because a penny increment in a mini-option is 
equivalent to quoting at an increment of $0.10 per share.
    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 systems capacity 
to handle the potential additional traffic associated with the listing 
and trading of mini-options contracts. The Exchange has further 
discussed the proposed listing and trading of mini-options contracts 
with the OCC, which has represented that it is able to accommodate the 
proposal.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \8\ of the Securities Exchange Act of 1934 (the ``Act''), 
in general, and furthers the objectives of Section

[[Page 21122]]

6(b)(5),\9\ in particular, because it is designed to promote just and 
equitable principles of trade, to prevent fraudulent and manipulative 
acts, to remove impediments to and to perfect the mechanism for a free 
and open market and a national market system and, in general, to 
protect investors and the public interest. Specifically, the Exchange 
believes that investors would benefit from the availability of mini-
options contracts by making options on high priced securities more 
readily available as an investing tool and at more affordable and 
realistic prices, most notably for the average retail investor. As 
described above, the proposal contains a number of features designed to 
protect investors by reducing investor confusion, such as the mini-
options contracts being designated by different trading symbols from 
their related standard contracts.\10\ Moreover, the proposal is 
designed to protect investors and the public interest by providing 
investors with an enhanced tool to reduce risk in high priced 
securities. In particular, the proposed contracts will provide retail 
customers who invest in high priced issues in lots of less than 100 
shares with a means of protecting their investments that is presently 
only available to those who have positions of 100 shares or more. 
Further, the proposal currently is limited to five high priced 
securities for which there is already significant options liquidity, 
and therefore significant customer demand and trading volume.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ See supra note 6.
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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

    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 email to [email protected]. Please include 
File No. SR-NYSEArca-2012-26 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-NYSEArca-2012-26. This 
file number should be included on the subject line if email 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-NYSEArca-2012-26 and should 
be submitted on or before April 30, 2012.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-8428 Filed 4-6-12; 8:45 am]
BILLING CODE 8011-01-P