[Federal Register Volume 77, Number 124 (Wednesday, June 27, 2012)]
[Notices]
[Pages 38347-38350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-15633]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67229; File No. SR-NASDAQ-2012-058]


 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change Relating to the Listing and 
Trading of Alpha Index-Linked Securities

June 21, 2012.
    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 11, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II 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 proposes to adopt Nasdaq Rule 5712, Alpha Index-Linked 
Securities, providing for the listing, trading and delisting of 
securities linked to the performance of certain specified NASDAQ OMX 
Alpha Indexes as set forth below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, 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 provide for the 
listing and trading on NASDAQ of Equity Index-Linked Securities (as 
defined in Exchange Rule 5710) linked, on an unleveraged basis, to the 
following Alpha Indexes owned and maintained by NASDAQ OMX Group Inc.: 
GOOG vs. SPY (GOOSY) and AAPL vs. SPY (AVSPY) (together, the 
``Specified Alpha Indexes''). These Alpha Indexes are relative 
performance based equity indexes maintained by The NASDAQ OMX Group.\3\
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    \3\ The Commission has previously approved the listing and 
trading of options on certain Alpha Indexes (``Alpha Index 
Options'') on NASDAQ OMX PHLX (``PHLX''). See Securities Exchange 
Act Release No. 63860 (February 7, 2011), 76 FR 7888 (February 11, 
2011) (SR-Phlx-2010-176), approving options on the following Alpha 
Indexes: AAPL/SPY, AMZN/SPY, CSCO/SPY, F/SPY, GE/SPY, GOOG/SPY, HPQ/
SPY, IBM/SPY, INTC/SPY, KO/SPY, MRK/SPY, MSFT/SPY, ORCL/SPY, PFE/
SPY, RIMM/SPY, T/SPY, TGT/SPY, VZ/SPY and WMT/SPY. The Commission 
subsequently approved options on the following Alpha Indexes in 
which the Target Component, as well as the Benchmark Component, is 
an ETF share: DIA/SPY, EEM/SPY, EWJ/SPY, EWZ/SPY, FXI/SPY, GLD/SPY, 
IWM/SPY, QQQ/SPY, SLV/SPY, TLT/SPY, XLE/SPY and XLF/SPY. See 
Securities Exchange Act Release No. 65149 (August 17, 2011), 76 FR 
52729 (August 23, 2011) (SR-Phlx-2011-89).
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    Currently, Nasdaq Rule 5710 provides for the listing and trading of 
Equity Index-Linked Securities. In particular, Nasdaq Rule 
5710(k)(i)(A) provides for the listing and trading pursuant to 
Commission Rule 19b-4(e) of Equity Index-Linked Securities with respect 
to which the underlying indexes have at least 10 component securities 
and either (1) have been reviewed and approved for the trading of 
options or other derivatives by the Commission under Section 19(b)(2) 
of the Act and rules thereunder and the conditions set forth in the 
Commission's approval order, including comprehensive surveillance 
sharing agreements for non-U.S. stocks, continue to be satisfied, or 
(2) meet specific index criteria set forth in Rule 5710(k)(i)(A)(2). 
NASDAQ Alpha Indexes do not contain at least 10 component securities 
and therefore do not meet these requirements, even if they have been 
reviewed and approved for the trading of options by the Commission 
under Section 19(b)(2) of the Act, and therefore are ineligible for 
listing and trading pursuant to Rule 5710(k)(i)(A).
    This proposed rule change would therefore add new Exchange Rule 
5712 which provides that NASDAQ will consider for listing and trading 
Equity Index-Linked Securities that are linked to the Specified Alpha 
Indexes and that meet the criteria specified therein (the ``Alpha 
Index-Linked Securities'').
Alpha Index Calculation
    The Alpha Indexes measure relative total returns of one stock or 
one exchange-traded fund (``ETF'') share versus another ETF share (each 
such combination of two components is referred to as an ``Alpha 
Pair'').\4\ The first component identified in an Alpha Pair (the 
``Target Component'') is measured against the second component 
identified in the Alpha Pair (the ``Benchmark Component'').
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    \4\ As noted above, the Commission has previously approved 31 
Alpha Indexes for options trading. The NASDAQ OMX Group currently 
maintains and calculates three additional Alpha Indexes, for a total 
of 34, and may develop additional Alpha Indexes in the future. At 
this time, the Exchange proposes to list and trade only those Alpha 
Index-Linked Securities that are linked to the Specified Alpha 
Indexes identified herein. The Exchange may in the future request 
Commission approval to list and trade Alpha Index-Linked Securities 
based upon other Alpha Indexes.
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    In order to calculate an Alpha Index, NASDAQ measures the total 
return performance of the Target Component relative to the total return 
performance of the Benchmark Component, based upon prices of 
transactions on the primary listing exchange of the Benchmark Component 
and the Target Component. The value of each Alpha Index was initially 
set at 100.00.\5\
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    \5\ The total return measures performance (rate of return) of 
price appreciation plus dividends over any given evaluation period.
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    To calculate any Alpha Index, NASDAQ first calculates a daily total 
return for both the Target Component

[[Page 38348]]

and the Benchmark Component of the Alpha Pair. To calculate the daily 
total return today of a Target Component or a Benchmark Component, 
respectively, the previous trading day's closing market price for the 
Target Component or Benchmark Component, respectively, would be 
subtracted from today's closing market price for the Target Component 
or Benchmark Component, respectively, to determine a price difference 
(the ``Price Difference''). The Price Difference would be added to any 
declared dividend, if today were an ``ex-dividend'' date, to yield the 
Price Plus Dividend Difference for the Target Component or the 
Benchmark Component, respectively.
    The Price Plus Dividend Difference for the Target Component or 
Benchmark Component is then divided by the previous trading day's 
closing market price for the Target Component or Benchmark Component, 
and the result is rounded to four decimal places to yield the daily 
total return.
    To calculate all Alpha Indexes, the daily total return for the 
Target Component and for the Benchmark Component is then added to the 
whole number one. This figure for the Target Component is then divided 
by the comparable figure for the Benchmark Component, and then 
multiplied by the previous trading day's closing Alpha Index value. The 
resulting level depicts the Target Component's total return performance 
for that day compared to the Benchmark Component's total return 
performance for that day.
    The following example illustrates the Alpha Index calculation for 
ABC stock as against SPY.\6\
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    \6\ Daily total return values and Alpha Index values will be 
updated based upon prices of each reported transaction in the 
primary listing market. In the example below, today's closing prices 
are used simply for purposes of illustration.
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    (Step 1.) For both ABC and SPY, the previous trading day's closing 
market price is subtracted from today's closing market price with the 
result added to any dividend declared today as the ``ex-dividend'' 
date. For example, today's closing price for ABC (214.01) minus the 
previous day's closing price (210.73) equals 3.28. Today is not an ex-
dividend date for ABC; therefore, nothing is added to 3.28. Similarly, 
today's closing price for SPY (113.33) minus the previous trading day's 
closing price (111.44) equals 1.89. Today is not an ex-dividend date 
for SPY; therefore, nothing is added to 1.89.
    (Step 2.) The step one result is divided by the previous trading 
day's closing market price and the new result is rounded, using simple 
rounding, to four decimal places to yield the daily total return. For 
ABC, 3.28 would be divided by 210.73 to yield a daily total return of 
0.0156. Similarly, for SPY, 1.89 would be divided by 111.44 and yield a 
daily total return of 0.0170.
    (Step 3.) The step two results above are added to the whole number 
one. For ABC, the daily total return of 0.0156 would be added to 1 for 
a result of 1.0156. For SPY the daily total return of 0.0170 would be 
added to 1 for a result of 1.0170.
    (Step 4.) In order to calculate the Alpha Index, the 1.0156 ABC 
figure is divided by the 1.0170 SPY figure and then multiplied by the 
previous trading day's closing Alpha Index value. Thus, assuming in the 
example that the previous trading day's closing Alpha Index value was 
100.00, today's closing Alpha Index value would be 99.86 (1.0156/1.0170 
x 100.00 = 99.86). The 99.86 index level reflects that ABC's total 
return performance today versus yesterday was -.14% relative to SPY.
    In the case of a corporate event which eliminates one of the 
underlying components of an Alpha Pair, NASDAQ will cease calculation 
of the Alpha Index for that Alpha Pair in which case NASDAQ will 
commence delisting or removal proceedings pursuant to Rule 5712(c). In 
the case of a corporate event such as a two-for-one stock split that 
affects the price of one of the underlying components, NASDAQ will make 
an appropriate one-time adjustment to the price of the underlying 
component used in the calculation to ensure that the Alpha Index 
continues to reflect the daily total return of the component. For 
example, on the effective date of the two-for-one stock split, NASDAQ 
will multiply the resulting stock price by two in order to reconstitute 
the economic value of the stock on the day before the effective date. 
On the day following the effective date, the Alpha Index formula will 
revert to the base formula to compare daily returns.
    To be eligible for listing, values of all Alpha Indexes underlying 
Alpha Index-Linked Securities must be disseminated at least once every 
second over the NASDAQ OMX Global Index Data Service (``GIDS'').\7\
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    \7\ See http://www.nasdaqtrader.com/Trader.aspx?id=globalindexDS 
for a description of the NASDAQ OMX Global Index Data Service.
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Requirements With Respect to the Security
    Alpha Index-Linked Securities listed and traded under proposed Rule 
5712 would be required to meet the requirements of Exchange Rule 
5710(a)-(j). Effectively, the only provision of Rule 5710 which would 
not apply to Alpha Index-Linked Securities is subsection (k), which 
specifies the index criteria for eligibility for listing and trading 
under Commission Rule 19b-4(e) as well as certain continued listing and 
delisting criteria. Pursuant to Rule 5712(a), all other provisions of 
Rule 5710 applicable to Equity Index-Linked Securities eligible for 
listing and trading pursuant to Rule 19b-4(e) shall apply to Alpha 
Index-Linked Securities.
Alpha Index Components
    Proposed Nasdaq Rule 5712 would permit the listing and trading of 
Alpha Index-Linked Securities only on the Specified Alpha Indexes with 
respect to which the Target Component and Benchmark Component meet 
certain criteria. Specifically, at the initial listing of the Alpha 
Index-Linked Security, options on the Target Component and the 
Benchmark Component of the Alpha Index must also be listed and traded 
on the NASDAQ Options Market and must meet the requirements of Chapter 
IV, Section 3, Criteria for Underlying Securities, of the NASDAQ 
Options Market rules. Additionally, both the Target Component's and the 
Benchmark Component's trading volume (in all markets in which the 
Target Component or the Benchmark Component is traded) must have 
averaged at least 2,250,000 shares per day in the preceding twelve 
months.\8\ No Alpha Index-Linked Security will be listed unless and 
until options overlying each of the Alpha Index component securities 
have been listed and traded on a national securities exchange with an 
average daily options trading volume during the three previous months 
of at least 10,000 contracts.\9\
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    \8\ The 2,250,000 shares per day volume requirement is the same 
volume requirement applicable to Target Components and Benchmark 
Components of Alpha Index Options listed on PHLX.
    \9\ See Rule 5712(a).
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    Following the initial listing of the Alpha Index-Linked Security, 
options on both the Target Component and the Benchmark Component of the 
Alpha Index must continue to meet the continued listing standards set 
forth by Chapter IV, Section 4, Withdrawal of Approval of Underlying 
Securities, of the NASDAQ Options Market rules. Additionally, both the 
Target Component's and the Benchmark Component's trading volume (in all 
markets in which the Target Component or Benchmark Component is traded) 
must have averaged at least 2,000,000 shares per day in the preceding 
twelve months.\10\ Following the listing of an

[[Page 38349]]

Alpha Index-Linked Security, options on each of the component 
securities of the Alpha Index must continue to meet the options average 
daily volume standard set forth in Rule 5712(a)(ii).\11\
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    \10\ The 2,000,000 shares per day continued listing volume 
requirement is the same continued listing volume requirement 
applicable to Target Components and Benchmark Components of Alpha 
Index Options listed on PHLX.
    \11\ See Rule 5712(b).
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Delisting of Alpha Index-Linked Securities
    Rule 5712(c) provides for delisting of Alpha Index-Linked 
Securities. Delisting or removal proceedings will be commenced (unless 
the Commission has approved the continued trading) with respect to any 
Alpha Index-Linked Security that was listed pursuant to Rule 5712 if 
any of the standards set forth in Rule 5712(b) with respect to the 
underlying Alpha Index are not continuously maintained. Additionally, 
NASDAQ will commence delisting or removal proceedings (unless the 
Commission has approved the continued trading of the subject Alpha 
Index-Linked Security) under any of the following circumstances: (i) If 
the aggregate market value or principal amount of the Alpha Index-
Linked Securities publicly held is less than $400,000; (ii) if the 
value of the underlying Alpha Index is no longer calculated or widely 
disseminated on at least a one second basis, provided, however, that if 
the official index value does not change during some or all of the 
period when trading is occurring on NASDAQ then the last calculated 
official index value must remain available throughout NASDAQ trading 
hours; or (iii) if such other event shall occur or condition exists 
which in the opinion of NASDAQ makes further dealings on NASDAQ 
inadvisable. These provisions proposed with respect to delisting track, 
to the extent applicable, the Rule 5710(k)(i)(B) delisting provisions 
applicable to Equity Index-Linked Securities listed pursuant to 
Commission Rule 19b-4(e). Section (c)(iv) of Rule 5712 would provide 
for the commencement of delisting or removal proceedings if an 
underlying Alpha Index fails to satisfy the maintenance standards or 
conditions for such index as set forth by the Commission in its order 
under Section 19(b)(2) of the Act approving the index for the trading 
of options or other derivatives.
Trading Rules and Procedures
    Trading in Alpha Index-Linked Securities will be governed by the 
same trading rules and procedures that apply to other Equity Index-
Linked Securities listed pursuant to Nasdaq Rule 5710. Moreover, 
pursuant to Nasdaq Rule 5710(i), FINRA will implement on behalf of 
NASDAQ written surveillance procedures for Alpha Index-Linked 
Securities. Surveillance will be in place for the launch of Alpha 
Index-Linked Securities. Pursuant to Nasdaq Rule 5710(j), Alpha Index-
Linked Securities will be treated as equity instruments and for 
purposes of fee determination shall be deemed and treated as Other 
Securities. Pursuant to Nasdaq Rule 5710(h), if the value of an Alpha 
Index is not being disseminated as required, the Exchange may halt 
trading during the day on which such interruption occurs and will halt 
trading no later than the beginning of trading following the trading 
day when the interruption commenced if such interruption persists at 
this time.
2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the 
Act,\12\ in general, and furthers the objectives of section 
6(b)(5),\13\ in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and 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.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    Specifically, NASDAQ believes that the proposed rule change would 
expand the investment choices available to market participants. 
NASDAQ's listing requirements as proposed herein are generally the same 
as those previously approved for listing Equity Index-Linked Securities 
on NASDAQ pursuant to Rule 19b-4(e), supplemented by listing standards 
tailored specifically to Equity Index-Linked Securities based upon 
Alpha Indexes, and, consequently, the proposed rule change is 
consistent with the protection of investors and the public interest. 
Additionally, the proposal is designed to prevent fraudulent and 
manipulative acts and practices, as the proposed Alpha Index-Linked 
Securities are subject to existing, previously-approved NASDAQ rules 
governing trading in Equity Index-Linked Securities. The proposal also 
furthers the objectives of Section 6(b)(5) in that Nasdaq Rule 2310, 
which imposes suitability obligations on NASDAQ members with respect to 
recommending transactions to customers, will apply to Alpha Index-
Linked Securities. Finally, NASDAQ represents that FINRA, on behalf of 
NASDAQ, will have in place surveillance procedures that are adequate to 
properly monitor trading in the Alpha Index-Linked Securities and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws. The Exchange may obtain information via the 
Intermarket Surveillance Group, ``ISG'', from other exchanges that are 
members of ISG or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement. The Target Component and 
the Benchmark Component, as well as options on the Target Component and 
on the Benchmark Component, are traded on exchanges which are ISG 
members.
    The proposal is also designed to promote just and equitable 
principles of trade by way of initial and continued listing standards 
which, if not maintained, will result in the discontinuation of trading 
in the affected products. These requirements, together with the 
applicable NASDAQ equity trading rules (which apply to the proposed 
Alpha Index-Linked Securities), ensure that no investor would have an 
unfair advantage over another respecting the trading of the products. 
On the contrary, all investors will have the same access to, and use 
of, information concerning the products and trading in the products, 
all to the benefit of public customers and the marketplace as a whole.

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

    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 such proposed rule change, or

[[Page 38350]]

    (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 Number SR-NASDAQ-2012-058 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-2012-058. 
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 10:00 a.m. and 3:00 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-2012-058 and should be submitted on or before July 18, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-15633 Filed 6-26-12; 8:45 am]
BILLING CODE 8011-01-P