[Federal Register Volume 84, Number 98 (Tuesday, May 21, 2019)]
[Notices]
[Pages 23122-23125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10513]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85866; File No. SR-PEARL-2019-18]
Self-Regulatory Organizations; Miami PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange
Rule 404, Series of Option Contracts Open for Trading
May 15, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\
[[Page 23123]]
notice is hereby given that on May 7, 2019, Miami PEARL, LLC (``MIAX
PEARL'' or the ``Exchange'') 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 Exchange filed the proposal as a ``non-controversial''
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act
\3\ and Rule 19b-4(f)(6) thereunder.\4\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend Exchange Rule 404,
Series of Option Contracts Open for Trading, Interpretation and Policy
.10, to allow for $1 strike prices above $200 on additional series of
options of certain exchange-traded fund (``ETF'') shares.
The text of the proposed rule change is available on the Exchange's
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX
PEARL'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, the Exchange 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. 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 Exchange proposes to amend Exchange Rule 404, Series of Option
Contracts Open for Trading, Interpretation and Policy .10, to allow for
the interval between strike prices of series of options on ETF shares
of the PowerShares QQQ Trust (``QQQ'') and iShares Russell 2000 ETF
(``IWM'') to be $1 or greater where the strike price is greater than
$200.
Currently, Exchange Rule 404, Series of Option Contracts Open for
Trading, Interpretation and Policy .10, allows for the interval between
strike prices of series of options on ETF shares of SPDR S&P 500 ETF
(``SPY''), iShares S&P 500 Index ETF (``IVV''), and SPDR Dow Jones
Industrial Average ETF (``DIA'') to be $1 or greater where the strike
price is greater than $200.\5\ Under Exchange Rule 404(g), the interval
between strike prices of series of options on ETF shares approved for
options trading \6\ shall be fixed at a price per share which is
reasonably close to the price per share at which the underlying
security is traded in the primary market at or about the same time such
series of options is first open for trading on the Exchange, or at such
intervals as may have been established on another options exchange
prior to the initiation of trading on the Exchange.\7\ The Exchange
generally sets the interval between strike prices of series of options
on ETF shares at $5 or greater where the strike price is greater than
$200, in accordance with such intervals that have been established on
other options exchanges and Exchange Rule 404(g).\8\ Specifically, the
Exchange proposes to modify the interval setting regime to allow for $1
strike price intervals where the strike price is above $200 for IWM and
QQQ options. The Exchange believes that the proposed rule change would
make QQQ and IWM options easier for investors and traders to use and
more tailored to their investment needs.
---------------------------------------------------------------------------
\5\ See Exchange Rule 404, Interpretation and Policy .10.
\6\ See Exchange Rule 402(i).
\7\ See Exchange Rule 404(g).
\8\ See id.
---------------------------------------------------------------------------
Options on QQQ and IWM are designed to provide investors different
ways to efficiently gain exposure to the equity markets and execute
risk management, hedging, asset allocation and income generation
strategies. The QQQ is an investment trust designed to closely track
the price and performance of the Nasdaq-100 Index (``NDX''), which
represents the largest and most active non-financial domestic and
international issues listed on The Nasdaq Stock Market based on market
capitalization. Likewise, the IWM is an index ETF designed to closely
track the price and performance of the Russell 2000 Index (``RUT''),
which represents the small capitalization sector of the U.S. equity
market. In general, QQQ and IWM options provide investors with the
benefit of trading broader markets in a manageably sized contract.
The value of QQQ is designed to approximate 1/40 the value of the
underlying NDX. For example, if the NDX price level is 1400, QQQ strike
prices generally would be expected to be priced around $35. The value
of IWM is designed to approximate 1/10 the value of the underlying RUT.
In the past year, the NDX has climbed above a price level of 7500, and
the RUT climbed to a price level of approximately 1700 (both prior to
the December 2018 market-wide decline). As the value of the underlying
ETF (and the index the ETF tracks) and resulting strike prices for each
option continues to appreciate, market participants have requested the
listing of additional strike prices ($1 increments) in QQQ and IWM
options above $200. The QQQ is among the most actively traded ETFs on
the market. It is widely quoted as an indicator of technology stock
prices and investor confidence in the technology and telecommunication
market spaces, a significant indicator of overall economic health.
Similarly, IWM is among the most actively traded ETFs on the market and
provides investors with an investment tool to gain exposure to small
U.S. public companies. Industry-wide trade volume in QQQ more than
doubled from 2017 to 2018. As a result, QQQ options and IWM options
have grown to become two of the largest options contracts in terms of
trading volume. Investors use these products to diversify their
portfolios and benefit from market trends.
Accordingly, the Exchange believes that offering a wider base of
QQQ and IWM options affords traders and investors important hedging and
trading opportunities, particularly in the midst of current price
trends. The Exchange believes that not having the proposed $1 strike
price intervals above $200 in QQQ and IWM classes significantly
constricts investors' hedging and trading possibilities. The Exchange
therefore believes that by having smaller strike intervals in QQQ and
IWM, investors would have more efficient hedging and trading
opportunities due to the lower $1 interval ascension. The proposed $1
intervals above the $200 strike price will result in having at-the-
money series based upon the underlying ETFs moving less than 1%. The
Exchange believes that the proposed strike setting regime is in line
with the slower movements of broad-based indices. Considering the fact
that $1 intervals already exist below the $200 price point and that
both QQQ and IWM have consistently inclined in price toward the $200
level, the Exchange believes that continuing to maintain the current
$200 level (above which intervals increase 500% to $5), may have a
negative effect on investing,
[[Page 23124]]
trading and hedging opportunities, and volume. The Exchange believes
that the investing, trading, and hedging opportunities available with
QQQ and IWM options far outweighs any potential negative impact of
allowing QQQ and IWM options to trade in more finely tailored intervals
above the $200 price point.
The proposed strike setting regime would permit strikes to be set
to more closely reflect the increasing values in the underlying indices
and allow investors and traders to roll open positions from a lower
strike to a higher strike in conjunction with the price movements of
the underlying ETFs. Under the current rule, where the next higher
available series would be $5 away above a $200 strike price, the
ability to roll such positions is effectively negated. Accordingly, to
move a position from a $200 strike to a $205 strike under the current
rule, an investor would need for the underlying product to move 2.5%,
and would not be able to execute a roll up until such a large movement
occurred. As stated, the NDX and RUT have experienced continued, steady
growth. The Exchange believes that with the proposed rule change, the
investor would be in a significantly safer position of being able to
roll his open options position from a $200 to a $201 strike price,
which is only a 0.5% move for the underlying. As a result, the proposed
rule change will allow the Exchange to better respond to customer
demand for QQQ and IWM strike prices more precisely aligned with the
smaller, longer-term incremental increases in respective underlying
ETFs. The Exchange believes that the proposed rule change, like the
other strike price programs currently offered by the Exchange, will
benefit investors by providing investors the flexibility to more
closely tailor their investment and hedging decisions using QQQ and IWM
options. Moreover, by allowing series of QQQ and IWM options to be
listed in $1 intervals between strike prices over $200, the proposal
will moderately augment the potential total number of options series
available on the Exchange. However, the Exchange believes it and the
Options Price Reporting Authority (``OPRA'') have the necessary systems
capacity to handle any potential additional traffic associated with
this proposed rule change. The Exchange also believes that Members \9\
will not have a capacity issue due to the proposed rule change. In
addition, the Exchange represents that it does not believe that this
expansion will cause fragmentation of liquidity, but rather, believes
that finer strike intervals will serve to increase liquidity available
as well as price efficiency by providing more trading opportunities for
all market participants.
---------------------------------------------------------------------------
\9\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposed rule change is consistent
with Section 6(b) of the Act \10\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \11\ 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 regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanisms of a free and open market and a national market
system and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) requirement that the rules of an
exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In particular, the proposed rule change to Exchange Rule 404,
Series of Option Contracts Open for Trading, Interpretation and Policy
.10, will allow investors to more easily use QQQ and IWM options.
Moreover, the proposed rule change would allow investors to better
trade and hedge positions in QQQ and IWM options where the strike price
is greater than $200, and ensure that investors in both options are not
at a disadvantage simply because of the strike price.
The Exchange believes the proposed rule change is consistent with
Section 6(b)(1) of the Act, which provides that the Exchange be
organized and have the capacity to be able to carry out the purposes of
the Act and the rules and regulations thereunder, and the rules of the
Exchange. The rule change proposal allows the Exchange to respond to
customer demand to allow QQQ and IWM options to trade in $1 intervals
above a $200 strike price. The Exchange does not believe that the
proposed rule would create additional capacity issues or affect market
functionality.
As noted above, ETF options trade in wider $5 intervals above a
$200 strike price, whereby options at or below a $200 strike price
trade in $1 intervals. This creates a situation where contracts on the
same option class effectively may not be able to execute certain
strategies such as, for example, rolling to a higher strike price,
simply because of the $200 strike price above which options intervals
increase by 500%. This proposal remedies the situation by establishing
an exception to the current ETF interval regime for QQQ and IWM options
to allow such options to trade in $1 or greater intervals at all strike
prices.
The Exchange believes that the proposed rule change, like other
strike price programs currently offered by the Exchange, will benefit
investors by giving them increased flexibility to more closely tailor
their investment and hedging decisions. Moreover, the proposed rule
change is consistent with the change adopted by Cboe Exchange, Inc.
(``Cboe'').\12\
---------------------------------------------------------------------------
\12\ See Securities Exchange Act Release No. 85754 (April 30,
2019), 84 FR 19823 (May 6, 2019) (SR-CBOE-2019-015).
---------------------------------------------------------------------------
With regard to the impact of this proposal on system capacity, the
Exchange believes it and OPRA have the necessary systems capacity to
handle any potential additional traffic associated with this proposed
rule change. The Exchange believes that its members will not have a
capacity issue as a result of this proposal.
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. Rather, the Exchange
believes that the proposed rule change will result in additional
investment options and opportunities to achieve the investment and
trading objectives of market participants seeking efficient trading and
hedging vehicles, to the benefit of investors, market participants, and
the marketplace in general. Specifically, the Exchange believes that
QQQ and IWM options investors and traders will significantly benefit
from the availability of finer strike price intervals above a $200
price point. In addition, the interval setting regime the Exchange
proposes to apply to QQQ and IWM options is currently applied to SPY,
IVV, and DIA options, which are similarly popular and widely traded ETF
products and track indexes at similarly high price levels. Thus, the
proposed strike setting regime for QQQ and IWM options will allow
options on the most actively traded ETFs with index levels at
corresponding price
[[Page 23125]]
levels to trade pursuant to the same strike setting regime. This will
permit investors to employ similar investment and hedging strategies
for each of these options.
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
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 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 \13\ and subparagraph (f)(6) of Rule 19b-4
thereunder.\14\
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give 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 date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \15\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \16\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposal may become operative immediately upon filing. The Exchange
stated that waiver of this requirement will ensure fair competition
among the exchanges by allowing the Exchange to set the interval
between strike prices of series of options on ETF shares of QQQ and IWM
in a manner consistent with another exchange. Further, the Exchange
stated that because the proposed rule change is based on the rules of
another Self-Regulatory Organization,\17\ it does not introduce any new
or novel regulatory issues. For these reasons, the Commission believes
that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest. Accordingly, the
Commission hereby waives the operative delay and designates the
proposed rule change operative upon filing.\18\
---------------------------------------------------------------------------
\15\ 17 CFR 240.19b-4(f)(6).
\16\ 17 CFR 240.19b-4(f)(6)(iii).
\17\ See supra note 12.
\18\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
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. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
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-PEARL-2019-18 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-PEARL-2019-18. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2019-18 and should be submitted on
or before June 11, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
---------------------------------------------------------------------------
\19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10513 Filed 5-20-19; 8:45 am]
BILLING CODE 8011-01-P