[Federal Register Volume 84, Number 112 (Tuesday, June 11, 2019)]
[Notices]
[Pages 27173-27176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12188]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86035; File No. SR-BOX-2019-18]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend BOX Rule
IM-5050-1 Allow $1 Strike Price Intervals Above $200 on Options on the
QQQ and IWM Exchange-Traded Funds
June 5, 2019.
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 May 30, 2019, BOX Exchange LLC (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.
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\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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend BOX Rule IM-5050-1 (Strike Price
Intervals) to allow for $1 strike prices above $200 on additional
options on Units of certain exchange-traded fund (``ETF'') products.
The text of the proposed rule change is available from the principal
office of the Exchange, at the Commission's Public Reference Room and
also on the Exchange's internet website at http://boxoptions.com.
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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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 BOX Rule IM-5050-1 to allow for $1
strike prices above $200 on additional options on Units of certain
exchange-traded fund (``ETF'') products. This is a competitive filing
that is based on a proposal recently submitted by Cboe Exchange, Inc.
(``Cboe'') and approved by the Commission.\5\
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\5\ See Securities Exchange Act Release No. 85754 (April 30,
2019), 84 FR 19823 (May 6, 2019) (SR-CBOE-2019-015).
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Currently, IM-5050-1(b) to Rule 5050 allows for the interval
between strike prices of series of options on Units of SPY, IVV, and
DIA to be $1 or greater where the strike price is greater than $200.
Under IM-5050-1(b), for all other series of options on Exchange Traded
Fund Shares that satisfy the criteria set forth in Rule 5020(h), the
interval of strike prices may be $1 or greater where the strike price
is $200 or less or $5 or greater where the strike price is over $200.
The Exchange now proposes to modify the interval setting regime to
allow $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.
The 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 a Unit investment trust designed to closely track the price
and performance of a 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
[[Page 27174]]
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 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, 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 Participants
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.
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Securities Exchange Act of 1934
(the ``Act''),\6\ in general, and Section 6(b)(5) of the Act,\7\ 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.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
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In particular, the proposed rule change to IM-5050-1(b) 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
[[Page 27175]]
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 changes adopted by Cboe.\8\
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\8\ See supra note 5.
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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 Participants 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 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
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
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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 \9\ and Rule 19b-
4(f)(6) thereunder.\10\
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 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.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \11\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \12\ 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 requested that the Commission waive the 30-day operative delay so
that the proposed rule change may become operative upon filing. The
Exchange asserts that waiving the operative delay would be consistent
with the protection of investors and the public interest because the
proposed rule change would ensure fair competition among the exchanges
(because the proposed rule change is modelled after a rule of another
exchange, and allow more investors to immediately start trading options
on QQQ and IWM at the proposed strike price intervals. The Commission
believes that the proposal raises no new or substantive issues and that
waiver of the 30-day operative delay is consistent with the protection
of investors and the public interest. The Commission hereby waives the
operative delay and designates the proposed rule change operative upon
filing.\13\
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\11\ 17 CFR 240.19b-4(f)(6).
\12\ 17 CFR 240.19b-4(f)(6)(iii).
\13\ 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).
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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 will 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-BOX-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-BOX-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
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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-BOX-2019-18
and should be submitted on or before July 2, 2019.
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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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-12188 Filed 6-10-19; 8:45 am]
BILLING CODE 8011-01-P