[Federal Register Volume 86, Number 32 (Friday, February 19, 2021)]
[Notices]
[Pages 10375-10378]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03342]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91125; File No. SR-BX-2020-032]


Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
of Amendment No. 1 and Order Granting Accelerated Approval of Proposed 
Rule Change, as Modified by Amendment No. 1, To Amend Options 4, 
Section 5, To Limit Short Term Options Series Intervals Between Strikes 
That Are Available for Quoting and Trading on BX

February 12, 2021.

I. Introduction

    On November 6, 2020, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to amend 
Options 4, Section 5, ``Series of Options Contracts Open for Trading'' 
to limit Short Term Options Series intervals between strikes which are 
available for quoting and trading on BX. The proposed rule change was 
published for comment in the Federal Register on November 16, 2020.\3\ 
On December 23, 2020, pursuant to Section 19(b)(2) of the Act,\4\ the 
Commission extended the time period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the proposed 
rule change, to February 14, 2021.\5\ On February 10, 2021, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
replaced and superseded the proposed rule change in its entirety.\6\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1, from interested 
persons, and is approving the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 90384 (November 9, 
2020), 85 FR 73113 (November 16, 2020) (``Notice''). Comments on the 
proposed rule change can be found at https://www.sec.gov/comments/sr-bx-2020-032/srbx2020032.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90796 (December 23, 
2020), 85 FR 86590 (December 30, 2020).
    \6\ In Amendment No. 1, the Exchange: (1) Stated that the 
proposed changes in Supplementary Material .07 of Options 4, Section 
5 supersede Supplementary Material .03(d) and that the Exchange will 
not be able to utilize the rule text within Supplementary Material 
.03(d) to permit additional series to be opened for trading on the 
Exchange that have an expiration date more than twenty-one days from 
the listing date despite the noted circumstances when such 
additional series could otherwise be added; (2) clarified how a 
Short Term Option Opening Date is calculated when the Exchange is 
not open for business on the applicable Thursday or Friday; (3) 
provided that that Short Term Options Series that are newly eligible 
for listing pursuant to Options 4, Section 3(a) will not be subject 
to proposed Supplementary Material .07 until after the end of the 
first full calendar quarter following the date the option class was 
first listed for trading on any options market; (4) discussed 
additional data underlying its proposal; (5) proposed to make 
publically available a report on a quarterly basis that indicates, 
for each Short Term Options Series eligible to be listed under 
proposed Supplementary Material .07 of Options 4, Section 5, the 
applicable tiering, which includes the closing price of the 
underlying, and the average daily Customer volume of the option; and 
(6) changed its implementation timeframe for the proposed rule 
change from prior to March 31, 2021 to prior to June 30, 2021. When 
the Exchange filed Amendment No. 1, it also submitted it as a 
comment to the filing so that the text of Amendment No. 1 promptly 
became available at https://www.sec.gov/comments/sr-bx-2020-032/srbx2020032-8359799-229182.pdf.
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II. Description of the Proposed Rule Change

    Currently, under the Short Term Options Series (``STOS'') program 
(also referred to as the ``weekly series'' or ``weeklies''), BX may 
open for trading on a Thursday or Friday (``Short Term Option Opening 
Date'') a series of options that expires on each of the next five 
Fridays that are business days and are not Fridays in which monthly 
options series or Quarterly Options series expire (``Short Term Option 
Expiration Dates'').\7\ Weeklies currently may have strike price 
intervals of $0.50, $1, or $2.50.\8\
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    \7\ See Supplementary Material .03 of Options 4, Section 5. 
There are limits on the number of series that can participate in 
STOS (i.e., 30 initial series and up to 50 currently listed 
classes). See Supplementary Material .03 of Options 4, Section 5(c). 
In addition to the weeklies, the Exchange may list series of options 
for trading with monthly expirations (that expire on the third 
Friday of the month) or quarterly expirations. See Options 4, 
Section 5(g) and Supplementary Material .04 of Options 4, Section 5, 
respectively. Exchange rules set forth the intervals between strike 
prices of series of options on individual stocks, which generally 
are $2.50, $5, and $10. In addition to those intervals, the Exchange 
may list certain series of options in finer increments, including, 
e.g., pursuant to the $1 Strike Price Interval Program 
(Supplementary Material .01 of Options 4, Section 5) and the $0.50 
Strike Program (Supplementary Material .05 of Options 4, Section 5).
    \8\ Specifically, (i) $0.50 or greater where the strike price is 
less than $100, and $1 or greater where the strike price is between 
$100 and $150 for all option classes that participate in the Short 
Term Options Series Program; (ii) $0.50 for option classes that 
trade in one dollar increments and are in the Short Term Options 
Series Program; or (iii) $2.50 or greater where the strike price is 
above $150. See Amendment No. 1, supra note 6, at 34.
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    In the proposed rule change, as modified by Amendment No. 1, the 
Exchange proposes to amend its STOS Program to increase, and thereby 
limit, the intervals between strikes in multiply listed equity options 
(excluding options on Exchange Traded Funds (``ETFs'') and Exchange 
Traded Notes (``ETNs'')) under the STOS program for those weeklies that 
have an expiration date more than twenty-one days from the listing 
date.\9\ Accordingly, the proposal seeks to reduce the number of 
strikes in the weeklies furthest from expiration.
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    \9\ The proposal does not apply to index options.
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    Specifically, the new applicable strike intervals will be as 
follows: \10\
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    \10\ The table supersedes Supplementary Material .03(d), which 
currently permits additional series to be opened for trading on the 
Exchange when the Exchange deems it necessary to maintain an orderly 
market, to meet customer demand, or when the market price of the 
underlying security moves substantially from the exercise price or 
prices of the series already opened. As a result, the Exchange will 
not be able to utilize the rule text within Supplementary Material 
.03(d) to permit additional series to be opened for trading on BX 
that have an expiration date more than twenty-one days from the 
listing date despite the noted circumstances when such additional 
series could otherwise be added.

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                                                                                                      Underlying share price
                                         Customer-range options average  -------------------------------------------------------------------------------
                 Tier                             daily volume                              $25 to less     $75 to less    $150 to less       $500 or
                                                                           Less than $25     than $75        than $150       than $500        greater
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1.....................................  greater than 5,000..............           $0.50           $1.00           $1.00           $5.00           $5.00
2.....................................  1,000 to 5,000..................            1.00            1.00            1.00            5.00           10.00
3.....................................  0 to 1,000......................            2.50            5.00            5.00            5.00           10.00
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[[Page 10376]]

    As shown in the table, the proposal sets the strike increment for 
those weekly series with an expiration date of more than twenty-one 
days from the listing date (e.g., weeks 4 and 5) through a matrix of 15 
possible choices representing 5 different strike intervals (i.e., 
$0.50, $1, $2.50, $5, or $10). The Exchange will determine the 
applicable strike interval through a combination of two factors: (1) 
The Customer-cleared average daily volume (``ADV'') tier for the option 
over the applicable quarter \11\ and (2) the closing share price of the 
underlying stock on its primary market on the last day of the calendar 
quarter.
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    \11\ The Customer-cleared ADV is the total number of options 
contracts traded in the Customer range in a given security for the 
applicable calendar quarter, divided by the number of trading days 
in the applicable calendar quarter. Beginning on the second trading 
day of each calendar quarter, the ADV will be calculated by using 
data from the prior calendar quarter based on volume cleared in the 
Customer range as reported by the Options Clearing Corporation 
(``OCC'').
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    The Exchange states that STOS comprise a significant portion of 
listed options, as the weekly strikes increased at a 8.9% compound 
annual growth rate (``CAGR'') from 2015 to 2020, compared to a 4.3% 
CAGR for standard expirations using 3rd Friday expirations. Weeklies 
are available on 16% of underlying products, and weeklies with an 
expiration date greater than twenty-one days from the listing date 
account for 7.5% of the total number of strikes in the options market, 
equaling approximately 81,000 strikes.\12\
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    \12\ See Amendment No. 1, supra note 6, at 42.
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    In its filing, the Exchange explains that it chose to use OCC 
Customer-cleared volume because the Exchange believes it represents a 
measure of customer demand, including for the weekly series.\13\ Under 
the proposal, higher customer demand results in a tier that corresponds 
to a more granular strike interval (e.g., $0.50 instead of $2.50).
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    \13\ See id. at 22.
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    The Exchange further explains that its proposal seeks to reduce the 
number of strikes in the furthest weekly options series, which the 
Exchange believes typically have wider markets and lower market 
quality.\14\ The Exchange's proposal imposes more distanced strike 
intervals where the underlying stock has higher priced shares and where 
there is less customer volume as measured by the ADV tiers. Conversely, 
the proposal preserves finer strike intervals for options that have 
higher Customer ADV and lower priced underlying stocks.
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    \14\ See id. at 40-41, for the Exchange's data on average 
spreads in weekly options during the month of August 2020.
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    BX also proposes to make publically and freely available a report 
on a quarterly basis that indicates, for each weekly series eligible to 
be listed under proposed Supplementary Material .07 of Options 4, 
Section 5, the applicable strike increment, the applicable closing 
price of the underlying stock sourced from the closing prices for Tape 
A, B and C securities published by the UTP and CTA/CQ Plans, and the 
applicable Customer ADV of the option sourced from OCC. BX will post 
the report by the close of business on the first trading day of the 
quarter.
    The Exchange intends that its proposal will allow market makers to 
deploy capital more efficiently, while improving displayed market 
quality, by tailoring the granularity of strikes to correspond to the 
anticipated future customer demand for the option and the price of the 
underlying stock, thus reducing the number of listed weekly options in 
the later weeks of the STOS program.\15\ The Exchange states that its 
proposal is responsive to concerns from industry members, including 
market makers, regarding the proliferation of strike prices.\16\ The 
Exchange expects that its proposal will be the first step in a broader 
initiative to revisit the patchwork of strike listing rules.\17\
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    \15\ See id. at 44.
    \16\ See id. at 45.
    \17\ See id. at 45-46.
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III. Discussion and Commission Findings

    After careful review of the proposed rule change, as modified by 
Amendment No. 1, and the comment letters received on the proposal, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to national securities 
exchanges.\18\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Act,\19\ which requires that the rules of an exchange be 
designed, among other things, 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, 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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    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \19\ 17 U.S.C. 78f(b)(5).
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    The Commission received several comments expressing support for the 
proposed rule change.\20\ Another commenter expressed general support 
for the goals of the proposal but suggested ideas to simplify and 
clarify the proposal.\21\ In particular, that commenter recommends that 
the proposal be ``simplified in its application'' because it believes 
the ADV and underlying share price components could be ``unduly 
burdensome from an exchange operational perspective.'' \22\ The 
commenter states that the proposal could ``create significant 
operational overhead with respect to implementing and maintaining this 
proposed strike listing regime'' but would only ``result in a limited 
strike reduction''.\23\ Further, the commenter states that the 
proposal's ``complexity may also cause confusion among participants 
regarding permissible strikes.'' \24\ As an alternative, the commenter 
suggests ``use of a single ADV component for classes to qualify for the 
STOS program'' such as 2,500 ADV.\25\
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    \20\ See Letters to Vanessa Countryman, Secretary, Commission, 
from Chris Halverson, Chairman of the Board, Security Traders 
Association and James Toes, President & CEO, Security Traders 
Association, dated December 9, 2020; from Joanna Mallers, Secretary, 
FIA Principal Traders Group, dated December 8, 2020; from Venu 
Palaparthi, Managing Director, Dash Financial Technologies LLC, 
dated December 7, 2020; from Andrew Stevens, General Counsel, IMC 
Chicago, LLC, dated December 7, 2020; from Joseph P. Kamnik, Chief 
Regulatory Counsel, Options Clearing Corporation, dated December 4, 
2020; and from Ellen Greene, Managing Director, Equities & Options 
Market Structure, Securities Industry and Financial Markets 
Association, dated December 4, 2020.
    \21\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Laura G. Dickman Vice President, Associate General Counsel, 
Cboe Exchange, Inc., dated February 1, 2021 (``Cboe Letter'').
    \22\ Cboe Letter, supra note 21 at 2.
    \23\ Id.
    \24\ Id.
    \25\ Id.
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    In response, the Exchange states that its proposal ``was not 
intended to amend the current STOS program'' but rather was to 
``curtail certain strike intervals within STOS to avoid operational 
burdens to listing exchanges.'' \26\ The Exchange believes that the 
commenter's suggested alternative ``may have a detrimental impact on of 
meeting customer demand in terms of the availability of STOS which are 
listed today.'' \27\ The Commission believes the Exchange has

[[Page 10377]]

addressed the commenter's concern. The Exchange's proposal, though 
modest in scope, is an attempt to rationalize strike listing rules in 
the furthest-out weekly series, which may serve as a starting point to 
a broader initiative to revisit, harmonize, and update the panoply of 
strike listing rules more broadly. The Exchange's proposal is but one 
of many possible alternative approaches that could address the same or 
similar goals. Nevertheless, the Exchange's proposal reflects its 
preferred approach, which the Commission finds is consistent with the 
Act.
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    \26\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Kevin Kennedy, Senior Vice President, North American Markets, 
Nasdaq, Inc., dated February 10, 2021 (``BX Response''), at 1.
    \27\ Id.
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    The commenter also suggested certain aspects of the proposal that 
could be further clarified, including ``whether exceptions would apply 
to extremely active option classes or new options on equities that were 
subject to recent initial public offerings'' as such events ``often 
increase customer demand for more strikes, including at narrower 
intervals.'' \28\ The commenter also suggested that the proposal be 
flexible to allow more granular strikes when ``necessary to maintain an 
orderly market, to meet customer demand, or when the market price of 
the underlying security moves substantially.'' \29\
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    \28\ Cboe Letter, supra note 21, at 3.
    \29\ Id.
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    In response, the Exchange proposed text in Amendment No. 1 to 
address the initial public offering situation by adding a 3-month 
curtailment period by which the new rule would not take effect for such 
options until after the end of the first full calendar quarter 
following the date the options class was first listed on any options 
market.\30\ The Exchange states that the curtailment period will 
``allow the initial customer demand to be met'' and ``price discovery 
to occur in the offering'' before the new strike intervals would apply 
in the further out weeklies.\31\ Further, the Exchange added text in 
Amendment No. 1 to clarify that the proposal would not accommodate 
flexibility to add more granular strikes for stocks with volatile 
prices or in response to customer requests.\32\ The Commission believes 
the Exchange has addressed the commenter's concerns. While the Exchange 
will not permit exceptions to its new rule, weeklies in the first few 
weeks are not impacted by the rule change, so the Exchange will 
continue to be able to list more granular strikes in those weeks as 
appropriate to meet customer demand in active classes or classes with 
volatile underlying stock prices.
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    \30\ BX Response, supra note 26, at 2.
    \31\ Id.
    \32\ Id.
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    Finally, the commenter states that ``exchanges should use quarterly 
ADV data from a centralized party when identifying classes subject to 
the strike interval limits to ensure fair and consistent application of 
the rule across the industry.'' \33\ In response, the Exchange added 
detail in Amendment No. 1 to describe the report it will prepare and 
publicly post that details the applicable tier, Customer ADV, and 
closing price for each affected weekly series. The Exchange stated that 
the public availability of this report should ``provide consistency and 
relieve administrative burdens on other options markets'' who ``may 
elect to utilize [it] to validate their own information.'' \34\ The 
Commission believes the Exchange has addressed the commenter's 
concerns. The Exchange will use OCC data to calculate the Customer ADV, 
which is available to all options exchanges, and will use the publicly-
reported consolidated market data to determine the underlying share 
price, which also is available to all. Publishing each series subject 
to the new rule with its applicable strike increment, along with the 
inputs used to determine those increments, will promote transparency 
and certainty among all market participants of the application and 
effect of the Exchange's rule.
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    \33\ Cboe Letter, supra note 21, at 3.
    \34\ BX Response, supra note 26, at 2.
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    The Commission believes that the Exchange's proposal, as amended, 
promotes just and equitable principles of trade, fosters cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and removes impediments to and perfect the mechanism of a 
free and open market and a national market system. Specifically, the 
Commission believes that the Exchange's proposal to increase, and thus 
limit, the intervals between strikes listed under the STOS program that 
have an expiration date more than twenty-one days removes impediments 
to and perfects the mechanism of a free and open market and a national 
market system by seeking to strike an efficient balance between 
offering customers choice of appropriately granular strikes in less 
liquid weekly options with higher underlying stock prices and setting 
rational and consistent strike intervals that do not unduly burden the 
market makers that quote them, the broker-dealers and customers that 
view and trade them, or the infrastructure and systems that handle the 
transmission, processing, and dissemination of quotations, orders, and 
trades.
    More efficient and better calibrated strike increment rules can 
have a positive impact on the options markets, as it can provide 
certainty, minimize confusion, and promote more efficient use of 
resources including among market makers that are obligated to 
continuously quote such series, all while still offering customers 
choice to meet their investment needs. The Exchange's proposal should 
eliminate certain clusters of relatively granular strikes in further 
out weekly series, whose characteristics (e.g., risk properties) may 
closely resemble each other as a result of their close strike prices 
and length to time to expiration. Such clustering may not be necessary 
in less liquid further out weekly series where the price of the 
underlying stock is higher. The Exchange's proposal seeks to focus more 
granular strike increments on those series where they are more 
relevant, applicable, and likely more in demand from customers. 
Accordingly, the Exchange's proposal is designed to protect investors 
while also supporting market quality. For these reasons, the Commission 
finds that the proposed rule change is consistent with the Act.

IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether the proposal, as modified by Amendment No. 
1, 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-BX-2020-032 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-BX-2020-032. 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

[[Page 10378]]

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 
this filing will also 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-BX-2020-032 
and should be submitted on or before March 12, 2021.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of Amendment No. 1 in the Federal 
Register. In Amendment No. 1, the Exchange provided additional 
information to clarify and support the proposal, and did not materially 
change the substance of the proposal over what the Commission published 
in the Federal Register. Among other things, in the Amendment the 
Exchange committed to freely and publicly post a ``report'' in which it 
will detail the weekly series that it will list under the proposal, 
along with information on the applicable strike interval tier and the 
underlying Customer ADV and underlying share price values upon which it 
determined the applicable strike interval. That information should be 
useful to market participants, as well as other options exchanges, as 
it will provide transparency into how BX applied its rule and should 
remove any potential for confusion that could be presented by a lack of 
transparency into the applicable strike intervals BX will apply under 
the new rule. Further, the Exchange added detail to address when the 
new rule will apply to a new option (e.g., an option on a recent 
initial public offering), which will provide certainty as to how the 
new rule applies in such cases. Accordingly, the Commission finds good 
cause, pursuant to Section 19(b)(2) of the Act,\35\ to approve the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \35\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change SR-BX-2020-032, as modified by 
Amendment No. 1 be, and hereby is, approved.
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    \36\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-03342 Filed 2-18-21; 8:45 am]
BILLING CODE 8011-01-P