[Federal Register Volume 85, Number 128 (Thursday, July 2, 2020)]
[Notices]
[Pages 39953-39956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14234]
[[Page 39953]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89167; File No. SR-NASDAQ-2020-036]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Options 3, Section 3 To Conform the Rule to Section 3.1 of the
Plan for the Purpose of Developing and Implementing Procedures Designed
To Facilitate the Listing and Trading of Standardized Options
June 26, 2020.
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 June 23, 2020, The Nasdaq Stock Market 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 Options 3, Section 3 to conform the
rule to Section 3.1 of the Plan for the Purpose of Developing and
Implementing Procedures Designed to Facilitate the Listing and Trading
of Standardized Options (the ``OLPP'').
The text of the proposed rule change is available on the Exchange's
website 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 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 purpose of this rule change is to amend Options 3, Section 3
(Minimum Increments) to align the rule with the recently approved
amendment to the OLPP.
Background
On January 23, 2007, the Commission approved on a limited basis a
Penny Pilot in option classes in certain issues (``Penny Pilot''). The
Penny Pilot was designed to determine whether investors would benefit
from options being quoted in penny increments, and in which classes the
benefits were most significant. The Penny Pilot was initiated at the
then existing option exchanges in January 2007 \5\ and was expanded and
extended numerous times over the last 13 years.\6\ In each instance,
these approvals relied upon the consideration of data periodically
provided by the Exchanges that analyzed how quoting options in penny
increments affects spreads, liquidity, quote traffic, and volume.
Today, the Penny Pilot includes 363 option classes, which are among the
most actively traded, multiply listed option classes. The Penny Pilot
is scheduled to expire by its own terms on June 30, 2020.\7\
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\5\ See Securities Exchange Act Release Nos. 55154 (January 23,
2007), 72 FR 4743 (February 1, 2007) (SR-CBOE-2006-92); 55161
(January 24, 2007), 72 FR 4754 (February 1, 2007) (SR-ISE-2006-62);
54886 (December 6, 2006), 71 FR 74979 (December 13, 2006) (SR-Phlx-
2006-74); 54590 (October 12, 2006), 71 FR 61525 (October 18, 2006)
(SR-NYSEArca-2006-73); and 54741 (November 9, 2006), 71 FR 67176
(November 20, 2006) (SR-Amex-2006-106).
\6\ The Penny Pilot was established on the Exchange in March
2008 and was last extended in December 2019. See Securities Exchange
Act Release Nos. 57579 (March 28, 2008), 73 FR 18587 (April 4, 2008)
(SR-NASDAQ-2008-026); and 87831 (December 20, 2019), 84 FR 72013
(December 30, 2019) (SR-NASDAQ-2019-100).
\7\ See Securities Exchange Act Release No. 87831 (December 20,
2019), 84 FR 72013 (December 30, 2019) (SR-NASDAQ-2019-100).
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In light of the imminent expiration of the Penny Pilot on June 30,
2020, the Exchange, together with other participating exchanges, filed,
on July 18, 2019 a proposal to amend the OLPP.\8\ On April 1, 2020 the
Commission approved the amendment to the OLPP to make permanent the
Pilot Program (the ``OLPP Program'').\9\
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\8\ See Securities Exchange Act Release No. 87681 (December 9,
2019), 84 FR 68960 (December 17, 2019) (``Notice'').
\9\ See Securities Exchange Act Release No. 88532 (April 1,
2020), 85 FR 19545 (April 7, 2020) (File No. 4-443) (``Approval
Order'').
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The OLPP Program replaces the Penny Pilot by instituting a
permanent program that would permit quoting in penny increments for
certain option classes. Under the terms of the OLPP Program, designated
option classes would continue to be quoted in $0.01 and $0.05
increments according to the same parameters for the Penny Pilot. In
addition, the OLPP Program would: (i) Establish an annual review
process to add option classes to, or to remove option classes from, the
OLPP Program; (ii) to allow an option class to be added to the OLPP
Program if it is a newly listed option class and it meets certain
criteria; (iii) to allow an option class to be added to the OLPP
Program if it is an option class that has seen a significant growth in
activity; (iv) to provide that if a corporate action involves one or
more option classes in the OLPP Program, all adjusted and unadjusted
series and classes emerging as a result of the corporate action will be
included in the OLPP Program; and (v) to provide that any series in an
option class participating in the OLPP Program that have been delisted,
or are identified by OCC as ineligible for opening Customer
transactions, will continue to trade pursuant to the OLPP Program until
they expire.
To conform its Rules to the OLPP Program, the Exchange proposes to
delete the current rule text in Supplementary Material.01 to Options 3,
Section 3 (the ``Penny Pilot Rule''), and replace it with the
requirements for the proposed Penny Interval Program from the OLPP
Program, which is described below. The Exchange also proposes to
relocate the Exchange's rules regarding the minimum price variations
for options in the proposed Penny Interval Program, which are currently
within Supplementary Material .01 to Options 3, Section 3, into new
subparagraphs (a)(3)(A)--(C) of Options 3, Section 3. Specifically, the
Exchange proposes to provide in new subparagraphs (a)(3)(A)--(C) that
for options series traded pursuant to the proposed Penny Interval
Program as described in Supplementary Material .01 to Options 3,
Section 3, the following minimum quoting increments will apply: (A) One
cent ($0.01) for all options series in QQQ, SPY, and IWM; (B) one cent
($0.01) for all other options series included in the Penny Interval
Program that are trading at less than $3.00; and (C) five cents ($0.05)
for all
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other options series included in the Penny Interval Program that are
trading at or above $3.00.
The Exchange also proposes to delete obsolete and superfluous
language in Options 3, Section 3(a) regarding amendments to the minimum
increments that may be established by the Board and designated as a
stated policy, practice or interpretation within the meaning of the
Act, and the process for such amendments by rule filing.\10\ Today, the
Exchange may determine to establish a change to the minimum increments
within its Rules and must submit proposed rule changes for such
amendments to the Commission.\11\ Accordingly, Options 3, Section 3(a),
as amended, will simply provide that the following minimum quoting
increments (as enumerated within Options 3, Section 3(a)) shall apply
to options contracts traded on the Exchange.
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\10\ See Options 3, Section 3(a), which specifically provides:
``The Board may establish minimum quoting increments for options
contracts traded on NOM. Such minimum increments established by the
Board will be designated as a stated policy, practice, or
interpretation with respect to the administration of this Rule
within the meaning of Section 19 of the Exchange Act and will be
filed with the SEC as a rule change for effectiveness upon filing.''
\11\ Decisions to change the minimum increments relate to
Exchange trading and operations, and thus are made by Exchange
management via delegated authority from the Board, rather than the
Board itself, which is generally not involved in determinations
related to day-to-day operations of the Exchange.
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Penny Interval Program
The Exchange proposes to codify the OLPP Program in Supplementary
Material .01 to Options 3, Section (Requirements for Penny Interval
Program) (the ``Penny Program''), which will replace the Penny Pilot
Rule and permanently permit the Exchange to quote certain option
classes in minimum increments of one cents ($0.01) and five cents
($0.05) (``penny increments''), as set forth in proposed subparagraphs
(a)(3)(A)--(C) of Options 3, Section 3. As discussed above, the penny
increments that currently apply under the Penny Pilot \12\ will
continue to apply for options classes included in the Penny
Program.\13\
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\12\ See Supplementary Material .01 to Options 3, Section 3.
\13\ See proposed subparagraphs (a)(3)(A)--(C) of Options 3,
Section 3.
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The Penny Program would initially apply to the 363 most actively
traded multiply listed option classes, based on National Cleared Volume
at The Options Clearing Corporation (``OCC'') in the six full calendar
months ending in the month of approval (i.e., November 2019--April
2020) that currently quote in penny increments, or overlie securities
priced below $200, or any index at an index level below $200.
Eligibility for inclusion in the Penny Program will be determined at
the close of trading on the monthly Expiration Friday of the second
full month following April 1, 2020 (i.e., June 19, 2020).
Once in the Penny Program, an option class will remain included
until it is no longer among the 425 most actively traded option classes
at the time the annual review is conducted (described below), at which
point it will be removed from the Penny Program. As described in more
detail below, the removed class will be replaced by the next most
actively traded multiply listed option class overlying securities
priced below $200 per share, or any index at an index level below $200,
and not yet in the Penny Program. Advanced notice regarding the option
classes included, added, or removed from the Penny Program will be
provided to the Exchange's membership via Options Trader Alert and
published by the Exchange on its website.
Annual Review
The Penny Program would include an annual review process that
applies objective criteria to determine option classes to be added to,
or removed from, the Penny Program. Specifically, on an annual basis
beginning in December 2020 and occurring every December thereafter, the
Exchange will review and rank all multiply listed option classes based
on National Cleared Volume at OCC for the six full calendar months from
June 1st through November 30th for determination of the most actively
traded option classes. Any option classes not yet in the Penny Program
may be added to the Penny Program if the class is among the 300 most
actively traded multiply listed option classes and priced below $200
per share or any index at an index level below $200.
Following the annual review, option classes to be added to the
Penny Program would begin quoting in penny increments (i.e., $0.01 if
trading at less than $3; and $0.05 if trading at $3 and above) on the
first trading day of January. In addition, following the annual review,
any option class in the Penny Program that falls outside of the 425
most actively traded option classes would be removed from the Penny
Program. After the annual review, option classes that are removed from
the Penny Program will be subject to the minimum trading increments set
forth in Options 3, Section 3, effective on the first trading day of
April.
Changes to the Composition of the Penny Program Outside of the Annual
Review
Newly Listed Option Classes and Option Classes With Significant Growth
in Activity
The Penny Program would specify a process and parameters for
including option classes in the Penny Program outside the annual review
process in two circumstances. These provisions are designed to provide
objective criteria to add to the Penny Program new option classes in
issues with the most demonstrated trading interest from market
participants and investors on an expedited basis prior to the annual
review, with the benefit that market participants and investors will
then be able to trade these new option classes based upon quotes
expressed in finer trading increments.
First, the Penny Program provides for certain newly listed option
classes to be added to the Penny Program outside of the annual review
process, provided that (i) the class is among the 300 most actively
traded, multiply listed option classes, as ranked by National Cleared
Volume at OCC, in its first full calendar month of trading; and (ii)
the underlying security is priced below $200 or the underlying index is
at an index level below $200. Such newly listed option classes added to
the Penny Program pursuant to this process would remain in the Penny
Program for one full calendar year and then would be subject to the
annual review process.
Second, the Penny Program would allow an option class to be added
to the Penny Program outside of the annual review process if it is an
option class that meets certain specific criteria. Specifically, new
option classes may be added to the Penny Program if: (i) The option
class is among the 75 most actively traded multiply listed option
classes, as ranked by National Cleared Volume at OCC, in the prior six
full calendar months of trading and (ii) the underlying security is
priced below $200 or the underlying index is at an index level below
$200. Any option class added under this provision will be added on the
first trading day of the second full month after it qualifies and will
remain in the Penny Program for the rest of the calendar year, after
which it will be subject to the annual review process.
Corporate Actions
The Penny Program would also specify a process to address option
classes in the Penny Program that undergo a corporate action and is
designed to ensure continuous liquidity
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in the affected option classes. Specifically, if a corporate action
involves one or more option classes in the Penny Program, all adjusted
and unadjusted series of an option class would continue to be included
in the Penny Program.\14\ Furthermore, neither the trading volume
threshold, nor the initial price test would apply to option classes
added to the Penny Program as a result of the corporate action.
Finally, the newly added adjusted and unadjusted series of the option
class would remain in the Penny Program for one full calendar year and
then would become subject to the annual review process.
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\14\ For example, if Company A acquires Company B and Company A
is not in the Penny Program but Company B is in the Penny Program,
once the merger is consummated and an options contract adjustment is
effective, then Company A would be added to the Penny Program and
remain in the Penny Program for one calendar year.
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Delisted or Ineligible Option Classes
Finally, the Penny Program would provide a mechanism to address
option classes that have been delisted or those that are no longer
eligible for listing. Specifically, any series in an option class
participating in the Penny Program in which the underlying has been
delisted, or is identified by OCC as ineligible for opening customer
transactions, would continue to quote pursuant to the terms of the
Penny Program until all options series have expired.
Implementation
The Exchange proposes to implement the Penny Program on July 1,
2020, which is the first trading day of the third month following the
Approval Order issued on April 1, 2020--i.e., July 1, 2020.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\15\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\16\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, 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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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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In particular, the proposed rule change, which conforms the
Exchange rules to the recently adopted OLPP Program, allows the
Exchange to provide market participants with a permanent Penny Program
for quoting options in penny increments, which maximizes the benefit of
quoting in a finer quoting increment to investors while minimizing the
burden that a finer quoting increment places on quote traffic.
Accordingly, the Exchange believes that the proposal is consistent
with the Act because, in conforming the Exchange rules to the OLPP
Program, the Penny Program would employ processes, based upon objective
criteria, that would rebalance the composition of the Penny Program,
thereby helping to ensure that the most actively traded option classes
are included in the Penny Program, which helps facilitate the
maintenance of a fair and orderly market.
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. The proposed Penny Program,
which modifies the Exchange's rules to align them with the Commission
approved OLPP Program, is not designed to be a competitive filing nor
does it impose an undue burden on intermarket competition as the
Exchange anticipates that the options exchanges will adopt
substantially identical rules. Moreover, the Exchange believes that by
conforming Exchange rules to the OLPP Program, the Exchange would
promote regulatory clarity and consistency, thereby reducing burdens on
the marketplace and facilitating investor protection. To the extent
that there is a competitive burden on those option classes that do not
qualify for the Penny Program, the Exchange believes that it is
appropriate because the proposal should benefit all market participants
and investors by maximizing the benefit of a finer quoting increment in
those option classes with the most trading interest while minimizing
the burden of greater quote traffic in option classes with less trading
interest. The Exchange believes that adopting rules, which it
anticipates will likewise be adopted by all option exchanges that are
participants in the OLPP, would allow for continued competition between
Exchange market participants trading similar products as their
counterparts on other exchanges, while at the same time allowing the
Exchange to continue to compete for order flow with other exchanges.
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
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 after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6)
\18\ thereunder. The Exchange has proposed to implement the Penny
Program on July 1, 2020 and has asked the Commission to waive the 30-
day operative delay for this filing.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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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The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest
because it will allow the Exchange to modify its rules to conform to
the OLPP Program and implement the Penny Program on July 1, 2020,
consistent with the Commission's approval of the OLPP Amendment.
Accordingly, the Commission designates the proposed rule change as
operative on July 1, 2020.\19\
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\19\ For purposes only of waiving the operative delay for this
proposal, the Commission 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 shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing,
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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-2020-036 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-NASDAQ-2020-036. 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-NASDAQ-2020-036 and should be submitted
on or before July 23, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14234 Filed 7-1-20; 8:45 am]
BILLING CODE 8011-01-P