[Federal Register Volume 76, Number 113 (Monday, June 13, 2011)]
[Notices]
[Pages 34281-34284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-14518]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64616; File No. SR-NASDAQ-2011-077]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Adopt a Risk Monitor
Mechanism
June 7, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 1, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared by NASDAQ. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ is filing with the Securities and Exchange Commission
(``Commission'') a proposal for the NASDAQ Options Market (``NOM'') to
amend Chapter VI, Trading Systems, to adopt new Section 19, Risk
Monitor Mechanism, to provide a risk monitor mechanism for all NOM
Participants.\3\
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\3\ The term ``Options Participant'' or ``Participant'' means a
firm or organization that is registered with the Exchange pursuant
to Chapter II of the NOM Rules for purposes of participating in
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or
``Nasdaq Options Market Maker.''
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This change is scheduled to be implemented on NOM on or about
August 1, 2011; the Exchange will announce the implementation schedule
by Options Trader Alert, once the rollout schedule is finalized.
The text of the proposed rule change is available at
nasdaq.cchwallstreet.com, at NASDAQ'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, NASDAQ 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. NASDAQ 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 the proposed rule change is to reflect in NOM's
rules that Participants will be able to establish new risk control
parameters. Specifically, NASDAQ proposes to adopt new Chapter VI,
Section 19, Risk Monitor Mechanism, which is very similar to NASDAQ OMX
PHLX (``PHLX'') Rule 1093 (as explained in detail below) and is
intended to bring this aspect of PHLX's technological functionality to
NOM. The Risk Monitor Mechanism provides protection from the risk of
multiple executions across multiple series of an option. The risk to
Participants is not limited to a single series in an option;
Participants have exposure in all series of a particular option,
requiring them to offset or hedge their overall position in an option.
In particular, the Risk Monitor Mechanism will be useful for Market
Makers,\4\ who are required to continuously quote in assigned options.
Quoting across many series in an option creates the possibility of
``rapid fire'' executions that can create large, unintended principal
positions that expose the Market Maker to unnecessary market risk. The
Risk Monitor Mechanism is intended to assist such Participants in
managing their market risk.
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\4\ Unlike the PHLX Risk Monitor Mechanism, the NOM Risk Monitor
Mechanism will be available to all Participants, not just Market
Makers.
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Though the Risk Monitor Mechanism will be most useful to Market
Makers, the Exchange proposes to offer the functionality to all
participant types. There are other firms that trade on a proprietary
basis and provide liquidity to the Exchange; these firms could
potentially benefit, similarly to Market Makers, from the Risk Monitor
Mechanism. The Exchange believes that the Risk Monitor Mechanism should
help liquidity providers generally, market makers and other
participants alike, in managing risk and providing deep and liquid
markets to investors.
Pursuant to new Section 19(a), the Risk Monitor Mechanism operates
by the System maintaining a counting program for each Participant,
which counts the number of contracts traded in an option by each
Participant within a specified time period, not to exceed 15 seconds,
established by each Participant (the ``specified time period''). The
specified time period will commence for an option when a transaction
occurs in any series in such option. Furthermore, the System engages
the Risk Monitor Mechanism in a particular option when the counting
program has determined that a Participant has traded a Specified
Engagement Size (as defined below) established by such Participant
during the specified time period. When such Participant has traded the
Specified Engagement Size during the specified time period, the Risk
Monitor Mechanism automatically removes such Participant's orders in
all series of the particular option.
As provided in proposed subparagraph (b)(ii), the Specified
Engagement Size is determined by the following: (A) For each series in
an option, the counting program will determine the percentage that the
number of contracts executed in that series represents relative to the
Participant's total size at all price levels in that series (``series
percentage''); (B) The counting program will determine the sum of the
series percentages in the option issue (``issue percentage''); (C) Once
the counting program determines that the issue percentage equals or
exceeds a percentage established by the Participant (``Specified
Percentage''), the number of executed contracts in the option issue
equals the Specified Engagement Size. For example, if a Participant is
quoting in four series of a particular option issue, and sets its
Specified Percentage at 100%, the Specified Engagement Size would be
determined as follows:
[[Page 34282]]
Example I
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Number of
Series Size contracts Percentage
executed
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Series 1........................................................ 100 40 40
Series 2........................................................ 50 20 40
Series 3........................................................ 200 20 10
Series 4........................................................ 150 15 10
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Total....................................................... 500 95 100
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In this example, the Specified Engagement Size is 95 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
Example II
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Number of
Series Size contracts Percentage
executed
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Series 1........................................................ 100 0 0
Series 2........................................................ 50 0 0
Series 3........................................................ 200 0 0
Series 4........................................................ 150 150 100
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Total....................................................... 500 150 100
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In this example, the Specified Engagement Size is 150 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 100%.
If a Participant is quoting in four series of a particular option,
and sets its Specified Percentage at 200%, the Specified Engagement
Size would be determined as follows:
Example III
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Number of
Series Size contracts Percentage
executed
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Series 1........................................................ 100 80 80
Series 2........................................................ 50 40 80
Series 3........................................................ 200 40 20
Series 4........................................................ 150 30 20
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Total....................................................... 500 190 200
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In this example, the Specified Engagement Size is 190 contracts,
which is the aggregate number of contracts executed among all series
during the specified time period that represents an issue percentage
equal to the Specified Percentage of 200%.
The Specified Engagement Size will be automatically offset by a
number of contracts that are executed on the opposite side of the
market in the same option issue during the specified time period (the
``Net Offset Specified Engagement Size''). Long call positions will
only be offset by short call positions, and long put positions will
only be offset by short put positions. For example, a Participant that
buys calls and also sells calls in the same option during the specified
time period would have a Net Offset Specified Engagement Size as
follows:
Example IV
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Net offset
Series Size Buy call Sell call size Percentage
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Series 1.................................... 100 60 20 40 40
Series 2.................................... 100 100 60 40 40
Series 3.................................... 200 150 130 20 10
Series 4.................................... 150 75 60 15 10
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Total................................... 550 385 270 115 100
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[[Page 34283]]
Here, the Net Offset Specified Engagement Size for each series is
determined by offsetting the number of contracts executed on the
opposite side of the market for each series during the specified time
period. The Risk Monitor Mechanism shall be engaged once the Net Offset
Specified Engagement Size is for a net number of contracts executed
among all series in an option issue during the specified time period
that represents an issue percentage equal to or greater than the
Specified Percentage.
As explained above, the Specified Engagement Size would be based on
all price levels. For example, if a Participant is quoting in two
series of a particular option, at several price levels in each, and
sets its Specified Percentage at 90%, the Specified Engagement Size
would be determined as follows:
Example V
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Number of Number of
Series 1 Series 2 contracts contracts
Price level size size executed executed Percentage
series 1 series 2
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Level 1..................................... 100 50 100 50 32.5
Level 2..................................... 100 50 100 50 32.5
Level 3..................................... 150 100 0 100 25
Level 4..................................... 150 200 0 0 ..............
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Total................................... 500 400 200 200 ..............
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Percentage.................................. ........... ........... 40 50 90
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In this example, the Specified Engagement Size is 400 contracts,
which is the aggregate number of contracts executed among all series,
at all price levels, during the specified time period that represents
an issue percentage equal to the Specified Percentage of 90%. Although
the Participant executed 40% and 50% of the aggregate size displayed in
series 1 and series 2, respectively, 100% of the Participant's top
price level was executed in both series.
While the Risk Monitor Mechanism is a useful feature that serves an
important risk management purpose, it operates consistent with the firm
quote obligations of a broker-dealer pursuant to Rule 602 of Regulation
NMS. Specifically, proposed paragraph (c) provides that any marketable
orders or quotes that are executable against a Participant's quotation
that are received prior to the time the Risk Monitor Mechanism is
engaged will be automatically executed at the price up to the
Participant's size, regardless of whether such an execution results in
executions in excess of the Participant's Specified Engagement Size.
Accordingly, the Risk Monitor Mechanism cannot be used to circumvent a
Participant's firm quote obligation.
If a Participant is quoting in two series of a particular option,
at several price levels in each, and sets its Specified Percentage at
90%, one contra side order can result in executions in excess of the
Specified Engagement Size. Specifically, if a market order to sell 500
contracts is received in Series 1, the order will execute against all
four levels that the Participant is quoting, as follows:
Example VI
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Number of Number of
Series 1 Series 2 contracts contracts
Price level size size executed executed Percentage
series 1 series 2
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Level 1..................................... 100 50 100 0 20
Level 2..................................... 100 50 100 0 20
Level 3..................................... 150 100 150 0 25
Level 4..................................... 150 200 150 0 25
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Total................................... 500 400 200 0 ..............
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Percentage.................................. ........... ........... 100 0 100
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Although the Participant's Specified Percentage is 90%, the contra
side order executes in its entirety and the Risk Protection Mechanism
is engaged after the resulting executions have surpassed the Specified
Engagement Size.
Proposed Section 19(d) further provides that the system will
automatically reset the counting program and commence a new specified
time period when:
(i) A previous counting period has expired and a transaction occurs
in any series in such option; or
(ii) the Participant refreshes his/her quotation, in a series for
which an order has been executed (thus commencing the specified time
period) prior to the expiration of the specified time period.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \5\ in general, and furthers the objectives of Section
6(b)(5) of the Act \6\ 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, and to
remove impediments to and perfect the
[[Page 34284]]
mechanisms of a free and open market and a national market system, and,
in general, to protect investors and the public interest. The Exchange
believes that the proposal is appropriate and reasonable, because it
offers additional functionality for Participants to manage their risk.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASDAQ does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File No. SR-NASDAQ-2011-077 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2011-077. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NASDAQ-2011-077 and should be submitted on or before July 5, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-14518 Filed 6-10-11; 8:45 am]
BILLING CODE 8011-01-P