[Federal Register Volume 77, Number 183 (Thursday, September 20, 2012)]
[Notices]
[Pages 58433-58435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23237]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67863; File No. SR-NYSEARCA-2012-94]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change Proposes [sic] To Amend Commentary .06 to NYSE
Arca Options Rule 6.4 To Permit the Exchange To List Additional Strike
Prices Until the Close of Trading on the Second Business Day Prior to
Monthly Expiration.
September 14, 2012.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on September 6, 2012, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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
The Exchange proposes to proposes to [sic] amend Commentary .06 to
NYSE Arca Options Rule 6.4 to permit the Exchange to list additional
strike prices until the close of trading on the second business day
prior to monthly expiration. The text of the proposed rule change is
available on the Exchange's Web site at www.nyse.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 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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to amend Commentary .06 to NYSE Arca
Options Rule 6.4 to permit the Exchange to add additional strikes until
the close of trading on the second business day prior to a monthly
expiration.
NYSE Arca Options Rule 6.4 currently permits the Exchange to open
additional series of individual stock options until the first calendar
day of the month in which the option expires or until the fifth
business day prior to expiration if unusual market conditions exist.\4\
Options market participants generally prefer to focus their trading in
strike prices that immediately surround the price of the underlying
security. However, if the price of the underlying stock moves
significantly, there may be a market need for additional strike prices
to adequately account for market participants risk management needs in
a stock. In these situations, the Exchange
[[Page 58434]]
has the ability to add additional series at strike prices that are
better tailored to the risk management needs of market participants.\5\
The Exchange may make the determination to open additional series for
trading when the Exchange deems it necessary to maintain an orderly
market, to meet customer demand, or when certain price movements take
place in the underlying market.\6\ If the market need occurs prior to
five business days prior to expiration, then the market participants
may have access to an option contract that is more tailored to the
movement in the underlying stock.\7\ However, if the market need to
manage risk due to unusual market conditions comes to light anytime
from five to two days prior to expiration, then market participants are
left without a contract that is tailored to manage their risk.\8\ For
example:
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\4\ See Commentary .06 to NYSE Arca Options Rule 6.4. `Until the
fifth business day prior' generally means up through the end of the
day on the Friday of the week prior to expiration week. When options
were first approved for listing and trading in the United States,
the generally uniform rules of the options exchanges restricted the
addition of new series ``until the first calendar day of the month
in which the option expires.'' At various times in 1985, exchanges
were granted authority to list new equity options series until five
business days prior to expiration under unusual market conditions.
In 1985 there were two main concerns expressed by the Commission:
(i) Worry over the proliferation of strikes and possible capacity
concerns, and (ii) effective and timely communication to market
participants about the new strikes. At the time, though, exchanges
were only allowed to list three expiration months per issue, and
were expanding from listing three strikes to listing five strikes.
Since then, there has been a continual expansion of the number of
strikes, the number of expiration months, and alternative expiration
days. Following the restructuring of OPRA in 2003, each exchange
became responsible for purchasing sufficient capacity to handle its
own quotes generated by the series and classes it listed. Also, when
options were first listed, additional strikes were communicated via
teletype and firm wires to branch offices, firm back offices, and
OCC. As communications were improved, through the use of fax
machines and then email, the time to send notifications decreased
significantly. Now, with the adoption of Streamline Options Series
Adds (``SOSA'') by OCC, notification of new strikes is in real time
throughout the industry.
\5\ See NYSE Arca Options Rule 6.4.
\6\ See NYSE Arca Options Rule 6.4(a).
\7\ See NYSE Arca Options Rule 6.4(a).
\8\ While these situations are relatively rare, the Exchange
represents that approximately two times a month there is a
legitimate need to add additional strikes closer to expiration than
the five business day limitation permits, due to it being necessary
to maintain an orderly market, to meet customer demand, or when
certain price movements take place in the underlying market.
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On October 17, 2011, a Monday of the week that monthly
options expired, Crocs Inc. (CROX) closed at $26.65.
After the close of trading the issuer published a warning
regarding earnings, and on Tuesday morning the underlying opened at
$17.40.
The lowest expiring series were the $18 strike calls and
puts. The Exchange was unable to add additional series to tailor the
risk management needs of market participants in the stock due in a
situation where the stock moves more than 35%.
In this situation, investors had no nearest term strikes to
effectively manage their risk in the underlying stock, CROX. Because of
the current five-days-before-expiration restriction, investors were
unable to tailor their hedging activities in options and effectively
manage their risk going into expiration.\9\
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\9\ The Exchange notes that if the proposed rule were in place,
the Exchange would have added $15, $16, and $17 strikes expiring the
following Saturday.
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The Exchange proposes to permit the listing of additional strikes
until the close of trading on the second business day prior to
expiration in unusual market conditions. Since expiration of the
monthly contract is on a Saturday, the close of trading on the second
business day will typically fall on a Thursday. However, in the cases
where Friday is a holiday during which the Exchange is closed, the
close of trading on the second business day will occur on a Wednesday.
The Exchange will continue to make the determination to open additional
series for trading when the Exchange deems it necessary to maintain an
orderly market, to meet customer demand, or when certain price
movements take place in the underlying market. The proposed change will
provide an additional four days to the Exchange to gauge market impact
of the underlying stock and to react to any market conditions that
would render additional series prior to expiration beneficial to market
participants. The Exchange believes that the impact on the market from
the proposed change will be very minimal to market participants,
however it will be extremely beneficial in that minority of situations
where unusual market conditions dictate immediately prior to
expiration. The proposal would simply allow participants to adjust
their risk exposure in narrow situations when an unusual market event
occurred on trading days 2, 3, 4, 5 prior to expiration.
This proposal does not raise any capacity concerns on the Exchange,
because the changes have no material difference in impact from the
current rules. The Exchange notes the proposed change allows for new
strikes that would otherwise be permitted to add under existing rules
either on the fifth day prior or immediately after expiration.\10\ A
strike which opens two days prior to expiration will have minimal
impact on quoting, as it adds two series out of hundreds of thousands,
and only for a small number of days.\11\ Thus, any additional strikes
that may be added under the proposed change would have no measurable
effect on systems capacity.
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\10\ Any new strikes added under this proposal would be added in
a manner consistent with the range limitations described in NYSE
Arca Options Rule 6.4A.
\11\ In the case of a multi-stock event where multiple stocks
may be subject to unusual market conditions, a strike which opens
two days prior to expiration will also have minimal impact on
quoting, as it adds two series per stock out of hundreds of
thousands, and only for a small number of days.
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The Exchange discussed the proposed listing and trading of series
during expiration week with the OCC. The OCC represented that it is
able to accommodate the proposal and would have no operational concerns
with adding new series on any day except the last day of trading an
expiring series.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Securities Exchange Act of 1934 (the
``Act''),\12\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\13\ in particular, in that it is designed to
promote just and equitable principles of trade, remove impediments to
and perfect the mechanisms of a free and open market and a national
market system and, in general, to protect investors and the public
interest.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that providing an additional four days to the
Exchange to gauge market impact and to react to any market conditions
prior to expiration beneficial [sic] will result in a continuing
benefit to investors by giving them more flexibility to closely tailor
their investment decisions and hedging decisions prior to expiration.
The Exchange also believes that the additional four days will provide
the investing public and other market participants with additional
opportunities to hedge their investment thus allowing these investors
to better manage their risk exposure with additional in the money
series. While the four additional days may generate additional quote
traffic, the Exchange does not believe that this increased traffic will
become unmanageable since the proposal remains limited to the narrow
situations when an unusual market event occurred on trading days 2, 3,
4, 5 prior to expiration.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
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
[[Page 58435]]
(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 email to [email protected]. Please include
File Number SR-NYSEARCA-2012-94 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEARCA-2012-94. 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 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
10:00 a.m. and 3:00 p.m. The text of the proposed rule change is
available on the Commission's Web site at http://www.sec.gov. 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-NYSEARCA-2012-94 and should be submitted on or before
October 11, 2012.
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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-23237 Filed 9-19-12; 8:45 am]
BILLING CODE 8011-01-P