[Federal Register Volume 77, Number 198 (Friday, October 12, 2012)]
[Notices]
[Pages 62303-62308]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25087]
[[Page 62303]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68001; File No. SR-NYSEArca-2012-112]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending Commentary
.06 to NYSE Arca Rule 6.8 Adopting a Pilot Program Eliminating Position
Limits for Options on the SPDR[supreg] S&P 500[supreg] Exchange-Traded
Fund,\1\ Which List and Trade Under the Symbol SPY October 5, 2012.
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\1\ ``SPDR[supreg],'' ``Standard & Poor's[supreg],''
``S&P[supreg],'' ``S&P 500[supreg],'' and ``Standard & Poor's 500''
are registered trademarks of Standard & Poor's Financial Services
LLC. The SPY ETF represents ownership in the SPDR S&P 500 Trust, a
unit investment trust that generally corresponds to the price and
yield performance of the SPDR S&P 500 Index.
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Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on October 1, 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 and II
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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\2\ 15 U.S.C. 78s(b)(1).
\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 amend Commentary .06 to NYSE Arca Rule 6.8
to adopt a pilot program eliminating position limits for options on the
SPDR[supreg] S&P 500[supreg] exchange-traded fund (``SPY ETF''),\4\
which list and trade under the symbol SPY. 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.
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\4\ ``SPDR[supreg],'' ``Standard & Poor's[supreg],''
``S&P[supreg],'' ``S&P 500[supreg],'' and ``Standard & Poor's 500''
are registered trademarks of Standard & Poor's Financial Services
LLC. The SPY ETF represents ownership in the SPDR S&P 500 Trust, a
unit investment trust that generally corresponds to the price and
yield performance of the SPDR S&P 500 Index.
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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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposal is to amend Commentary .06 to NYSE Arca
Rule 6.8 to adopt a pilot program eliminating position limits for SPY
options. The Exchange is basing this proposal on a recently approved
rule change by NYSE MKT LLC, on behalf of NYSE Amex Options LLC (``NYSE
Amex Options''), to adopt a pilot program to eliminate position limits
for SPY options.\5\
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\5\ See Securities Exchange Act Release No. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (Order approving NYSEAmex-2012-
29). NYSE Amex Options is the options trading facility of NYSE MKT,
LLC, f/n/a NYSE Amex LLC.
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Background
Position limits serve as a regulatory tool designed to address
potential manipulative schemes and adverse market impact surrounding
the use of options. The Exchange understands that the Commission, when
considering the appropriate level at which to set option position and
exercise limits, has considered the concern that the limits be
sufficient to prevent investors from disrupting the market in the
security underlying the option.\6\ This consideration has been balanced
by the concern that the limits ``not be established at levels that are
so low as to discourage participation in the options market by
institutions and other investors with substantial hedging needs or to
prevent specialists and market-makers from adequately meeting their
obligations to maintain a fair and orderly market.'' \7\
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\6\ See Securities Exchange Act Release No. 40969 (January 22,
1999), 64 FR 4911, 4912-4913 (February 1, 1999) (SR-CBOE-98-23)
(citing H.R. No. IFC-3, 96th Cong., 1st Sess. at 189-91 (Comm. Print
1978)).
\7\ Id. at 4913.
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SPY options are currently the most actively traded option class in
terms of average daily volume (``ADV'').\8\ The Exchange believes that,
despite the popularity of SPY options as evidenced by their significant
volume, the current position limits on SPY options could be a deterrent
to the optimal use of this product as a hedging tool. The Exchange
further believes that position limits on SPY options may inhibit the
ability of certain large market participants, such as mutual funds and
other institutional investors with substantial hedging needs, to
utilize SPY options and gain meaningful exposure to the hedging
function they provide.
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\8\ SPY ADV was 2,156,482 contracts in April 2012. ADV for the
same period for the next four most actively traded options was:
Apple Inc. (option symbol AAPL)--1,074,351; S&P 500 Index (option
symbol SPX)--656,250; PowerShares QQQ Trust\SM\, Series 1 (option
symbol QQQ)--573,790; and iShares[supreg] Russell 2000[supreg] Index
Fund (option symbol IWM)--550,316.
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The Exchange believes that current experience with the trading of
SPY options, as well as the Exchange's surveillance capabilities, has
made it appropriate to consider other, less prophylactic alternatives
to regulating SPY options, while still seeking to ensure that large
positions in SPY options will not unduly disrupt the options or
underlying cash markets. Accordingly, the Exchange proposes to
eliminate the position limits on SPY options--currently 900,000
contracts on the same side of the market.\9\ In proposing the
elimination of position limits on SPY options, the Exchange has
considered several factors, including (1) the availability of
economically equivalent products and their respective position limits,
(2) the liquidity of the option and the underlying security, (3) the
market capitalization of the underlying security and the related index,
(4) the reporting of large positions and requirements surrounding
margin, and (5) the potential for market on close volatility.
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\9\ See Commentary .06 to NYSE Arca Rule 6.8. See also
Securities Exchange Act Release No. 64945 (July 21, 2011), 76 FR
44969 (July 27, 2011) (SR-NYSEArca-2011-47).
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Economically Equivalent Products
The Exchange has considered the existence of economically
equivalent or similar products, and their respective position limits,
if any, in assessing the appropriateness of proposing an elimination of
position limits for SPY options.
For example, AM-settled options on the S&P 500 Index, which list
and trade exclusively on the Chicago Board Options Exchange (``CBOE'')
under the symbol SPX, are currently not subject to position limits.\10\
Moreover, SPX options are 10 times the size of SPY options, so that a
position of only
[[Page 62304]]
90,000 SPX options is the equivalent of a position of 900,000 SPY
options, which is the current position limit for SPY options.\11\
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\10\ See Securities Exchange Act Release No. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22). Position
limits were also eliminated for options on the S&P 100 Index (option
symbol OEX) and the Dow Jones Industrial Average (option symbol
DJX).
\11\ The Exchange notes that the reduced-value option on the S&P
500 Index (option symbol XSP) is the equivalent size of SPY options
and, similar to SPX options, is not subject to position limits. See
Securities Exchange Act Release No. 56350 (September 4, 2007), 72 FR
51878 (September 11, 2007) (SR-CBOE-2007-79).
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Similarly, the C2 Options Exchange (``C2'') has recently introduced
a PM-settled S&P 500 cash settled contract (``SPXPM''), which also is
not subject to position limits.\12\ This contract, unlike the existing
SPX contract, is cash-settled based on the closing value of the S&P 500
Index. In this respect, SPXPM is very much like SPY options in that it
is settled at the close, albeit into cash as opposed to shares of the
underlying like SPY options.
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\12\ See Securities Exchange Act Release No. 65256 (September 2,
2011), 76 FR 55969 (September 9, 2011) (SR-C2-2011-008) (``SPXPM
Approval'').
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The Exchange believes that, because SPX, SPXPM, and SPY options are
ultimately derivative of the same benchmark--the S&P 500 Index--they
should be treated equally from a position limit perspective. As a
practical matter, investors utilize SPX, SPXPM, and SPY options and
their respective underlying instruments and futures to gain exposure to
the same benchmark index: The S&P 500. Further, because the creation
and redemption process for the underlying SPY ETF allows large
investors to transfer positions from a basket of stocks comprising the
S&P 500 index to an equivalent number of ETF shares (and the reverse)
with relative ease, there is no reason to disadvantage options
overlying the one versus the other. The Exchange believes that this
view is supported by the recent expansion of various exemptions from
position limits, such as the Delta-Based Equity Hedge Exemption \13\
for positions of a member, member organization or non-member affiliate
that are delta neutral, which allows SPY option positions to be delta-
hedged by positions in SPX options. Given that SPX options are not
subject to position limits, a member or member organization (or non-
member affiliate thereof) could theoretically establish a position in
SPY options far in excess of the current 900,000 contract limit,
provided that the position is hedged with SPX options. The Exchange
believes that this situation accurately reflects the economic
equivalence of SPX and SPY options, supporting the Exchange's proposal
to further acknowledge this equivalence by eliminating position limits
in SPY options.
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\13\ See Commentary .07(iii) to NYSE Arca Rule 6.8.
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The Exchange also believes that Commission findings in approving
the SPXPM options further support treating SPY options in the same
manner as SPX and SPXPM options for purposes of position limits. In
particular, the Commission noted in approving SPXPM options that ``C2's
proposal will offer investors another investment option through which
they could obtain and hedge exposure to the S&P 500 stocks,'' and that
``C2's proposal will provide investors with the ability to trade an
option on the S&P 500 index in an all-electronic market, which may
better meet the needs of investors who may prefer to trade
electronically.'' \14\ The Commission also noted that ``C2's proposal
will provide investors with added flexibility through an additional
product that may be better tailored to meet their particular
investment, hedging, and trading needs.'' \15\ The Exchange believes
that these Commission findings apply equally to SPY options. In this
respect, SPY options with no position limit will (1) offer investors
another investment option through which they could obtain and hedge
significant levels of exposure to the S&P 500 stocks, (2) be available
to trade on the Exchange (and presumably all other U.S. options
exchanges) electronically, and (3) provide investors with added
flexibility through an additional product that may be better tailored
to meet their particular investment, hedging, and trading needs,
because, among other things, they are PM-settled.
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\14\ See SPXPM Approval at 55975.
\15\ Id.
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The Exchange notes that, with respect to competition amongst
economically equivalent products, a 2005 paper by Hans Dutt and
Lawrence Harris that set forth a model to determine appropriate
position limits for cash-settled index derivatives observed that
``markets and their regulators should take a closer look at the
underlying economic rationale for the levels at which they currently
set their position limits to ensure that the limits adequately protect
markets from manipulation and that inconsistent position limits do not
produce competitive advantages and disadvantages among contracts.''
\16\ On this point, the Exchange believes that if no position limits
have been found to be warranted on both SPX and SPXPM options, then
such treatment should be extended to SPY options so that inconsistent
position limits do not produce competitive advantages and disadvantages
among contracts.
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\16\ The Journal of Futures Markets, Vol. 25, no. 10, 945-965,
949 (2005) (``Position Limits for Cash-Settled Derivative
Contracts,'' by Hans R. Dutt and Lawrence E. Harris) (``Dutt-Harris
Paper''). In the paper, the authors examined existing position
limits to determine whether they were consistent with the model the
authors developed, and found that the results indicated that
existing limits were not correlated with the limits suggested by
their model.
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In addition, the Exchange notes that the Dutt-Harris Paper focuses
its attention on the concerns relating to manipulation of cash-settled
derivatives, stating that ``[a]lthough several scholars have argued
that cash settlement may increase the risk of market manipulation,
until recently, the theoretical problems arising from potential cash
settlement manipulation has been considered minor, as evidenced by the
lack of academic interest in this area.'' \17\ The paper further noted
that ``[t]he reason for this may arise from the fact that most
exchange-traded derivative index contracts that are cash settled are
broad-based, and each of the underlying components typically possesses
ample liquidity,'' and that ``manipulation of the underlying components
would likely be extremely costly to the would-be manipulator.'' \18\
This suggests that whatever manipulation risk does exist in a cash-
settled, broad-based product such as SPXPM, the corresponding
manipulation risk in a physically-settled, but equally broad-based
product such as SPY, is likely to be equally low, if not lower.
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\17\ Id. at 946.
\18\ Id.
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Similarly, the Exchange notes that in the Dutt-Harris Paper the
authors observed that the lack of scholarly interest in the cash-
settlement manipulation problem may have been ``due to the fact that,
until recently, most U.S. exchange-traded cash-settled derivative
contracts were based on broad indices of very liquid stocks,'' and that
``[m]anipulation of such instruments require very large trades that are
costly to make and easy to detect through conventional surveillance.''
\19\ This observation applies equally to SPY options, which are based
on a broad index of very liquid stocks and can easily be created by
submitting a position in the underlying securities. Moreover, it
provides additional support for the Exchange's view that the enhanced
reporting and surveillance for SPY options discussed below adequately
address concerns about manipulation.\20\
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\19\ Id. at 948.
\20\ The authors of the Dutt-Harris Paper further posited that
``position limits need only apply during the period when cash
settlement takes place.'' Id. at 964. The Exchange notes that no
such period exists with respect to SPY options, which are physically
settled.
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[[Page 62305]]
Liquidity in the Option and the Underlying Security
The Exchange has also considered the liquidity of SPY options and
the underlying SPY ETF in assessing the appropriateness of proposing an
elimination of position limits for SPY options.
In approving the elimination of position and exercise limits on SPX
options, the Commission noted that the deep, liquid markets for the
securities underlying the S&P 500 Index reduced concerns regarding
market manipulation or disruption in the underlying markets.\21\ The
Commission further noted that removing position limits for SPX options
could also bring additional depth and liquidity, in terms of both
volume and open interest, without increasing concerns regarding
intermarket manipulations or disruptions of the options or the
underlying securities.\22\ The Exchange similarly believes that this
would be the case if position limits for SPY options were eliminated.
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\21\ See supra note 6 at 4913.
\22\ Id.
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In this regard, both the SPY ETF and SPY options similarly exhibit
deep, liquid markets. However, SPY options are not as active as SPX
options when adjusted for the difference in their notional size.\23\ As
described below, the Exchange believes that this is partly due to the
existence of position limits for SPY options. The table below compares
the ADV in both SPX and SPY options, and includes an ``implied SPY
volume'' figure that reflects theoretical SPY ADV without the
constraint of position limits:
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\23\ SPX options have a notional value 10 times greater than SPY
options (i.e., one SPX contract equals 10 SPY contracts).
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Implied SPY
Date range Trade days SPX option ADV SPY option ADV Implied SPY option ADV
option ADV shortfall
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Jan 1, 2011 to Dec 31, 2011.............................. 252 1,567,535 5,789,511 15,675,353 9,885,842
Jan 1, 2012 to Apr 19, 2012.............................. 75 1,343,735 4,525,709 13,437,353 8,911,644
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The Exchange believes that certain factors may result in SPX
options--adjusted for their larger notional size--currently trading
with greater volume than SPY options.\24\ In this regard, the Exchange
believes that, based on input from various market participants, the
existence of position limits in SPY options is reason in itself to
instead utilize SPX options. Anecdotally, market participants perceive
value in avoiding the regulatory risk of exceeding the SPY option
position limit by instead using SPX options for their hedging needs.
The Exchange also believes that, while exemptions are available with
respect to position limits for SPY options, such exemptions, and the
regulatory burden attendant therewith, may dissuade investors from
using SPY options when they can instead use an SPX option without the
need for such an exemption. Because SPY and SPX options are
economically equivalent products, an investor deciding between the two
would generally trade the product with the least barriers or
requirements to engage in such activity. In this respect, SPX options
are currently the easier product to trade.
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\24\ The Exchange notes that the ``Implied SPY Option ADV
Shortfall'' has narrowed over time and at an accelerated rate, which
the Exchange believes is a direct result of the implementation of
the Delta-Based Equity Hedge Exemption that allows SPY options to be
hedged via SPX options.
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As a further comparison, the following table sets forth certain
data for both the SPY ETF and the combined volume for the component
securities upon which the S&P 500 Index is based:
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\25\ The data considers the aggregate volume for all component
stocks of the S&P 500 Index.
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S&P 500 Index S&P 500 Index
underlying underlying component SPY ETF average
Date range component ADV average daily value SPY ETF ADV daily value
\25\ traded traded
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Jan. 1, 2011 to Dec. 31, 2011. 3,289,595,675 $4,149,726,217,456 218,227,747 $27,297,097,993
Jan. 1, 2012 to Apr. 19, 2012. 2,851,457,600 3,860,704,307,080 145,164,527 19,684,577,239
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This data shows that there is tremendous liquidity in both SPY ETF
shares and the component securities upon which the S&P 500 Index is
based. While the ADV for the components underlying the S&P 500 Index is
greater than the ADV for the SPY ETF, the Exchange believes that SPY
ETF volume has been, is currently and will likely continue to be within
a range that the Commission has previously determined to be a deep,
liquid market.\26\
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\26\ See supra note 6 at n. 13. The ADV for the components of
the indexes underlying the options for which position limits were
eliminated were 94.77 million shares (DJX), 244.3 million shares
(OEX), and 757.5 million shares (SPX).
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Market Capitalization of the Underlying Security and the Related Index
The Exchange has also considered the market capitalization of the
SPY ETF and the S&P 500 Index in assessing the appropriateness of
proposing an elimination of position limits for SPY options.
The Exchange understands that the Commission similarly considered
the market capitalization of the underlying index when it approved the
elimination of position limits in SPX options. Accordingly, the
Exchange believes that the capitalization of and the deep, liquid
markets for the underlying SPY ETF reduces concerns regarding market
manipulation or disruption in the underlying market. The table below
shows the market capitalization of the SPY ETF and the S&P 500 Index:
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Average S&P 500 Index Average SPY ETF market
Date range market cap cap
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Jan. 1, 2011 to Dec. 31, 2011................................. $11,818,270,341,270 $89,533,777,897
Jan. 1, 2012 to Apr. 19, 2012................................. 12,547,946,920,000 99,752,986,022
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[[Page 62306]]
This data shows the enormous capitalization of both the SPY ETF and
the component securities upon which the S&P 500 Index is based. While
the capitalization for the components underlying the S&P 500 Index is
greater than that for the SPY ETF, the Exchange believes that the SPY
ETF capitalization has nonetheless been, is currently and will likely
continue to be at a level consistent with that which the Commission has
previously determined to be enormously capitalized.\27\
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\27\ See supra note 11 at 51879. Specifically, the market
capitalization of the component securities of the Russell 2000 Index
(``RUT'') of $1.73 trillion was determined to be enormously
capitalized.
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The Exchange notes that the theoretical limit on one's ability to
hedge both SPX and SPY options is the full market capitalization of the
S&P 500 Index itself. This similarly contributes to the Exchange's
determination that it is appropriate for position limits on SPY options
to be eliminated.
Large Position Reporting and Margin Requirements
The Exchange has also considered the reporting of large option
positions and related margin requirements in assessing the
appropriateness of proposing an elimination of position limits for SPY
options.
The Exchange notes that the Large Option Position Reporting
(``LOPR'') requirement in NYSE Arca Rule 6.6 would continue to apply.
Rule 6.6 requires members and member organizations to file a report
with the Exchange with respect to each account in which the member or
member organization has an interest; each account of a partner,
officer, director, trustee or employee of such member organization; and
each customer account that has established an aggregate position
(whether long or short) that meets certain determined thresholds (e.g.,
200 or more option contracts if the underlying security is a stock or
Exchange-Traded Fund Share). Rule 6.6 also permits the Exchange to
impose a higher margin requirement upon the account of a member or
member organization when it determines that the account maintains an
under-hedged position.
Additionally, Rule 6.6 provides:
In addition to the requirements under Rule 6.6(a), each OTP Holder
or OTP Firm (other than an Exchange Market Maker), that maintains a
position in excess of 10,000 Non-FLEX equity option contracts on the
same side of the market on behalf of its own account or for the account
of a customer, must report information, in a manner and form prescribed
by the Exchange, as to whether such positions are hedged and provide
documentation as to how such contracts are hedged. In addition,
whenever the Exchange determines, based on a report to the Exchange or
otherwise, that a higher margin requirement is necessary in light of
the risks associated with an under-hedged Non-FLEX equity option
position in excess of 10,000 contracts on the same side of the market,
the Exchange may, pursuant to its authority under Exchange Rule 4.16,
consider imposing additional margin upon the account maintaining such
under-hedged position. It should be noted that the clearing firm
carrying the account will be subject to capital charges under SEC Rule
15c3-1 to the extent of any margin deficiency from the higher margin
requirements.
Monitoring accounts maintaining large positions provides the
Exchange with the information necessary to determine whether to impose
additional margin and/or whether to assess capital charges upon a
member organization carrying the account. In addition, the Commission's
net capital rule, Rule 15c3-1 under the Securities Exchange Act of 1934
(the ``Act''),\28\ imposes a capital charge on members to the extent of
any margin deficiency resulting from the higher margin requirement,
which should serve as an additional form of protection.
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\28\ 17 CFR 240.15c3-1.
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In approving SPXPM, the Commission addressed concerns about the
lack of a position limit by noting that CBOE will rely on its enhanced
surveillance requirements and procedures for SPX options to monitor
trading activity in SPXPM options.\29\ Similarly, the Exchange notes
that certain option products are currently traded on the Exchange
without position limits (e.g., the NASDAQ[supreg] 100 Index option
(option symbol NDX) and the Russell 2000[supreg] Index option (option
symbol RUT)), and believes that the reporting, surveillance and
monitoring mechanisms in place for these products are effective and
could easily accommodate SPY options if position limits thereon are
eliminated.
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\29\ See SPXPM Approval at 55972.
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Market on Close Volatility
The Exchange has also considered the potential for resulting or
increased market on close volatility in assessing the appropriateness
of proposing an elimination of position limits for SPY options.
SPY options are American-style, physically settled options that can
be exercised at any time and settle into shares of the underlying SPY
ETF. A key characteristic of the SPY ETF is that the number of shares
outstanding is limited only by the number of shares available in the
component securities of the S&P 500 Index, which can be used to create
additional SPY ETF shares as needed. This in-kind creation and
redemption mechanism has proven to be quite robust, as evidenced by the
SPY ETF's close tracking of its benchmark index and the relatively
small premiums or discounts to Net Asset Value (``NAV'') that it has
historically exhibited.\30\ Additionally, the ability to hedge with SPX
options against the stocks underlying the S&P 500 is limited to the
shares outstanding for those stocks--the same limit that applies to
hedging with SPY options. Accordingly, the Exchange believes that the
risk of distortions to the market resulting from the elimination of
position limits in SPY options is no greater than the risk presented by
SPX options not being subject to position limits.
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\30\ See SPDR[supreg] S&P 500[supreg] ETF Trust, Annual Report
(September 30, 2011), available at https://www.spdrs.com/library-content/public/SPY%20Annual%20Report%2009.30.11.pdf.
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As a physically-settled option, SPY options can be easily hedged
via long or short positions in SPY ETF shares, which, as noted above,
can be easily created or redeemed as needed. With a physically-settled
contract such as SPY options, once a hedge in the form of a long or
short position is obtained, that hedge can only be lost if the
underlying security becomes hard to borrow and the short position is
bought in.\31\ The Exchange believes that this ability to hedge with
shares of the SPY ETF is very important, and reduces the likelihood of
market on close volatility in the component securities underlying the
S&P 500 Index (i.e., a market participant can remain fully hedged
through expiration via shares of the SPY ETF), which should also be the
case if position limits for SPY options are eliminated. At the same
time, the Exchange believes that the elimination of position limits for
SPY options would not increase market volatility or facilitate the
ability to manipulate the market. The Exchange believes that any
potential concern regarding volatility at the closing that could result
from an elimination in the position limits for
[[Page 62307]]
SPY options is further alleviated by the current trading environment,
including that there are markets for individual securities on more than
one exchange, via unlisted trading privileges, that there is wide
dispersion of trading across multiple exchanges, and that exchange
procedures and systems are designed to facilitate orderly closings,
even when there is volatility.\32\
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\31\ As noted, the in-kind creation and redemption process
allows for short term imbalances in supply and demand to be resolved
readily, which in turn reduces the likelihood of getting ``bought
in'' on a short position in SPY. Since the implementation of
Regulation SHO, SPY has never been on the threshold security list,
which further evidences the efficacy of the in-kind creation and
redemption process in resolving imbalances in supply and demand.
\32\ See, e.g., Rule 123C--NYSE Amex Equities (The Closing
Procedures).
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Implementation
The implementation of this proposed rule change will be contingent
on other factors, including the completion of any changes that may be
necessary to the Exchange's regulatory and surveillance program. Once
this rule filing is effective, the Exchange will announce the
implementation of the elimination of position limits on SPY options
through a notice to OTP Holders.
Pilot Program
NYSE Arca proposes that this rule change be adopted pursuant to a
pilot program, set to expire December 5, 2013. The Exchange will
perform an analysis of the initial pilot program to eliminate position
limits in SPY after the first twelve (12) months of the pilot program
(the ``Pilot Report''). NYSE Arca represents that the Pilot Report will
be submitted within thirty (30) days of the end of such twelve (12)
month time period. The Pilot Report will detail the size and different
types of strategies employed with respect to positions established as a
result of the elimination of position limits in SPY. In addition, the
Pilot Report will note whether any problems resulted due to the no
limit approach and any other information that may be useful in
evaluating the effectiveness of the pilot program. The Pilot Report
will compare the impact of the pilot program, if any, on the volumes of
SPY options and the volatility in the price of the underlying SPY
shares, particularly at expiration. In preparing the report the
Exchange will utilize various data elements such as volume and open
interest. In addition, the Exchange has represented that it will make
available to Commission staff data elements relating to the
effectiveness of the pilot.
Depending on the findings in the Pilot Report, NYSE Arca will file
with the Commission a proposal to either extend the pilot program,
adopt the pilot program on a permanent basis, or terminate the pilot
program. If the pilot program is not extended or adopted on a permanent
basis by December 5, 2013, the position limits for SPY would revert to
limits in effect at the commencement of the pilot program.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b)\33\ of the
Act, in general, and furthers the objectives of Section 6(b)(5),\34\ 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. The Exchange believes that the proposed rule change
would be beneficial to market participants, including market makers,
institutional investors and retail investors, by permitting them to
establish greater positions when pursuing their investment goals and
needs. The Exchange also believes that economically equivalent products
should be treated in an equivalent manner so as to avoid regulatory
arbitrage, especially with respect to position limits. Treating SPY and
SPX options differently by virtue of imposing different position limits
is inconsistent with the notion of promoting just and equitable
principles of trade and removing impediments to perfect the mechanisms
of a free and open market. At the same time, the Exchange believes that
the elimination of position limits for SPY options would not increase
market volatility or facilitate the ability to manipulate the market.
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\33\ 15 U.S.C. 78f(b).
\34\ 15 U.S.C. 78f(b)(5).
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The Exchange further notes that the rule proposal will remove
impediments to and perfect the mechanism of a free and open market
because it will harmonize how position limits are treated for SPY
options across options markets. As noted above, the Commission has
already approved the elimination of position limits for SPY options for
NYSE Amex Options, and the Exchange believes that harmonizing the
standard across options markets will enable market participants to
handle trading in SPY options similarly regardless of which options
market in which they are trading.
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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \35\ and Rule 19b-4(f)(6) thereunder.\36\
Because the 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 prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act \37\ and Rule 19b-
4(f)(6) thereunder.\38\
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\35\ 15 U.S.C. 78s(b)(3)(A)(iii).
\36\ 17 CFR 240.19b-4(f)(6).
\37\ 15 U.S.C. 78s(b)(3)(A).
\38\ 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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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \39\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6) \40\ 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 asked
the Commission to waive the 30-day operative delay, noting that doing
so will allow participants on the Exchange to benefit from the
opportunity to establish greater positions when pursuing their
investment goals and needs without undue delay and will allow dual
members of NYSE Amex Options and the Exchange to harmonize how they
establish position limits for SPY options when trading at both markets.
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of
[[Page 62308]]
investors and the public interest.\41\ Therefore, the Commission hereby
waives the 30-day operative delay and designates the proposal operative
as of October 5, 2012.
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\39\ 17 CFR 240.19b-4(f)(6).
\40\ 17 CFR 240.19b-4(f)(6).
\41\ For purposes only of waiving the 30-day operative delay,
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.
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-2012-112 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-2012-112. 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
a.m. and 3 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; 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-2012-112
and should be submitted on or before November 2, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25087 Filed 10-11-12; 8:45 am]
BILLING CODE 8011-01-P