Notice2021-25754
Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a Proposed Rule Change To Amend Options 4A, Section 12 Regarding the Calculation of the Closing Volume Weighted Average Price for Options on the Nasdaq-100® Volatility Index in Certain Circumstances
Primary source
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Published
November 26, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 225 (Friday, November 26, 2021)</title>
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[Federal Register Volume 86, Number 225 (Friday, November 26, 2021)]
[Notices]
[Pages 67555-67557]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-25754]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93628; File No. SR-Phlx-2021-56]
Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a
Proposed Rule Change To Amend Options 4A, Section 12 Regarding the
Calculation of the Closing Volume Weighted Average Price for Options on
the Nasdaq-100[supreg] Volatility Index in Certain Circumstances
November 19, 2021.
I. Introduction
On September 23, 2021, Nasdaq PHLX LLC (``Exchange'' or ``Phlx'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend the process used to calculate the final settlement price for
Nasdaq-100 Volatility Index (``Volatility Index'' or ``VOLQ'') options
in certain circumstances. The proposed rule change was published for
comment in the Federal Register on October 7, 2021.\3\ The Commission
received no comments on the proposed rule change. This order approves
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 93237 (October 1,
2021), 86 FR 55896 (``Notice'').
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II. Description of the Proposed Rule Change \4\
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\4\ Additional information regarding the proposal can be found
in the Notice, supra note 3.
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Overview
The Commission previously approved the listing and trading of VOLQ
options.\5\ VOLQ is an index that measures changes in 30-day implied
volatility as expressed by options on the Nasdaq-100 Index
(``NDX'').\6\ The calculation of the final settlement price for VOLQ
options, the Closing Volume Weighted Average Price or ``Closing VWAP,''
is based on one-second time observations of the NDX component options
\7\ over a 300 second period of time (the ``Closing Settlement
Period'').\8\ The Closing Settlement period commences at 9:32:010 a.m.
on the expiration day, and continues each second for the next 300
seconds.\9\ Now, the Exchange proposes to amend the process used to
calculate the final settlement price for VOLQ options in the event any
of the underlying NDX component options do not have a trade or quote
during the Closing Settlement Period.
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\5\ See Securities Exchange Act Release No. 91781 (May 5, 2021),
86 FR 25918 (May 11, 2021) (SR-Phlx-2020-41) (Notice of Filing of
Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To List
and Trade Options on a Nasdaq-100 Volatility Index) (``Approval
Order'').
\6\ See Id. at 25919.
\7\ The Closing VWAP is calculated using one-second time
observations of the prices and sizes of executed orders or quotes in
the underlying NDX component options. See Options 4A, Section
12(b)(6)(D)(II).
\8\ See Options 4a93628A, Section 12(b)(6)(D)(II).
\9\ See Options 4A, Section 12(b)(6)(D)(II).
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Closing VWAP Calculation in the Event One or More Component Option
Series Do Not Have a Trade or Quote During Any One Second of the
Observation Period
First, the Exchange proposes if, during any one second of the
observation period, any of the thirty-two NDX option series used for
the Closing VWAP during that second \10\ does not have a trade or
quote, the index calculator would look back and use the most recent
published quote midpoint during that day for the One Second VWAP \11\
for the option component that does not have a trade or quote.\12\ If
there is no One Second VWAP to utilize for any of the thirty-two NDX
option series during the Closing Settlement Period, then the index
calculator will consider that Closing Settlement Period invalid and
will be unable to determine a Closing VWAP at that time.
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\10\ The thirty-two component Volatility Index option inputs may
change each second depending upon the movement of the Nasdaq-100
Index. See Notice, supra note 3, n.5 at 55897.
\11\ At the end of individual one-second time observations
during the Closing Settlement Period, the number of contracts
resulting from orders and quotes executed on Phlx, Nasdaq ISE, LLC,
and Nasdaq GEMX, LLC at each price during the observation period is
multiplied by that price to yield a reference number (``Reference
Number''). See Options 4A, Section 12(b)(6)(D)(II). All Reference
Numbers are then summed, and that sum is then divided by the total
number of contracts traded during the observation period [Sum of
(contracts traded at a price x price) / total contracts traded)] to
calculate a Volume Weighted Average Price for that observation
period (a ``One Second VWAP'') for that component option. See id.
\12\ The Exchange would utilize a quote from the Opening Process
only in the event an options series was able to open. See Notice,
supra note 3, at 55898. If the Opening Process did not complete for
an options series, there would be no value to obtain for a component
during a look back. See id.
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Second, in the event the Closing Settlement Period is invalid and a
Closing VWAP cannot be determined, the Exchange proposes that the index
calculator will then roll the Closing Settlement Period forward by one
second and determine if there is a One Second VWAP for each of the
thirty-two NDX option series for all 300 consecutive seconds of the new
Closing Settlement Period. If there is a One Second VWAP for all of the
thirty-two NDX option series for all 300 consecutive seconds, a Closing
VWAP will be calculated. If a One Second VWAP is not present for all of
the thirty-two NDX option series during the new observation period, the
index calculator will again roll the Closing Settlement Period forward
by one second. The index calculator would continue to roll the Closing
Settlement Period forward by one second until such time as it is able
to capture a One Second VWAP for each of the thirty-two NDX option
series for all 300 consecutive seconds. At that time, a Closing VWAP
will be calculated.
The Exchange states that the proposal seeks to create an automated,
non-discretionary process by which the Exchange would determine the
Closing VWAP in the event any of the thirty-two underlying NDX
component options do not have a trade or quote during the Closing
Settlement Period.\13\ The Exchange further states that it does not
anticipate utilizing the alternative Closing VWAP calculation on a
regular basis.\14\ According to the Exchange, a review of 43 expiration
dates from January 2018 through July 2021 revealed invalid values for
only 2 expiration dates.\15\
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\13\ See Notice, supra note 3, at 55897.
\14\ See id.
\15\ See Notice, supra note 3, at 55897. The Exchange states
that it reviewed the 9,660 NBBO inputs for the VOLS computation from
9:32.01 for the five minute Closing Settlement Period for each
expiration date. See id. at 55897 n.11.
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Closing VWAP Calculation in the Event of a Trading Halt
The Exchange also proposes that, in the event of a trading halt in
one or more options, excluding a trading halt in all Nasdaq-100 index
options, prior to the completion of the Closing Settlement Period, the
Exchange would continue to look back for a One Second VWAP prior to
looking forward. In the event a trading halt caused market makers to
not submit a valid width quote in certain components during the Opening
Process, the alternative
[[Page 67556]]
methodology would look forward to obtain a value.\16\
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\16\ See id. at 55898.
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The Exchange also proposes to modify its existing rule text
relating to trading halts. Currently, Options 4A, Section
12(b)(6)(D)(II) provides, ``If the Exchange is unable to publish a
settlement value by 12:00 p.m. (New York time) due to a trading halt,
the Exchange will commence the calculation of the settlement window
beginning 2.00.001 minutes after the re-opening of trading and publish
that value on its website.'' \17\ The Exchange proposes to replace this
rule text with language that provides, ``In the event of a trading halt
in all Nasdaq-100 index options, the Exchange would commence the
calculation of the settlement window beginning 2:00:01 \18\ minutes
after the re-opening of trading and publish that value on its website.
In this scenario, the Exchange would not look back prior to the trading
halt.'' The Exchange's proposal amends the current sentence to
eliminate the reference to 12:00 p.m., as a re-opening could occur any
time during the trading day. Further, the Exchange states that
specifically indicating a trading halt of the Nasdaq-100 index options
in the rule text is more precise and the proposed rule text more
directly expands upon the manner in which the Closing VWAP will be
handled in the event of trading halt.\19\
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\17\ See Phlx Options 4A, Section 12(b)(6)(D).
\18\ The Exchange also proposes to correct the time when the
Exchange will commence the calculation of the settlement window from
2.00.001 minutes to 2:00:01 minutes. The calculation begins on the
second.
\19\ See Notice, supra note 3, at 55898.
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Amendment to Definition of ``Executed Orders''
Finally, the Exchange proposes to amend the term ``executed
orders'' at Options 4A, Section 12(b)(6)(D)(II) which currently
provides, ``Executed orders shall include simple orders and complex
orders however, individual leg executions of a complex order will only
be included if the executed price of the leg is at or within the
NBBO.'' The Exchange proposes to exclude out-of-sequence and late
trades. The Exchange states that excluding out-of-sequence and late
trades would avoid potential stale data in the Closing VWAP
calculation.\20\
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\20\ See id.
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Surveillance
The Exchange also states that because the thirty-two component
Volatility Index option inputs are reviewed each second as the market
changes to determine the at-the-money strikes (meaning that Volatility
Index components could change 300 times during the Closing Settlement
Period), market participants could manipulate the Closing VWAP only if
they could replicate such value by guessing exact market moves over an
extended period of 300 million microseconds.\21\ Because the Exchange
believes that the likelihood of replication is extremely low, the
Exchange believes that it is unlikely the Closing VWAP could be
manipulated.\22\ Nonetheless, the Exchange states that, in its normal
course of surveillance, it will monitor for any potential manipulation
of the Volatility Index settlement value according to the Exchange's
current procedures.\23\ Additionally, the Exchange would monitor the
integrity of the Volatility Index by analyzing trades, quotations, and
orders that affect any of the 300 calculated reference prices for any
of the NDX option series used for the Closing VWAP for potential
manipulation on the Exchange.\24\
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\21\ See id. at 55899.
\22\ See id.
\23\ See id.
\24\ See id.
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Implementation of VOLQ Options
The Exchange proposes to issue an Options Trader Alert announcing
the day it will launch options on the Volatility Index. At this time,
the Exchange proposes to launch VOLQ options on or before March 31,
2022.
III. Discussion and Commission Findings
After careful review of the proposed rule change, the Commission
finds that the proposed rule change is consistent with the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\25\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\26\ which
requires, among other things, that the Exchange's rules be 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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\25\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\26\ 15 U.S.C. 78f(b)(5).
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In support of its proposal, the Exchange states that its proposed
alternate methodology may be utilized where there is no liquidity in
any of the thirty-two NDX option series used for the Closing VWAP,
which may be caused by, among other things, an Exchange system issue,
market maker issue, or a halt in an underlying, and would ensure a
Closing Settlement Period which has published liquidity for all of the
thirty-two NDX option series used for the Closing VWAP.\27\ The
Exchange further states that its proposal would create an automated,
non-discretionary process to ensure that the Closing VWAP is calculated
consistently in these circumstances, which the Exchange believes would
occur infrequently.\28\ Because market participants could not predict
which options components would be included in the Closing VWAP
calculation since that would entail predicting where the NDX price
level (a function of predicting the price of all one-hundred component
stocks) will be at the end of each of the 300 individual one-second
time periods, the Exchange believes that it is unlikely that the
Volatility Index Closing VWAP could be manipulated.\29\ The Exchange
further states that, in its normal course of surveillance, it will
monitor for any potential manipulation of the Volatility Index Closing
VWAP and will monitor the integrity of the Volatility Index by
analyzing trades, quotations, and orders that affect any of the 300
calculated reference prices for any of the NDX option series used for
the Closing VWAP for potential manipulation on the Exchange.\30\
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\27\ See Notice, supra note 3, at 55899.
\28\ See id. See also, supra note 14.
\29\ See id.
\30\ See id. at 55899-900.
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The Commission believes the Exchange's proposal would ensure a
consistent and transparent process for calculating the Closing VWAP in
situations where there is no liquidity in one or more of the thirty-two
NDX option series used each second to calculate the Closing VWAP. This
may occur, for example, if there is an Exchange system issue, a market
maker issue, or a halt in an underlying. Further, the Exchange's
proposal more specifically details the process for calculating the
Closing VWAP in the event of a trading halt in all NDX options.
According to the Exchange, the need for the alternate methodology would
arise infrequently.\31\ However, in those limited circumstances where
there is no input for one or more component options during the primary
Closing Settlement Period, the proposed settlement methodology would
help to ensure there is sufficient liquidity in the
[[Page 67557]]
component options and provide a clear alternate process to allow the
Exchange to calculate a Closing VWAP.
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\31\ See supra note 14.
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In addition, the Exchange states it will monitor for any potential
manipulation of the Volatility Index settlement value in the normal
course of its surveillance and will monitor the integrity the
Volatility Index by analyzing trades, quotations, and orders that
affect any of the 300 calculated reference prices for any of the NDX
option series used for the Closing VWAP for potential manipulation on
the Exchange.\32\ Consistent with the original approval of the listing
and trading of VOLQ options,\33\ the Commission believes that the
Exchange's surveillance of options on the Volatility Index and the
component option series will allow it to adequately surveil for any
potential manipulation in the trading of VOLQ and will help to ensure
that the settlement value is not readily susceptible to manipulation.
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\32\ See Approval Order at supra note 5 for a more detailed
description of the Exchange's planned surveillances.
\33\ See Approval Order, supra note 5.
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Accordingly, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act \34\ and the rules and
regulations thereunder applicable to a national securities exchange.
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\34\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\35\ that the proposed rule change (SR-Phlx-2021-56) be, and hereby
is, approved.
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\35\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25754 Filed 11-24-21; 8:45 am]
BILLING CODE 8011-01-P
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