Self-Regulatory Organizations; Nasdaq ISE, LLC; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Amend ISE Options 4, Section 5, Series of Options Contracts Open for Trading

Primary source

Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.

Published

June 16, 2022

Issuing agencies

Securities and Exchange Commission

Full Text

<html>
<head>
<title>Federal Register, Volume 87 Issue 116 (Thursday, June 16, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 116 (Thursday, June 16, 2022)]
[Notices]
[Pages 36353-36355]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-12940]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95085; File No. SR-ISE-2022-10]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Order Approving a
Proposed Rule Change, as Modified by Amendment No. 1, To Amend ISE
Options 4, Section 5, Series of Options Contracts Open for Trading

June 10, 2022.

I. Introduction

On April 11, 2022, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') 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 Supplementary Material .07 to Options 4, Section 5 to limit the
strike price intervals for certain Short Term Options Series with an
expiration date more than twenty-one days from the listing date. The
proposed rule change was published for comment in the Federal Register
on April 27, 2022.\3\ On June 1, 2022, the Exchange filed Amendment No.
1, which replaced and superseded the proposed rule change in its
entirety.\4\ This order approves the proposed rule change, as modified
by Amendment No. 1.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 94773 (April 11,
2022), 87 FR 25065 (``Notice''). The Commission received comment
letters that are not germane to the proposed rule change and are
available on the Commission's website at: <a href="https://www.sec.gov/comments/sr-ise-2022-10/srise202210.htm">https://www.sec.gov/comments/sr-ise-2022-10/srise202210.htm</a>.
\4\ In Amendment No. 1, the Exchange revised the three examples
provided in the proposal for greater clarity. Because the changes in
Amendment No. 1 do not materially alter the substance of the
proposed rule change or raise unique or novel regulatory issues,
Amendment No. 1 is not subject to notice and comment. Amendment No.
1 is available on the Commission's website at: <a href="https://www.sec.gov/comments/sr-ise-2022-10/srise202210.htm">https://www.sec.gov/comments/sr-ise-2022-10/srise202210.htm</a>.
---------------------------------------------------------------------------

II. Description of Proposed Rule Change, as Modified by Amendment No. 1

Background

Pursuant to Supplementary Material .03 to Options 4, Section 5, the
Exchange may open for trading certain option series that expire at the
close of business on each of the next five Fridays that are business
days and are not Fridays in which monthly options series or quarterly
option series expire (``Short Term Option Series Program'').
Supplementary Material .03(e) \5\ specifies the strike intervals for
the Short Term Option Series Program.
---------------------------------------------------------------------------

\5\ Supplementary Material .03(e) of Options 4, Section 5
states, ``Strike Interval. During the month prior to expiration of
an option class that is selected for the Short Term Option Series
Program pursuant to this Rule (``Short Term Option''), the strike
price intervals for the related non-Short Term Option (``Related
non-Short Term Option'') shall be the same as the strike price
intervals for the Short Term Option. The Exchange may open for
trading Short Term Option Series on the Short Term Option Opening
Date that expire on the Short Term Option Expiration Date at strike
price intervals of (i) $0.50 or greater where the strike price is
less than $100, and $1 or greater where the strike price is between
$100 and $150 for all option classes that participate in the Short
Term Options Series Program; (ii) $0.50 for option classes that
trade in one dollar increments and are in the Short Term Option
Series Program; or (iii) $2.50 or greater where the strike price is
above $150.''
---------------------------------------------------------------------------

To reduce the density of strike intervals that would be listed in
later weeks, ISE amended Options 4, Section 5 to limit the intervals
between strikes

[[Page 36354]]

in equity options listed as part of the Short Term Option Series
Program, excluding Exchange-Traded Fund Shares and ETNs, that have an
expiration date more than twenty-one days from the listing date
(``Outer STOs'').\6\ The Strike Interval Proposal adopted Supplementary
Material .07 to Options 4, Section 5, which specifies the applicable
strike intervals for Outer STOs, and Supplementary Material .03(f),
which provides that the strike intervals for Outer STOs shall be based
on the table within Supplementary Material .07.\7\ Currently, the table
within Supplementary Material .07 to Options 4, Section 5 provides: \8\
---------------------------------------------------------------------------

\6\ See Securities Exchange Act Release No. 91930 (May 18,
2021), 86 FR 27907 (May 24, 2021) (SR-ISE-2021-09) (``Strike
Interval Proposal'').
\7\ See supra note 6. See also Supplementary Material .03(f) of
Options 4, Section 5 and Supplementary Material .07 to Options 4,
Section 5.
\8\ The Share Price would be the closing price on the primary
market on the last day of the calendar quarter and the Average Daily
Volume would be the total number of options contracts traded in a
given security for the applicable calendar quarter divided by the
number of trading days in the applicable calendar quarter The
Average Daily Volume would be the total number of options contracts
traded in a given security for the applicable calendar quarter
divided by the number of trading days in the applicable calendar
quarter. Beginning on the second trading day in the first month of
each calendar quarter, the Average Daily Volume shall be calculated
by utilizing data from the prior calendar quarter based on Customer-
cleared volume at The Options Clearing Corporation. For options
listed on the first trading day of a given calendar quarter, the
Average Daily Volume shall be calculated using the quarter prior to
the last trading calendar quarter. See Supplementary Material .07 to
Options 4, Section 5.

Share Price
--------------------------------------------------------------------------------------------------------------------------------------------------------
$25 to less $75 to less $150 to less $500 or
Tier Average daily volume Less than $25 than $75 than $150 than $500 greater
--------------------------------------------------------------------------------------------------------------------------------------------------------
1......................................... Greater than 5,000.......... $0.50 $1.00 $1.00 $5.00 $5.00
2......................................... Greater than 1,000 to 5,000. 1.00 1.00 1.00 5.00 10.00
3......................................... 0 to 1,000.................. 2.50 5.00 5.00 5.00 10.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

According to the Exchange, the Strike Interval Proposal was
designed to reduce the density of strike intervals that would be listed
in later weeks within the Short Term Options Series Program by
utilizing limitations for intervals between strikes with an expiration
date more than twenty-one days from the listing date.\9\ However, there
may be instances where the allowable strike intervals under
Supplementary Material .07 and Supplementary Material .03(e) conflict,
potentially resulting in narrower strike intervals in those series with
more than twenty-one days from the listing date.\10\
---------------------------------------------------------------------------

\9\ See Amendment No. 1, supra note 4, at 13-14.
\10\ See e.g., Amendment No. 1, supra note 4, Examples 1-3 at 8-
10.
---------------------------------------------------------------------------

Proposal

The Exchange proposes to amend Supplementary Material .07 to
Options 4, Section 5, to state that when Supplementary Material .07 and
Supplementary Material .03(e) conflict, the greater interval would
apply. Specifically, the Exchange proposes to add a new sentence within
Supplementary Material .07 which states, ``To the extent there is a
conflict between applying Supplementary Material .03(e) and the below
table, the greater interval would apply.'' \11\ Supplementary Material
.03(e) would apply to Outer STOs only in the event that the interval
would be greater.\12\ The Exchange states that this rule change would
harmonize strike intervals as between inner weeklies (those having less
than twenty-one days from the listing date) and outer weeklies (those
having more than twenty-one days from the listing date) so that strike
intervals are not widening closer to expiration.\13\ The Exchange
provides Example 1 below to illustrate this point: \14\
---------------------------------------------------------------------------

\11\ See Amendment No. 1, supra note 4, at 7.
\12\ See id. at 7-8.
\13\ See id. at 14.
\14\ See id. at 8. The Exchange provided three examples in
Amendment No. 1. See also supra note 10.
---------------------------------------------------------------------------

Example 1: Assume a Tier 1 stock that closed on the last day of Q1
with a quarterly share price higher than $75 but less than $150.
Therefore, utilizing the table within Supplementary Material .07, the
interval would be $1.00 for strikes added during Q2 even for strikes
above $150. Next, assume during Q2 the share price rises above $150.
Utilizing only the table within Supplementary Material .07, the
interval would be $1.00 even though the stock is now trading above $150
because the Share Price for purposes of Supplementary Material .07 was
calculated utilizing data from the prior calendar quarter. However, a
separate rule, Supplementary Material .03(e), provides that the
Exchange may list a Short Term Option Series at $2.50 intervals where
the strike price is above $150. In other words, there is a potential
conflict between the permitted strike intervals above $150. In this
example, Supplementary Material .07 would specify a $1.00 interval
whereas Supplementary Material .03(e) would specify a $2.50 interval.
As proposed, the Exchange proposes to apply the greater interval. The
greater interval would then be $2.50 as per Supplementary Material
.03(e) in this scenario. Therefore, the following strikes would be
eligible to list: $152.5 and $157.5. For strikes less than $150, the
following strikes would be eligible to list: $149 and $148 because
Short Term Options Series with expiration dates more than 21 days from
the listing date as well as Short Term Options Series with expiration
dates less than 21 days from the listing date would both be eligible to
list $1 intervals pursuant to Supplementary Material .07 and
Supplementary Material .03(e) of Options 5, Section 4.
The Exchange also proposes to amend the first sentence of
Supplementary Material .07 to provide, ``With respect to listing Short
Term Option Series in equity options, excluding Exchange-Traded Fund
Shares and ETNs, which have an expiration date more than twenty-one
days from the listing date, the following table, which specifies the
applicable interval for listing, will apply as noted within
Supplementary Material .03(f).'' \15\ The Exchange proposes to add the
phrase ``which specifies the applicable interval for listing'' to make
clear that the only permitted intervals are as specified in the table
within Supplementary Material .07, except in the case where
Supplementary Material .03(e) provides for a greater interval as
described above.\16\ The Exchange also proposes to update the reference
within this sentence from Supplementary Material .03(e) to
Supplementary Material .03(f), as paragraph (f) indicates when the
table within Supplementary Material .07 applies.\17\
---------------------------------------------------------------------------

\15\ See Amendment No. 1, supra note 4, at 6.
\16\ See id.
\17\ See id. at 7.
---------------------------------------------------------------------------

The Exchange also proposes to delete the sentence from
Supplementary Material .07, which states, ``The below table indicates
the applicable strike

[[Page 36355]]

intervals and supersedes Supplementary Material .03(d) which permits
additional series to be opened for trading on the Exchange when the
Exchange deems it necessary to maintain an orderly market, to meet
customer demand or when the market price of the underlying security
moves substantially from the exercise price or prices of the series
already opened.'' \18\ The Exchange states that Supplementary Material
.07 is related to strike intervals, but does not supersede rules
governing the addition of option series.\19\ The Exchange further
states that Supplementary Material .07 and Supplementary Material
.03(d) do not conflict, and deleting the reference to Supplementary
.03(d) will avoid confusion.\20\
---------------------------------------------------------------------------

\18\ See id. at 10.
\19\ See id.
\20\ See id.
---------------------------------------------------------------------------

Finally, the Exchange proposes to delete the sentence from
Supplementary Material .03, which states, ``Notwithstanding the
limitations imposed by Supplementary Material .07, this proposal does
not amend the range of strikes that may be listed pursuant to
Supplementary Material .03, regarding the Short Term Option Series
Program.'' \21\ The Exchange states that while the range limitations
continue to be applicable to the table within Supplementary Material
.07, the strike ranges do not conflict with strike intervals and
therefore the sentence is not necessary.\22\ The Exchange further
states that Supplementary Material .03(f) otherwise indicates when
Supplementary Material .07 would apply.\23\
---------------------------------------------------------------------------

\21\ See id. at 10-11.
\22\ See id. at 11.
\23\ See id.
---------------------------------------------------------------------------

The Exchange proposes to implement this rule change on August 1,
2022.\24\ The Exchange represents that it will issue an Options Trader
Alert to notify Members of the implementation date.\25\
---------------------------------------------------------------------------

\24\ See id.
\25\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\26\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Act,\27\ 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.
---------------------------------------------------------------------------

\26\ In approving this proposed rule change, as modified by
Amendment No. 1, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. See 15
U.S.C. 78c(f).
\27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Exchange states that the Strike Interval Proposal was designed
to reduce the density of strike intervals that have an expiration date
more than twenty-one days from the listing date.\28\ In support of the
current proposal, the Exchange states it would result in a reduction of
the number of strikes listed in a manner consistent with the intent of
the Strike Interval Proposal, which was to reduce strikes which were
further out in time and would harmonize strike intervals for the Short
Term Option Series such that strike intervals would not widen as the
expiration date approaches.\29\ The Exchange further states that Strike
Interval Proposal continues to reduce the number of strikes listed on
ISE, allowing Lead Market Makers and Market Makers to expend their
capital in the options market in a more efficient manner, thereby
improving overall market quality on ISE.\30\
---------------------------------------------------------------------------

\28\ See Amendment No. 1, supra note 4, at 13-14.
\29\ See id. at 14.
\30\ See id. at 14.
---------------------------------------------------------------------------

The Exchange's proposal to apply the greater interval to Outer STOs
in cases where Supplementary Material .03(e) and .07 conflict serves to
increase, and thus limit, the intervals between strikes in those cases.
The proposal seeks to continue to focus more granular strike increments
on those series where they are more relevant, applicable, and likely
more in demand from customers and eliminate certain clusters of
relatively granular strikes in further out weekly series, consistent
with the Strike Interval Proposal.\31\ Further, the proposal would add
additional clarity to the Exchange's Short Term Option Series rules,
which should provide greater certainty as to the permitted strike
intervals and minimize confusion. The Commission believes that the
proposal is reasonably designed to effectuate the Exchange's goal of
balancing a reduction in the number of strikes in the Short Term Option
Series Program with the needs of market participants. Accordingly, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 6(b)(5) of the Act \32\ and
the rules and regulations thereunder applicable to a national
securities exchange.
---------------------------------------------------------------------------

\31\ See also Securities Exchange Act Release No. 91125 (Feb.
12, 2021), 86 FR 10375 (Feb. 19, 2021) (SR-BX-2020-032) (Order
approving proposal by Nasdaq BX, Inc. to limit Short Term Options
Series intervals).
\32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\33\ that the proposed rule change (SR-ISE-2022-10), as modified by
Amendment No. 1, be and hereby is, approved.
---------------------------------------------------------------------------

\33\ 15 U.S.C. 78f(b)(2).
\34\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12940 Filed 6-15-22; 8:45 am]
BILLING CODE 8011-01-P

</pre></body>
</html>

View on FederalRegister.gov →Plain-text source

Indexed from Federal Register on June 16, 2022.

This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.