82 FR 39636 - Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Supplementary Material .14 of Rule 504, Entitled “Series of Options Contracts Open for Trading”

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 160 (August 21, 2017)

[Federal Register Volume 82, Number 160 (Monday, August 21, 2017)]
[Notices]
[Pages 39636-39639]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-17550]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81403; File No. SR-ISE-2017-79]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend 
Supplementary Material .14 of Rule 504, Entitled ``Series of Options 
Contracts Open for Trading''

August 15, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 10, 2017, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes a proposal to amend Supplementary Material 
.14 of Rule 504, entitled ``Series of Options Contracts Open for 
Trading.''
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized; deleted text is in brackets.
* * * * *

Rule 504. Series of Options Contracts Open for Trading

    (a)-(h) No change.

Supplementary Material to Rule 504

    .01-.13 No change.
    .14 Notwithstanding any other provision regarding the interval of 
strike prices of series of options on Exchange-Traded Fund Shares in 
this rule, the interval of strike prices on SPDR S&P 500 ETF (``SPY''), 
iShares Core S&P 500 ETF (``IVV''), and the SPDR Dow Jones Industrial 
Average ETF (``DIA'') options will be $1 or greater.
* * * * *

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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 504 by modifying the strike 
setting regime for the iShares Core S&P 500 ETF (``IVV'') options. 
Specifically, the Exchange proposes to modify the interval setting 
regime for IVV options to allow $1 strike price intervals above $200.
    The Exchange believes that the proposed rule change would make IVV 
options easier for investors and traders to use and more tailored to 
their investment needs. Additionally, the interval setting regime the 
Exchange proposes to apply to IVV options is currently applied to 
options on units of

[[Page 39637]]

the Standard & Poor's Depository Receipts Trust (``SPY''), which is an 
exchange-traded fund (``ETF'') that is identical in all material 
respects to the IVV ETF.
    The SPY and IVV ETFs are identical in all material respects. The 
SPY and IVV ETFs are designed to roughly track the performance of the 
S&P 500 Index with the price of SPY and IVV designed to roughly 
approximate 1/10th of the price of the S&P 500 Index. Accordingly, SPY 
and IVV strike prices--having a multiplier of $100--reflect a value 
roughly equal to 1/10th of the value of the S&P 500 Index. For example, 
if the S&P 500 Index is at 1972.56, SPY and IVV options might have a 
value of approximately 197.26 with a notional value of $19,726. In 
general, SPY and IVV options provide retail investors and traders with 
the benefit of trading the broad market in a manageably sized contract. 
As options with an ETP underlying, SPY and IVV options are listed in 
the same manner as equity options under the Rules.
    IVV options currently trade at $5 intervals above a $200 strike 
price, whereas IVV options at or below a $200 strike price trade in $1 
intervals. Further, pursuant to Supplementary Material .12 of Rule 504, 
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.
    The Exchange's proposal seeks to narrow the strike price intervals 
to $1 for IVV options above $200, in effect matching the strike setting 
regime for strike intervals in IVV options below $200 and matching the 
strike setting regime applied to SPY options. Currently, the S&P 500 
Index is above 2000. The S&P 500 Index is widely regarded as the best 
single gauge of large cap U.S. equities and is widely quoted as an 
indicator of stock prices and investor confidence in the securities 
market. As a result, individual investors often use S&P 500 Index-
related products to diversify their portfolios and benefit from market 
trends. Accordingly, the Exchange believes that offering a wide range 
of S&P 500 Index-based options affords traders and investors important 
hedging and trading opportunities. The Exchange believes that not 
having the proposed $1 strike price intervals above $200 in IVV 
significantly constricts investors' hedging and trading possibilities.
    The Exchange proposes to amend Supplementary Material .14 of Rule 
504 to allow IVV options to trade in $1 increments above a strike price 
of $200. Specifically, the Exchange proposes to amend Supplementary 
Material .14 of Rule 504 to state that the interval between strike 
prices of series of options on Units of IVV will be $1 or greater. The 
Exchange believes that by having smaller strike intervals in IVV, 
investors would have more efficient hedging and trading opportunities 
due to the lower $1 interval ascension. The proposed $1 intervals, 
particularly above the $200 strike price, will result in having at-the-
money series based upon the underlying IVV moving less than 1%.
    The Exchange believes that the proposed strike setting regime is in 
line with the slower movements of broad-based indices. Furthermore, the 
proposed $1 intervals would allow option trading strategies (such as, 
for example, risk reduction/hedging strategies using IVV weekly 
options), to remain viable. Considering the fact that $1 intervals 
already exist below the $200 price point and that IVV is above the $200 
level, the Exchange believes that continuing to maintain the artificial 
$200 level (above which intervals increase 500% to $5), would have a 
negative effect on investing, trading and hedging opportunities, and 
volume.
    The Exchange believes that the investing, trading, and hedging 
opportunities available with IVV options far outweighs any potential 
negative impact of allowing IVV options to trade in more finely 
tailored intervals above the $200 price point. The proposed strike 
setting regime would permit strikes to be set to more closely reflect 
values in the underlying S&P 500 Index and allow investors and traders 
to roll open positions from a lower strike to a higher strike in 
conjunction with the price movement of the underlying.
    Pursuant to the strike price intervals established pursuant to Rule 
504(h), where the next higher available series would be $5 away above a 
$200 strike price, the ability to roll such positions is effectively 
negated. Accordingly, to move a position from a $200 strike to a $205 
strike pursuant to the current rule, an investor would need for the 
underlying product to move 2.5%, and would not be able to execute a 
roll up until such a large movement occurred. With the proposed rule 
change, however, the investor would be in a significantly safer 
position of being able to roll his open options position from a $200 to 
a $201 strike price, which is only a 0.5% move for the underlying.
    The proposed rule change will allow the Exchange to better respond 
to customer demand for IVV strike prices more precisely aligned with 
current S&P 500 Index values. The Exchange believes that the proposed 
rule change, like the other strike price programs currently offered by 
the Exchange, will benefit investors by providing investors the 
flexibility to more closely tailor their investment and hedging 
decisions using IVV options. By allowing series of IVV options to be 
listed in $1 intervals between strike prices over $200, the proposal 
will moderately augment the potential total number of options series 
available on the Exchange. However, the Exchange believes it and the 
Options Price Reporting Authority (``OPRA'') have the necessary systems 
capacity to handle any potential additional traffic associated with 
this proposed rule change. The Exchange also believes that members will 
not have a capacity issue due to the proposed rule change.
    In addition, the Exchange represents that it does not believe that 
this expansion will cause fragmentation of liquidity. In addition, the 
interval setting regime the Exchange proposes to apply to IVV options 
is currently applied to options on SPY, which is an ETF that is 
identical in all material respects to the IVV ETF.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\3\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\4\ in particular, the requirements of Section 6(b) 
of the Act.\5\ Specifically, the Exchange believes the proposed rule 
change is consistent with the Section 6(b)(5) \6\ requirements that the 
rules of an exchange be 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 
regulating, clearing, settling, processing information with respect to, 
and 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. Additionally, the Exchange believes the proposed rule change 
is consistent with

[[Page 39638]]

the Section 6(b)(5) \7\ requirement that the rules of an exchange not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \3\ 15 U.S.C. 78f(b).
    \4\ 15 U.S.C. 78f(b)(5).
    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ Id.
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    In particular, the proposed rule change will allow investors to 
more easily use IVV options. Moreover, the proposed rule change would 
allow investors to better trade and hedge positions in IVV options 
where the strike price is greater than $200, and ensure that IVV 
options investors are not at a disadvantage simply because of the 
strike price.
    The Exchange also believes the proposed rule change is consistent 
with Section 6(b)(1) of the Act, which provides that the Exchange be 
organized and have the capacity to be able to carry out the purposes of 
the Act and the rules and regulations thereunder, and the rules of the 
Exchange. The rule change proposal allows the Exchange to respond to 
customer demand to allow IVV options to trade in $1 intervals above a 
$200 strike price. The Exchange does not believe that the proposed rule 
would create additional capacity issues or affect market functionality.
    As noted above, IVV options currently trade in wider $5 intervals 
above a $200 strike price, whereas these options at or below a $200 
strike price trade in $1 intervals. This creates a situation where 
contracts on IVV options effectively may not be able to execute certain 
strategies such as, for example, rolling to a higher strike price, 
simply because of the arbitrary $200 strike price above which IVV 
options intervals increase by 500%. This proposal remedies the 
situation by establishing an exception to the current interval regime 
for IVV options to allow such options to trade in $1 or greater 
intervals at all strike prices.
    The Exchange believes that the proposed rule change, like other 
strike price programs currently offered by the Exchange, will benefit 
investors by giving them increased flexibility to more closely tailor 
their investment and hedging decisions. Moreover, the proposed rule 
change is consistent with a prior rule change.\8\
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    \8\ See Securities Exchange Act Release No. 72998 (September 4, 
2014), 79 FR 53813 (September 10, 2014) (Notice of Filing of 
Proposed Rule Change, Regarding Strike Price Intervals for SPY and 
DIA Options) (SR-ISE-2014-42).
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    With regard to the impact of this proposal on system capacity, the 
Exchange believes it and OPRA have the necessary systems capacity to 
handle any potential additional traffic associated with this proposed 
rule change. The Exchange believes that its members will not have a 
capacity issue as a result of this proposal.
    In addition, the interval setting regime the Exchange proposes to 
apply to IVV options is currently applied to options on SPY,\9\ which 
is an ETF that is identical in all material respects to the IVV ETF.
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    \9\ See Supplementary Material .14 to Rule 504.
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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 not necessary or appropriate in 
furtherance of the purposes of the Act. Rather, the Exchange believes 
that the proposed rule change will result in additional investment 
options and opportunities to achieve the investment and trading 
objectives of market participants seeking efficient trading and hedging 
vehicles, to the benefit of investors, market participants, and the 
marketplace in general. Specifically, the Exchange believes that IVV 
options investors and traders will significantly benefit from the 
availability of finer strike price intervals above a $200 price point. 
In addition, the interval setting regime the Exchange proposes to apply 
to IVV options is currently applied to options on SPY,\10\ which is an 
ETF that is identical in all material respects to the IVV ETF. Thus, 
applying the same strike setting regime to SPY and IVV options will 
help level the playing field for options on similar, competing ETFs.
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    \10\ Id.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing 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 for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \11\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 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, along 
with a brief description and text of 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 \13\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ 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 because 
this proposal permits listing IVV options in a manner permitted by the 
Chicago Board Options Exchange, Incorporated,\15\ and will provide 
investors with an alternative venue for trading IVV options. The 
Commission also notes that the proposed rule change is consistent with 
the strike price intervals in IVV options that is permitted on other 
exchanges and thus raises no new novel or substantive issues.\16\ 
Accordingly, the Commission hereby waives the operative delay and 
designates the proposal operative upon filing.\17\
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ See Securities Exchange Act Release No. 80913 (June 13, 
2017), 82 FR 27907 (June 19, 2017) (SR-CBOE-2017-048).
    \16\ See NASDAQ PHLX LLC Rule 1012.05(a)(iv)(C); The Nasdaq 
Options Market LLC Rules, Chapter IV, Section 6, Supplementary 
Material .01(c); Miami International Securities Exchange, LLC Rule 
404, Interpretations and Policies .10.
    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or 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

[[Page 39639]]

     Send an email to [email protected]. Please include 
File Number SR-ISE-2017-79 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2017-79. 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. 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-ISE-2017-79 and should be 
submitted on or before September 11, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-17550 Filed 8-18-17; 8:45 am]
 BILLING CODE 8011-01-P