This week, four proposed rule changes became effective for self-regulatory organizations. The Miami International Securities Exchange LLC (MIAX) filed two of the adopted rule changes: 1) permitting the listing of additional strikes until the closing of trading on the second business day prior to expiration in unusual market conditions; and 2) expanding the number of expirations available under the Short Term Option Series Program. The NASDAQ OMX PHLX LLC (Phlx) filed the other two adopted rule changes: 1) adopting a strategy fee cap applicable to jelly rolls; and 2) amending the Permit Fee and certain Options Trading Floor Fees, including a technical amendment to the Pricing Schedule.
The first rule change permits the listing of additional strikes until the closing of trading on the second business day prior to expiration in unusual market conditions. This will allow investors to manage their risk exposure and hedge their investments.
The change amends MIAX Rule 404, Series of Option Contracts Open for Trading. It is a competitive response to recently approved proposals of NYSE MKT LLC and NYSE Arca, Inc. Previously, MIAX Rule 404(e) permitted MIAX to “add new series of options on an individual stock until the beginning of the month in which the option contract will expire”* and allowed MIAX to “add new series of options on an individual stock until five (5) business days prior to expiration” in the event of unusual market conditions. If, however, the “price of the underlying stock moves significantly, there may be a market need for additional strike prices to adequately account for market participants’ risk management needs in an underlying stock.”
The issue here is that if unusual market conditions manifest in the period from five to two days prior to expiration, then “market participants are left without a contract that is tailored to manage their risk.” Although these situations are rare, MIAX says that they happen approximately two times a month. The solution is to “add additional strikes closer to expiration than the five business day limitation permits.” This is “necessary to maintain an orderly market, to meet customer demand, or when certain price movements take place in the underlying market.”
Basically, the rule change provides four more days for MIAX to figure out the market impact of underlying stock and to “react to any market conditions that would render additional series prior to expiration beneficial to market participants.” The rule change has a statutory basis in Section 6(b) of the Securities and Exchange Act since 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 second rule change increases the number of expirations available under the Short Term Option Series Program (STOS Program). This allows MIAX to “delist certain series in STOS that do not have open interest, and to expand the number of series in STOS under limited circumstances.”**
The change amends MIAX Rule 404, Interpretations and Policies .02. Previously, MIAX was able to “select up to 25 currently listed option classes in which STOS options may be opened in the STOS Program,” to “match any option classes that are selected by other securities exchanges that employ a similar program under their respective rules,” and to “open up to 30 Short Term Option Series for each expiration date in [each eligible] class.”
The rule change allows MIAX to open STOS options “for up to five consecutive week expirations,” to “delist certain series in STOS that do not have open interest,” and to “expand the number of series in STOS under limited circumstances when there are no series at least 10% but not more than 30% away from the current price of the underlying security.” This will increase quote traffic and trading, especially by retail investors, and will allow MIAX to “meet increased customer demand and provide market participants with the ability to hedge in a greater number of option classes and series.” MIAX “believes that it is important to allow investors to roll existing option positions.”
This change also finds statutory basis in Section 6(b), mentioned above. The change will benefit investors by “devoting the current cap in the number of series to those series that are more closely tailored to the investment decisions and hedging decisions of investors.”
*Quotations are excerpted from Kevin M. O’Neill, Deputy Secretary, Securities and Exchange Commission Release No. 34-69659; File No. SR-MIAX-2013-22, May 29, 2013, available here.
** Quotations are excerpted from Kevin M. O’Neill, Deputy Secretary, Securities and Exchange Commission Release No. 34-69658; File No. SR-MIAX-2013-23, May 29, 2013, available here.