[Federal Register Volume 73, Number 2 (Thursday, January 3, 2008)]
[Notices]
[Pages 528-529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-25570]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57049; File No. SR-CBOE-2007-125]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of Proposed Rule Change, as
Modified by Amendment No. 2 Thereto, Relating to the $1 Strike Pilot
Program
December 27, 2007.
I. Introduction
On October 31, 2007, the Chicago Board Options Exchange,
Incorporated (``CBOE'' 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 proposal to amend its rules relating to the $1 Strike
Pilot Program (``$1 Strike Program''). On November 14, 2007, the
Exchange filed Amendment No. 1 to the proposed rule change. The
Exchange subsequently withdrew Amendment No. 1 and filed Amendment No.
2 to the proposed rule change on November 15, 2007. The proposed rule
change, as amended, was published for comment in the Federal Register
on November 23, 2007.\3\ The Commission received no comments on the
proposal. This order approves the proposed rule change, as amended.
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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. 56801 (November 16,
2007), 72 FR 65784 (``Notice'').
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II. Description of the Proposal
The purpose of the proposed rule change is to expand the $1 Strike
Program and to request permanent approval of the $1 Strike Program. The
$1 Strike Program currently allows CBOE to select a total of 5
individual stocks on which option series may be listed at $1 strike
price intervals. To be eligible for selection into the $1 Strike
Program, the underlying stock must close below $20 in its primary
market on the previous trading day. If selected for the $1 Strike
Program, the Exchange may list strike prices at $1 intervals from $3 to
$20, but no $1 strike price may be listed that is greater than $5 from
the underlying stock's closing price in its primary market on the
previous day. The Exchange also may list $1 strikes on any other option
class designated by another securities exchange that employs a similar
$1 Strike Program under their respective rules. The Exchange may not
list long-term option series (``LEAPS'') at $1 strike price intervals
for any class selected for the $1 Strike Program. The Exchange also is
restricted from listing any series that would result in strike prices
being $0.50 apart.
The Exchange proposes to amend Interpretation and Policy .01 to
CBOE Rule 5.5 to expand the $1 Strike Program to allow it to select a
total of 10 individual stocks on which option series may be listed at
$1 strike price intervals. Additionally, CBOE proposes to raise the
upper limit of the price range on which it may list $1 strikes from $20
to $50. The existing restrictions on listing $1 strikes would continue,
e.g., no $1 strike price may be listed that is greater than $5 from the
underlying stock's closing price in its primary market on the previous
day, and CBOE would be restricted from listing any series that would
result in strike prices being $0.50 apart. In addition, because it
believes that the $1 Strike Program has been very successful by
allowing investors to establish equity options positions that are
better tailored to meet their investment objectives, CBOE requests that
the $1 Strike Program be approved on a permanent basis.
In its filing with the Commission, CBOE stated its belief that $1
strike price intervals provide investors with greater flexibility in
the trading of equity options that overlie lower priced stocks by
allowing investors to establish equity options positions that are
better tailored to meet their investment objectives. According to CBOE,
member firms representing customers have repeatedly requested that CBOE
seek to expand the $1 Strike Program, both in terms of the number of
classes that can be selected and the range in which $1 strikes may be
listed. CBOE concluded from its analysis of the $1 Strike Program that
the impact on CBOE's, OPRA's, and market data vendors' respective
automated systems has been minimal.\4\ CBOE has represented that is has
sufficient capacity to handle an expansion of the $1 Strike Program, as
proposed.
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\4\ See Notice, supra note 3, at 65785 (providing CBOE's $1
Strike Program analysis on systems capacity).
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Finally, the Exchange proposes to make a corresponding change to
[[Page 529]]
Interpretation and Policy .11(e) to CBOE Rule 24.9 to (i) note that the
Exchange shall designate no more than 9 individual stocks for inclusion
in the $1 Strike Program at the same time there are strike prices
listed at $1 intervals on Mini-SPX options,\5\ and (ii) make a
technical correction to a cross-reference to Interpretation and Policy
.01(a) to CBOE Rule 5.5.
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\5\ Although the $1 Strike Program generally allowed CBOE to
select a total of 5 individual stocks on which option series may be
listed at $1 strike price intervals, the $1 Strike Program provided
that CBOE could designate no more than 4 individual stocks for
inclusion in the $1 Strike Program at the same time there are strike
prices listed at $1 intervals on Mini-SPX options in accordance with
Interpretation and Policy .11 to CBOE Rule 24.9. See Securities
Exchange Act Release No. 52625 (October 18, 2005), 70 FR 61479
(October 24, 2005) (SR-CBOE-2005-81) (providing that as long as
there are open Mini-SPX option series listed at $1 strike price
intervals, the Exchange would be required to surrender one of its
five selections under the $1 Strike Program). If CBOE decides to
discontinue listing Mini-SPX option series at $1 strike price
intervals, CBOE would again be free to select up to 10 option
classes for inclusion in the $1 Strike Program, as proposed.
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III. Commission's Findings and Order Granting Approval of the Proposed
Rule Change
After careful review and based on the Exchange's representations,
the Commission finds that the proposed rule change is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\6\ In particular, the
Commission finds that the proposed rule change is consistent with
section 6(b)(5) of the Act \7\ in that it is designed 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.
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\6\ In approving this proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\7\ 15 U.S.C. 78f(b)(5).
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Specifically, the Commission believes that the proposed expansion
to permit the Exchange to select a total of 10 individual underlying
stocks trading at less than $50 on which option series may be listed at
$1 strike price intervals, and the request to make the $1 Strike
Program permanent, should provide investors with added flexibility in
the trading of equity options and further the public interest by
allowing investors to establish equity options positions that are
better tailored to meet their investment objectives. The Commission
also believes that the proposal strikes a reasonable balance between
the Exchange's desire to accommodate market participants by offering a
wider array of investment opportunities and the need to avoid
unnecessary proliferation of options series and the corresponding
increase in quotes. The Commission notes that the existing restrictions
on listing $1 strike price intervals will continue to apply, e.g., no
$1 strike price may be listed (a) that is greater than $5 from the
underlying stock's closing price in its primary market on the previous
day, or (b) that would result in strike prices being $0.50 apart.
The Commission expects the Exchange to continue to monitor for
options with little or no open interest and trading activity and to act
promptly to delist such options. In addition, the Commission expects
that CBOE will continue to monitor the trading volume associated with
the additional options series listed as a result of this proposal and
the effect of these additional series on market fragmentation and on
the capacity of the Exchange's, OPRA's, and vendors' automated systems.
IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\8\ that the proposed rule change (SR-CBOE-2007-125), as modified
by Amendment No. 2 thereto, be, and it hereby is, approved.
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\8\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
Nancy M. Morris,
Secretary.
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\9\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E7-25570 Filed 1-2-08; 8:45 am]
BILLING CODE 8011-01-P