[Federal Register Volume 75, Number 224 (Monday, November 22, 2010)]
[Notices]
[Pages 71168-71170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29344]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63322; File No. SR-BATS-2010-032]
Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Establish
a $0.50 Strike Program
November 16, 2010.
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 November 10, 2010, BATS Exchange, Inc. (the ``Exchange'' or
``BATS'') filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Exchange has
designated this proposal as a ``non-controversial'' proposed rule
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6)(iii) thereunder,\4\ which renders it effective upon filing with
the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend Rule 19.6 (Series of Options
Contracts Open for Trading) to adopt a $0.50 Strike Program consistent
with analogous programs offered by other options exchanges.
The text of the proposed rule change is available at the Exchange's
Web site at http://www.batstrading.com, at the principal office of the
Exchange, on the Commission's Web site at http://www.sec.gov, and at
the Commission's Public Reference Room.
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
[[Page 71169]]
forth in Sections A, B, and C below, of the most significant parts of
such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to adopt a $0.50 Strike
Program for BATS Options in order to provide investors with
opportunities and strategies to minimize losses associated with owning
a stock declining in price. In addition to adoption of a $0.50 Strike
Program, the Exchange proposes to make minor modifications to its $1
Strike Program.
The Exchange is proposing to establish strike price intervals of
$0.50, beginning at $0.50 for certain options classes where the strike
price is $5.50 or less and whose underlying security closed at or below
$5.00 in its primary market on the previous trading day and which have
national average daily volume that equals or exceeds 1,000 contracts
per day as determined by The Options Clearing Corporation (``OCC'')
during the preceding three calendar months. The Exchange also proposes
to limit the listing of $0.50 strike prices to options classes
overlying no more than 20 individual stocks as specifically designated
by the Exchange. In addition, the Exchange proposes to list $0.50
strike prices on any other option classes if those classes are
specifically designated by other securities exchanges that employ a
similar $0.50 Strike Program under their respective rules.
The Exchange does not currently offer a $0.50 Strike Program, but
does offer a $1 Strike Program. The proposal would provide $0.50 strike
offerings to market participants, such as traders and retail investors,
and thereby enhance their ability to tailor investing and hedging
strategies and opportunities in a volatile market place.
By way of example, if an investor wants to invest in 5,000 shares
of Sirius Satellite (``SIRI'') at $ 0.9678,\5\ the only choice the
investor would have today would be to buy out-of-the-money calls, at
the $1.00 strike, or to invest in the underlying stock with a total
outlay of $.96 per share or $4,800. However, if a $0.50 strike series
were available, an investor may be able to invest in 5,000 shares by
purchasing an exercisable in-the-money $0.50 strike call option. It is
reasonable to assume that with SIRI trading at $.96, the $0.50 strike
call option would trade at an estimated price of $.46 to $.48 under
normal circumstances. This would allow the investor to manage 5,000
shares with the same upside potential return for a cost of only $2,350
(assuming $.47 as a call price).
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\5\ SIRI was trading at $0.9678 on July 13, 2010.
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Similarly, if an investor wanted to spend $4,800 for 5,000 shares
of SIRI, a $0.50 put option that would trade for $.01 to $.05 would
provide protection against a declining stock price in the event that
SIRI dropped below $0.50 per share. In a down market, where high volume
widely held shares drop below $1.00, investors deserve the opportunity
to hedge downside risk in the same manner as investors have with stocks
greater than $1.00.
The proposal to allow $0.50 strikes in stocks under $5.00 will aid
investors by offering opportunities to manage risk and execute a
variety of option strategies to improve returns. For example, today an
investor can enhance their yield by selling an out-of-the-money call.
Using an example of an investor who wants to hedge Citigroup (``C'')
which is trading at $4.24,\6\ that investor would be able to choose the
$4.50 strike which is 6% out-of-the-money or they would be able to
choose the $5.00 strike which is 17.92% out-of-the-money, under this
proposal. Today, this investor only has the latter choice. Beyond that,
this investor today may choose the $6.00 strike which is 41% out-of-
the-money and offers significantly less premium. Pursuant to this
proposal if this investor had a choice to hedge with a $5.50 strike
option, the investor would have the opportunity to sell the option at
only 29% out-of-the-money and would improve their return by gaining
more premium, while also benefitting from 29% of upside return in the
underlying equity.
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\6\ C was trading at $4.24 on July 14, 2010.
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Based on its experience with $1 strike prices, the Exchange does
not believe that $0.50 strikes will have any impact on capacity.
Further, the Exchange has observed the popularity of $0.50 strikes on
other exchanges. The open interest in the $2.50 August strike series
for Synovus Financial Corp. (``SNV''), which closed at $2.71 on July
13, 2010, was 12,743 options; whereas open interest in the $2 and $3
August strike series was a combined 318 options. The open interest in
the August $1.50 strike series for Ambac Financial Group, Inc.
(``ABK''), which closed at $0.7490 on July 13, 2010, was 15,879 options
compared to 8,174 options for the $2 strike series. The August $2.50
strike series had open interest of 22,280 options, also more than the
traditional $2 strike series.
By adopting a $0.50 Strike Program investors would be able to
better enhance returns and manage risk by providing investors with
significantly greater flexibility in the trading of equity options that
overlie lower price stocks by allowing investors to establish equity
options positions that are better tailored to meet their investment,
trading and risk.
The Exchange also proposes making a corresponding amendment to Rule
19.6, Interpretation and Policy .02(b), which addresses listing series
with $1 intervals within $0.50 of an existing strike price in the same
series. Specifically, to account for the overlap with the $0.50 Strike
Program, the Exchange proposes to exclude the following series from
this prohibition: Strike prices of $2, $3, $4, $5 and $6 to account for
the proposed $0.50 Strike Program, which will allow strike prices of
$5.50.
Finally, the Exchange proposes making an amendment to Rule 19.6,
Interpretation and Policy .02(a), to expand the Exchange's $1 Strike
Program. The $1 Strike Program currently allows the Exchange to select
a total of 55 individual stocks on which option series may be listed at
$1 strike price intervals. In order to be eligible for selection into
the $1 Strike Program, the underlying stock must close below $50 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 $1 to $50, 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 may also list $1 strikes on any other
option class designated by another securities exchange that employs a
similar Program under their respective rules. The Exchange now proposes
to expand the $1 Strike Program to allow the Exchange to select a total
of 150 individual stocks on which option series may be listed at $1
strike price intervals. The existing restrictions on listing $1 strikes
would continue, i.e., 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 the Exchange is restricted from listing any
series that would result in strike prices being $0.50 apart (unless an
option class is selected to participate in both the $1 Strike Program
and the $0.50 Strike Program).
With regard to the impact of this proposal on system capacity, the
Exchange has analyzed its capacity and represents that it and OPRA have
the
[[Page 71170]]
necessary systems capacity to handle the potential additional traffic
associated with the listing and trading of an expanded number of series
in the $1 Strike Program. The Exchange believes that the $1 Strike
Program has provided investors with greater trading opportunities and
flexibility and the ability to more closely tailor their investment and
risk management strategies and decisions to the movement of the
underlying security. Furthermore, the Exchange has not detected any
material proliferation of illiquid options series resulting from the
narrower strike price intervals. For these reasons, the Exchange
requests an expansion of the current $1 Strike Program and the
opportunity to provide investors with additional strikes for
investment, trading, and risk management purposes.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \7\ in general, and furthers the objectives of Section
6(b)(5) of the Act \8\ in particular in that it is designed to promote
just and equitable principles of trade, to remove impediments to and
perfect the mechanisms of a free and open market and a national market
system, and, in general to protect investors and the public interest.
The Exchange believes that adopting the $0.50 Strike Program will
result in a benefit to investors by giving them more flexibility to
closely tailor their investment decisions in a greater number of
securities. Investors would be provided with an opportunity to minimize
losses associated with declining stock prices that do not exist today.
With the increase in active, low-prices securities, the Exchange
believes that adopting the $0.50 Strike Program to allow a $0.50 strike
interval below $1 for strike prices of $5.50 or less is necessary to
provide investor additional opportunity to minimize and manage risk. In
addition, the Exchange believes that expanding the current $1 Strike
Program will result in a continuing benefit to investors by giving them
more flexibility to closely tailor their investment decisions in a
greater number of securities.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change imposes
any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not significantly
affect the protection of investors or the public interest, does not
impose any significant burden on competition, and, by its terms, does
not 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) of the Act \9\ and Rule 19b-
4(f)(6) thereunder.\10\
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's 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
Commission has waived the five-day pre-filing requirement in this
case.
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The Exchange has requested that the Commission waive the 30-day
operative delay. The Commission believes that waiver of the operative
delay is consistent with the protection of investors and the public
interest because the proposal is substantially similar to that of
another exchange that has been approved by the Commission.\11\
Therefore, the Commission designates the proposal operative upon
filing.\12\
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\11\ See Securities Exchange Act Release No. 63132 (October 19,
2010), 75 FR 65541 (October 25, 2010) (SR-Phlx-2010-118) (order
approving expansion of $0.50 Strike Price Program). See also
Securities Exchange Act Release No. 62420 (June 30, 2010), 75 FR
39593 (July 9, 2010) (SR-Phlx-2010-72) (order approving expansion of
$1 Strike Price Program).
\12\ For purposes only of waiving the 30-day operative delay,
the Commission has 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 necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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
Send an e-mail to [email protected]. Please include
File Number SR-BATS-2010-032 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-BATS-2010-032. This file
number should be included on the subject line if e-mail 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 website 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
a.m. and 3 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-BATS-2010-032 and should be
submitted on or before December 13, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29344 Filed 11-19-10; 8:45 am]
BILLING CODE 8011-01-P