[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20764-20767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8856]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64258; File No. SR-ISE-2011-23]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Expand the $2.50 Strike Price Program
April 8, 2011.
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 April 6, 2011, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') filed with the Securities and
[[Page 20765]]
Exchange Commission (``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. The Exchange has filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend ISE Rule 504 to expand the $2.50
Strike Price program. The text of the proposed rule change is available
on the Exchange's Web site http://www.ise.com, at the principal office
of the Exchange, 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 self-regulatory organization 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 purpose of this proposed rule change is to expand the current
$2.50 Strike Price Program (``Program'') \5\ to permit the listing of
options with $2.50 strike price intervals for options with strike
prices between $50 and $100, provided the $2.50 strike price intervals
are no more than $10 from the closing price of the underlying stock in
the primary market.\6\ Additionally, ISE proposes to specify that it
may select up to sixty (60) option classes on individual stocks for
which the intervals of strike prices will be $2.50. Currently, ISE Rule
504(g) permits the listing of options with $2.50 strike price intervals
with strike prices between $50 and $75. Specifically, ISE proposes to
amend the current text of ISE Rule 504(g) to expand the Program.
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\5\ The $2.50 Strike Price Program existed among the options
exchanges when ISE began operations in 2000. Initially adopted in
1995 as a pilot program, the pilot $2.50 Strike Price Program
allowed options exchanges to list options with $2.50 strike price
intervals for options trading at strike prices greater than $25 but
less than $50 on a total of up to 100 option classes. See Securities
Exchange Act Release No. 35993 (July 19, 1995), 60 FR 38073 (July
25, 1995) (approving File Nos. SR-Phlx-95-08, SR-Amex-95-12, SR-PSE-
95-07, SR-CBOE-95-19, and SR-NYSE-95-12). In 1998, the pilot program
was permanently approved and expanded to allow the options exchanges
to select up to 200 option classes for the $2.50 Strike Price
Program. See Securities Exchange Act Release No. 40662 (November 12,
1998), 63 FR 64297 (November 19, 1998) (approving File Nos. SR-Amex-
98-21, SR-CBOE-98-29, SR-PCX-98-31, and SR-Phlx-98-26). The Exchange
lists options with $2.50 strike price intervals on those classes
selected by the other options exchanges and does not select any
class for inclusion in the $2.50 Strike Price Program. See
Securities Exchange Act Release No. 52960 (December 15, 2005), 70 FR
76090 (December 22, 2005) (SR-ISE-2005-59).
\6\ The term ``primary market'' is defined in ISE Rule
100(a)(37) as the principal market in which an underlying security
is traded.
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For example, consider a hypothetical where Caterpillar, Inc.
(``CAT'') was trading at $81. With approximately one month remaining
until expiration, and with a front month at-the-money put option (the
80 strike) trading at approximately $1.30, the investor would be able
to purchase a $77.50 strike put at an estimated $0.60 per contract.
Today, the next available strike of a one month put option is the 75
strike. While the 75 strike put would certainly trade at a lesser price
than the 80 strike put,\7\ the protection offered would only take
effect with a 7.40% decline in the market as oppose to a 4.30% decline
in the market. The $77.50 strike put would provide the investor an
additional choice to hedge exposure (the opportunity to hedge with a
reduced outlay) and thereby minimize risk if there were a decline in
the stock price of CAT.
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\7\ The 75 strike put would trade at $0.30 in this example.
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Another example would be if an investor desired to sell call
options to hedge the exposure of an underlying stock position and
enhance yield. Consider a hypothetical where CAT was trading at $81 and
the second month (two months remaining) of a recently out of-the-money
call option (the 85 strike) was trading at approximately $2.35. If the
investor were to sell the 85 strike call against an existing stock
position, the investor could yield a return of approximately 2.90% over
a two month period or an annualized return of 17.4%. By providing an
additional $2.50 strike interval above $75, the investor would have the
opportunity to sell the 82.50 strike instead of the 85 strike. If the
85 strike call were trading at $2.35, the 82.50 strike call would trade
at approximately $3.30. By selling the 82.50 strike call at $3.30
against an existing stock position, the investor could yield a 4.07%
return over a two month period or an annualized 24.40% return.
Therefore, an additional choice of a $2.50 strike interval could afford
varying yields to the investor.
ISE believes that the Program has to date created additional
trading opportunities for investors, thereby benefiting the
marketplace. The existence of $2.50 strike prices with strike intervals
above $75 affords investors the ability to more closely tailor
investment strategies to the precise movement of the underlying
security and meet their investment, trading and risk management
requirements.
ISE is also proposing to specify that it may select up to 60 option
classes on individual stocks for which the intervals of strike prices
will be $2.50. ISE has participated in the industry wide $2.50 Strike
Price Program since ISE's inception in 2000. Currently, the options
exchanges may collectively select up to 200 options classes on
individual stocks for which the intervals of strike prices will be
$2.50. In addition, each options exchange is permitted to list options
with $2.50 strike price intervals on any option class that another
options exchange selects under its program.
The industry wide collection of 200 options classes has not been
expanded since 1998, although increasingly more companies have
completed initial public offerings from 1998 through 2010.
Additionally, significantly more options classes are trading in 2011 as
compared to 1998. The Exchange proposes to specify that ISE may select
up to 60 options classes to remain competitive with other exchanges and
to offer investors additional investment choices. ISE believes that
offering additional options classes would benefit investors.
Furthermore, ISE does not believe that this proposal would have a
negative impact on the marketplace. ISE would compare this proposal
with the $1 Strike Price expansion, wherein ISE, among several options
exchanges, expanded its $1 Strike Price Program from 55 individual
stocks to 150 individual stocks on which an option series may be listed
at $1 strike price
[[Page 20766]]
intervals.\8\ ISE believes that this proposed rule change that would,
in part, result in an increase to the 200 options classes in the
industry wide Program, is less than the $1 Strike Price Program
increase among several exchanges and therefore would have less impact
than that program, which has not had any negative impact on the market
in terms of proliferation of quote volume or fragmentation. ISE
believes that the effect of the proposed expansion on the marketplace
would not result in a material proliferation of quote volume or
concerns with fragmentation.
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\8\ See Exchange Act Release No. 62442 (July 2, 2010), 75 FR
39597 (July 9, 2010) (SR-ISE-2010-64).
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With regard to the impact of this proposal on system capacity, ISE
has analyzed its capacity and represents that it and the Options Price
Reporting Authority have the necessary system capacity to handle the
potential additional traffic associated with the listing and trading of
additional classes on individual stocks in the $2.50 Strike Price
Program.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \9\ in general, and furthers the objectives of Section
6(b)(5) of the Act \10\ in particular, in that it is designed 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. ISE believes that the effect of the proposed expansion on the
marketplace would not result in a material proliferation of quote
volume or concerns with fragmentation. In addition, ISE believes that
it has the necessary system capacity to handle the potential additional
traffic associated with listing and trading of the additional classes.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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Rather, ISE believes the $2.50 Strike Price Program proposal would
provide the investing public and other market participants increased
opportunities to better manage their risk exposure. Accordingly, ISE
believes that the proposal to expand the Program to allow the listing
of options with $2.50 strike price intervals for options with strike
prices between $50 and $100 should further benefit investors and the
market by providing greater trading opportunities for those underlying
stocks that have low volatility and thus trade in a narrow range. While
expansion of the $2.50 Strike Price Program will generate additional
quote traffic, ISE does not believe that this increased traffic will
become unmanageable since the proposal is limited to a fixed number of
classes. Further, ISE does not believe that the proposal will result in
a material proliferation of additional series because it is limited to
a fixed number of classes and ISE does not believe that the additional
price points will result in fractured liquidity.
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
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 \11\ and Rule 19b-
4 (f)(6) thereunder.\12\
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 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 prefiling 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.\13\
Therefore, the Commission designates the proposal operative upon
filing.\14\
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\13\ See Securities Exchange Act Release No. 64157 (March 31,
2011), 76 FR 18817 (April 5, 2011) (SR-Phlx-2011-15) (order
approving expansion of $2.50 Strike Price Program).
\14\ 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-ISE-2011-23 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-ISE-2011-23. 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 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
a.m. and 3 p.m. Copies of the filing also
[[Page 20767]]
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-
2011-23 and should be submitted on or before May 4, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8856 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P