Document ID: SEC-2011-0140-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2011-02-01T05:00Z

[Federal Register Volume 76, Number 21 (Tuesday, February 1, 2011)]
[Notices]
[Pages 5644-5646]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2119]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63772; File No. SR-CBOE-2011-006]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Regarding the Listing of Option Series With $1 Strike 
Prices

January 25, 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 January 12, 2011, the Chicago Board Options Exchange, 
Incorporated (``CBOE''or the ``Exchange'') 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 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its rules regarding the listing of $1 strike 
prices. The text of the rule proposal is available on the Exchange's 
Web site (http://www.cboe.org/legal), at the Exchange's principal 
office, 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 self-regulatory organization 
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 those 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 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 Exchange proposes to amend Interpretation and Policy .01 to 
Rule 5.5 to improve the operation of the $1 Strike Program.
    Currently, the $1 Strike Program only allows the listing of new $1 
strikes within $5 of the previous day's closing price. In certain 
circumstances this has led to situations where there are no at-the-
money $1 strikes for a day, despite significant demand. For instance, 
on November 15, 2010, the underlying shares of Isilon Systems Inc. 
opened at $33.83. It had closed the previous trading day at $26.29. 
Options were available in $1 intervals up to $31, but because of the 
restriction to only listing within $5 of the previous close, the 
following strikes were not permitted to be added during the day: $32, 
$33, $34, $36, $37 and $38.
    The Exchange proposes that $1 interval strike prices be allowed to 
be added immediately within $5 of the official opening price in the 
primary listing market. Thus, on any day, $1 Strike Program strikes may 
be added within $5 of either the opening price or the previous day's 
closing price. On occasion, the price movement in the underlying 
security has been so great that listing within $5 of either the 
previous day's closing price or the day's opening price will leave a 
gap in the continuity of strike prices. For instance, if an issue 
closes at $14 one day, and the next day opens above $27, the $21 and 
$22 strikes will be more than $5 from either benchmark. The Exchange 
proposes that any such discontinuity be avoided by allowing the listing 
of all $1 Strike Program strikes between the closing price and the 
opening price.
    Additionally, issues that are in the $1 Strike Program may 
currently have $2.50 interval strike prices added that are more than $5 
from the underlying price or are more than a nine months to expiration 
(long-term options series). In such cases, the listing of a $2.50 
interval strike may lead to discontinuities in strike prices and also a 
lack of parallel strikes in different expiration months of the same 
issue. For instance, under the current rules, the Exchange may list a 
$12.50 strike in a $1 Strike Program issue where the underlying price 
is $24. This allowance was provided to avoid too large of an interval 
between the standard strike prices of $10 and $15. The unintended 
consequence, however, is that if the underlying price should decline to 
$16, the Exchange would not be able to list a $12 or $13 strike. If the 
underlying stayed near this level at expiration, a new expiration month 
would have the $12 and $13 strike but not the $12.50, leading to a 
disparity in strike intervals in different months of the same option 
class. This has also led to investor confusion, as they regularly 
request the addition of inappropriate strikes so as to roll a position 
from one month to another at the same strike level.
    To avoid this problem, the Exchange may not list series with $2.50 
intervals (e.g., $12.50, $17.50) below $50 under Interpretation and 
Policy .05 of Rule 5.5 ($2.50 Strike Price Program) for any issue 
included within the $1 Strike Program, including long term option 
series. At each standard $5 increment strike more than $5 from the 
price of the underlying security, the Exchange proposes to list the 
strike $2 above the standard strike for each interval above the price 
of the underlying security, and $2 below the standard strike, for each 
interval below the price of the underlying security, provided it meets 
the Options Listing Procedures Plan (``OLPP'') Provisions in Rule 
5.5A.\5\ For

[[Page 5645]]

instance, if the underlying security was trading at $19, the Exchange 
could list, for each month, the following strikes: $3, $5, $8, $10, 
$13, $14, $15, $16, $17, $18, $19, $20, $21, $22, $23, $24, $25, $27, 
$30, $32, $35, and $37.
---------------------------------------------------------------------------

    \5\ Rule 5.5A codifies the limitation on strike price ranges 
outlined in the OLPP, which, except in limited circumstances, 
prohibits options series with an exercise price more than 100% above 
or below the price of the underlying security if that price is $20 
or less. If the price of the underlying security is greater than 
$20, the Exchange shall not list new options series with an exercise 
price more than 50% above or below the price of the underlying 
security.
---------------------------------------------------------------------------

    Instead of $2.50 strikes for long-term options, the Exchange 
proposes to list one long-term $1 Strike option series strike in the 
interval between each standard $5 strike, with the $1 Strike being $2 
above the standard strike price for each interval above the price of 
the underlying security, and $2 below the standard strike price, for 
each interval below the price of the underlying security. In addition, 
the Exchange may list the long-term $1 strike which is $2 above the 
standard strike just below the underlying price at the time of listing, 
and may add additional long term options series strikes as the price of 
the underlying security moves, consistent with the OLPP. For instance, 
if the underlying is trading at $21.25, long-term strikes could be 
listed at $15, $18, $20, $22, $25, $27, and $30. If the underlying 
subsequently moved to $22, the $32 strike could be added. If the 
underlying moved to $19.75, the $13, $10, $8, and $5 strikes could be 
added.
    The Exchange also proposes that additional long-term option strikes 
may not be listed within $1 of an existing strike until less than nine 
months to expiration.
    Finally, the Exchange represents that it has the necessary systems 
capacity to support the small increase in new options series that will 
result from the proposed changes to the $1 Strike Program.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \6\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\7\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \8\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts, to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest. In particular, the proposed rule change seeks to 
reduce investor confusion and address issues that have arisen in the 
operation of the $1 Strike Program by providing a consistent 
application of strike price intervals for issues in the $1 Strike 
Program.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78s(b)(1).
    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to 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\
---------------------------------------------------------------------------

    \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 
Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release No. 63773 (January 25, 
2011) (SR-NYSEAmex-2010-109). See also Securities Exchange Act 
Release No. 63770 (January 25, 2011) (SR-NYSEArca-2010-106).
    \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).
---------------------------------------------------------------------------

    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 rule-comments@sec.gov. Please include 
File Number SR-CBOE-2011-006 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-CBOE-2011-006. 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 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

[[Page 5646]]

available publicly. All submissions should refer to File Number SR-
CBOE-2011-006 and should be submitted on or before February 22, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2119 Filed 1-31-11; 8:45 am]
BILLING CODE 8011-01-P