Document ID: SEC-2008-0513-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: American Stock Exchange LLC
Posted Date: 2008-04-04T04:00Z

[Federal Register: April 4, 2008 (Volume 73, Number 66)]
[Notices]               
[Page 18593-18596]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04ap08-119]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57581; File No. SR-Amex-2008-31]

 
Self-Regulatory Organizations; American Stock Exchange, LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Quarterly Options Series Pilot Program To Permit the Listing 
of Additional Series

March 31, 2008.
    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 March 25, 2008, the American Stock Exchange, LLC (``Exchange'' or 
``Amex'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
The Exchange has designated this proposal as non-controversial under

[[Page 18594]]

Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders the proposed rule change 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)(iii).
    \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 Amex Rule 903, Commentary .09 
(Quarterly Options Series Pilot Program) to permit the Exchange to list 
strike prices for Quarterly Options Series (``QOS'') in exchange traded 
fund (``ETF'') options that fall within a percentage range (30%) above 
and below the price of the underlying ETF. Additionally, upon 
demonstrated customer interest, the Exchange also will be permitted to 
open additional strike prices of QOS in ETF options that are more than 
30% above or below the current price of the ETF. Specialists and 
registered options traders (``ROTs'') trading for their own account 
will not be considered when determining customer interest under this 
provision. In addition to the initial listed series, the Exchange may 
list up to sixty (60) additional series per expiration month for each 
QOS in ETF options. Further, the proposal includes a delisting program 
to be undertaken by the Exchange in connection with QOS in ETF options.
    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.amex.com), 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 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 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 proposal is to amend Amex Rule 903, Commentary 
.09 (Quarterly Options Series Pilot Program) to allow the Exchange to 
open additional strike prices of QOS in ETF options that are within 
thirty percent (30%) above or below the closing price of the underlying 
ETF on the preceding business day. Additionally, upon demonstrated 
customer interest, the Exchange also will be permitted to open 
additional strike prices of QOS in ETF options that are more than 30% 
above or below the current price of the underlying ETF. Specialists and 
ROTs trading for their own account will not be considered when 
determining customer interest under this provision. In addition, the 
Exchange will be permitted to list up to sixty (60) additional series 
per expiration month for each QOS in ETF options.
    On July 11, 2006, the Exchange filed with the Commission a pilot 
program proposal to permit the listing and trading of QOS in options on 
indexes or options on ETFs that satisfy the applicable listing criteria 
under Amex rules.\5\ QOS trade based on calendar quarters that end in 
March, June, September and December. The Exchange lists QOS that expire 
at the end of the next consecutive four calendar quarters, as well as 
the fourth quarter of the next calendar year. For example, if the 
Exchange were trading QOS in the iShares Russell 2000 Index Fund 
(``IWM'') in the month of April 2008, it would list series at the end 
of the second quarter 2008 (June), third quarter 2008 (September), 
fourth quarter 2008 (December) and first quarter 2009 (March) and 
fourth quarter 2009 (December).
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    \5-\ See Securities Exchange Act Release No. 54137 (July 12, 
2006), 71 FR 41283 (July 20, 2006) (SR-Amex-2006-67) (``Pilot 
Program Release''). Under the Pilot Program, the Exchange is 
permitted to list QOS in up to five currently listed option classes 
that are either options on ETFs or indexes. The Exchange is also 
permitted to list QOS in any options class that is selected by other 
securities exchanges that employ a similar Pilot Program under their 
respective rules.
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    Currently, the Exchange lists QOS in five ETF options: (1) Nasdaq-
100 Index Tracking Stock (``QQQQ''); (2) IWM; (3) DIAMONDS Trust, 
Series 1 (``DIA''); (4) Standard & Poor's Depository Receipts 
(``SPY''); and (5) Energy Select SPDR (``XLE''). The average trading 
volume and total volume for QOS in IWM options, QQQQ options, and SPY 
options exceed the volumes for QOS in the other ETF options (DIA and 
XLE) that are listed and traded on the Exchange. The chart below 
provides trading volume figures for the fourth quarter in 2007, 
demonstrating that, depending on the particular month, QOS in IWM, 
QQQQ, or SPY options are the most popular and heavily traded QOS on the 
Exchange.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   October 2007                    November 2007                   December 2007
                           QOS                           -----------------------------------------------------------------------------------------------
                                                                ADV          Total Vol          ADV          Total Vol          ADV          Total Vol
--------------------------------------------------------------------------------------------------------------------------------------------------------
IWM.....................................................             715          16,443           9,435         198,143           6,306         126,119
QQQQ....................................................           1,004          23,103           4,655          97,763          11,303         226,068
SPY.....................................................           2,793          64,234           4,509          94,688           4,046          80,911
DIA.....................................................               3              63              38             792              72           1,435
XLE.....................................................              60           1,390           1,721          36,143             843          16,866
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    Over time, the Exchange has continually received requests from 
market participants to add additional strike prices for QOS in IWM, 
QQQQ, and SPY options that would be outside of the price range for 
setting strikes as provided under Commentary .09 to Rule 903 
(hereinafter the ``+/-$5 range'').\6\ Investors and other market 
participants have advised the Exchange that they are buying and selling 
QOS in IWM, QQQQ, and SPY options to trade volatility. In order to 
adequately replicate the desired volatility exposure, these market 
participants need to trade several options series in IWM, QQQQ, and 
SPY, many having strike prices that fall outside of the +/-$5 range 
currently allowed under the QOS rules.
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    \6\ Commentary .09(c) to Rule 903 provides that the Exchange 
shall list strike prices for a QOS that are within $5 from the 
closing price of the underlying on the preceding day.
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    In addition, other participants have advised the Exchange that 
their

[[Page 18595]]

investment strategies involve trading options tied to a particular 
option ``delta,'' \7\ rather than a particular level of the underlying 
security or index. At issue is the fact that delta depends on both the 
relative difference between the level of the underlying security or 
index and the option strike price and time to expiration. For example, 
with IWM trading at $85 per share, the strike price corresponding to a 
``25-delta'' IWM call (i.e., a call option with a delta of 25) with one 
month to expiration would be 89. However, the strike price 
corresponding to a ``25-delta'' IWM call with 3 months to expiration 
would be 93, and the strike price of a ``25-delta'' IWM call with 1 
year to expiration would be 106. In short, the Exchange has been 
advised that the +/-$5 range for QOS in IWM, QQQQ, and SPY options is 
insufficient to satisfy customer demand.
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    \7\ ``Delta'' is a measure of how an option price will change in 
response to a $1 price change in the underlying security or index. 
For example, XYZ option with a delta of ``50'' can be expected to 
change by $0.50 in response to a $1 change in the price of XYZ.
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    In order to meet customer demand, the Exchange proposes to amend 
Commentary .09 to Rule 903, which governs the Quarterly Options Series 
Pilot Program. Specifically, the Exchange proposes to revise Commentary 
.09 to Rule 903 to allow the Exchange to open additional strike prices 
of QOS in ETF options that are within thirty percent (30%) above or 
below the closing price of the underlying ETF Shares (as defined in 
Rule 900(b)(42)) on the preceding business day. The Exchange also will 
be permitted to open additional strike prices of QOS in ETF options 
that are more than 30% above or below the current price of the 
underlying ETF, provided that demonstrated customer interest exists for 
such series, as expressed by institutional, corporate, or individual 
customers or their brokers. Specialists and ROTs trading for their own 
account will not be considered when determining customer interest under 
this proposed provision. The Exchange will be permitted to list up to 
sixty (60) additional series per expiration month for each QOS in ETF 
options.
    The Exchange also is proposing to add new paragraph (e) to 
Commentary .09 to Rule 903, which will set forth a delisting policy. 
Specifically, with respect to QOS in ETF options, the Exchange will, on 
a monthly basis, review series that are outside a range of five strikes 
above and five strikes below the current price of the underlying ETF, 
and de-list series with no open interest in both the put and the call 
series having: (1) A strike higher than the highest strike price with 
open interest in the put and/or call series for a given expiration 
month; or (2) a strike lower than the lowest strike price with open 
interest in the put and/or call series for a given expiration month. To 
illustrate how the proposed delisting program will work, assume that 
IWM closed at $70 on the day the Exchange conducts the monthly review 
of QOS in ETF options. Series having strike prices above $75 and below 
$65 would be reviewed by the Exchange for possible delisting. Assume 
that the Exchange lists the following QOS in IWM options that expire in 
June 2008:

------------------------------------------------------------------------
         Calls--June 08 Exp                    Puts--June 08 Exp
------------------------------------------------------------------------
     Strike         Open  interest?        Strike       Open  interest?
------------------------------------------------------------------------
       62                 No                 62                No
       63                 No                 63               Yes
       64                 Yes                64               Yes
        *                  *                 *                 *
       76                 Yes                76               Yes
       77                 Yes                77               Yes
       78                 Yes                78               Yes
       79                 Yes                79               Yes
       80                 Yes                80               Yes
       81                 Yes                81               Yes
       82                 Yes                82               Yes
       83                 No                 83                No
       84                 No                 84                No
       85                 No                 85               Yes
       86                 Yes                86                No
       87                 Yes                87               Yes
       88                 Yes                88               Yes
       89                 Yes                89                No
       90                 Yes                90                No
       91                 No                 91                No
       92                 No                 92                No
       93                 No                 93                No
------------------------------------------------------------------------

    The Exchange would de-list the first series listed above, as well 
as the last three: $62, $91, $92, and $93. The Exchange would not, 
however, de-list the $83 and $84 series because there are series having 
open interest with strike prices higher than these two series. In 
addition, the Exchange would not de-list the $63 series because there 
is open interest in the put series. Notwithstanding the proposed 
delisting policy, customer requests to add strikes and/or maintain 
strikes in QOS in ETF options in series eligible for delisting shall be 
granted. Further, in connection with the proposed delisting policy, if 
the Exchange identifies series for delisting, the Exchange shall notify 
other options exchanges with similar delisting policies regarding 
eligible series for listing, and shall work with such other exchanges 
to develop a uniform list of series to be de-listed, so as to ensure 
uniform series delisting of multiply-listed QOS in ETF options. The 
Exchange expects that all options exchanges that have a QOS Pilot 
Program will adopt the proposed delisting policy.
    The Exchange represents that it has the necessary systems capacity 
to support new options series that will result from this proposal. 
Further, as proposed, the Exchange notes that this rule change will 
become part of the pilot program and, going forward, will be considered 
by the Commission when the Exchange seeks to renew or make permanent 
the pilot program in the future.\8\
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    \8\ To the extent the Commission views the proposed rule change 
as an expansion of the pilot program, thus triggering the 
requirement under the terms of the Pilot Program Approval Order that 
the Exchange submit a pilot program report, the Exchange notes that 
it submitted a report on June 28, 2007, in connection with its 
filing to extend the pilot program through July 10, 2008. See 
Securities Exchange Act Release No. 56032 (July 9, 2007), 72 FR 
38634 (July 13, 2007).
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \9\ of the 
Act in general and furthers the objectives of Section 6(b)(5) \10\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, remove impediments to and perfect the mechanisms of a free 
and open market and a national market system, and, in general, protect 
investors and the public interest. The Exchange believes that adoption 
of this proposal will promote competition among the options exchanges 
related to the quarterly options series pilot programs.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will impose no 
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

    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

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public

[[Page 18596]]

interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest. Therefore, the 
foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\12\ The Exchange has asked the Commission to waive the 30-
day operative delay to permit the Exchange to immediately compete with 
the other options exchanges that have similarly amended their quarterly 
options series pilot programs.
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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 a self-regulatory organization to provide the Commission 
with written notice of its 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 fulfilled this requirement.
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    The Commission notes that this proposal is substantially similar to 
a proposed rule change submitted by the Chicago Board Options Exchange, 
which was approved by the Commission following publication for notice 
and comment, and does not raise any new regulatory issues.\13\ Waiving 
the 30-day operative delay will promote, without undue delay, further 
competition in the options market.\14\ For these reasons, the 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest and 
designates the proposal operative upon filing.
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    \13\ See Securities Exchange Act Release No. 57410 (March 3, 
2008), 73 FR 12483 (March 7, 2008) (SR-CBOE-2007-96). See also 
Securities Exchange Act Release No. 57425 (March 4, 2008), 73 FR 
12783 (March 10, 2008) (SR-ISE-2008-19).
    \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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    The Commission notes that this rule change will become part of the 
pilot program and, going forward, its effects will be considered by the 
Commission in the event that the Exchange seeks to renew or make 
permanent the pilot program.\15\ Thus, in the Exchange's future reports 
on the Pilot Program, the Exchange should include analysis of (1) the 
impact of the additional series on the Exchange's market and quote 
capacity, and (2) the implementation and effects of the delisting 
policy, including the number of series eligible for delisting during 
the period covered by the report, the number of series actually 
delisted during that period (pursuant to the delisting policy or 
otherwise), and documentation of any customer requests to maintain QOS 
strikes that were otherwise eligible for delisting.
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    \15\ As set forth in the Pilot Program Release, if the Exchange 
were to propose an extension, expansion, or permanent approval of 
the Pilot Program, the Exchange must submit, along with any filing 
proposing such amendments to the program, a report that provides an 
analysis of the Pilot Program covering the entire period during 
which the Pilot Program was in effect. See Pilot Program Release, 
supra note 5. The Pilot Program Release requires the Exchange to 
include in its report, at a minimum: (1) Data and written analysis 
on the open interest and trading volume in the classes for which QOS 
were opened; (2) an assessment of the appropriateness of the option 
classes selected for the Pilot Program; (3) an assessment of the 
impact of the Pilot Program on the capacity of the Exchange, OPRA, 
and market data vendors (to the extent data from market data vendors 
is available); (4) any capacity problems or other problems that 
arose during the operation of the Pilot Program and how the Exchange 
addressed such problems; (5) any complaints that the Exchange 
received during the operation of the Pilot Program and how the 
Exchange addressed them; and (6) any additional information that 
would assist in assessing the operation of the Pilot Program.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the 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 No. SR-Amex-2008-31 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Amex-2008-31. 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 inspection and 
copying 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 such 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-Amex-2008-31 and should be 
submitted on or before April 25, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-7027 Filed 4-3-08; 8:45 am]

BILLING CODE 8011-01-P