Document ID: SEC-2011-1567-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2011-10-13T04:00Z

[Federal Register Volume 76, Number 198 (Thursday, October 13, 2011)]
[Notices]
[Pages 63691-63693]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26438]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65503; File No. SR-ISE-2011-60]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by International Securities Exchange, LLC to Expand the Short 
Term Options Series Program

October 6, 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 September 23, 2011, the International Securities Exchange, LLC 
(``ISE'' 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 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.
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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 its rules to expand the Short Term 
Option Series 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, at the Commission's Public Reference 
Room, and at the Commission's Web site at http://www.sec.gov.

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

[[Page 63692]]

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 amend ISE Rules 504 
and 2009 to expand the Short Term Option Series Program (``STOS 
Program'') \3\ so that the Exchange may select twenty-five option 
classes to participate in the STOS Program \4\ and list a total of 30 
Short Term Option Series (``STOS Options'') for each option class that 
participates in the Exchange's STOS Program.\5\
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    \3\ The Exchange adopted the STOS Program on a pilot basis in 
2005. See Securities Exchange Act Release No. 52012 (July 12, 2005), 
70 FR 41246 (July 18, 2005) (SR-ISE-2005-17). The STOS Program was 
approved on a permanent basis in 2010. See Securities Exchange Act 
Release No. 62444 (July 2, 2010), 75 FR 39595 (July 9, 2010) (SR-
ISE-2010-72).
    \4\ The Exchange previously increased the total number of option 
classes that may participate in the STOS Program from 5 to fifteen 
(15). See Securities Exchange Act Release No. 63878 (February 9, 
2011), 76 FR 8796 (February 15, 2011) (SR-ISE-2011-08).
    \5\ The Exchange previously increased the total number of series 
per STOS Options from 7 to 20 series. See Securities Exchange Act 
Release No. 62444 (July 2, 2010), 75 FR 39595 (July 9, 2010) (SR-
ISE-2010-72).
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    The STOS Program is codified in Supplementary Material .02 to ISE 
Rule 504 and Supplementary Material .01 to ISE Rule 2009. These rules 
state that after an option class has been approved for listing and 
trading on the Exchange, the Exchange may open for trading on any 
Thursday or Friday that is a business day series of options on no more 
than fifteen option classes that expire on the Friday of the following 
business week that is a business day. In addition to the fifteen-option 
class limitation, there is also a limitation that no more than twenty 
series for each expiration date in those classes that may be opened for 
trading.\6\ Furthermore, the strike price of each short term option has 
to be fixed with approximately the same number of strike prices being 
opened above and below the value of the underlying security at about 
the time that the short term options are initially opened for trading 
on the Exchange, and with strike prices being within thirty percent 
(30%) above or below the closing price of the underlying security from 
the preceding day. The Exchange does not propose any changes to the 
STOS Program limitations other than to increase from fifteen to twenty-
five the number of option classes that may be opened pursuant to the 
STOS Program and increase from 20 to 30 the number of Weekly Series 
that may be opened for each class of option selected to participate in 
the STOS Program.
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    \6\ However, if the Exchange opens less than twenty (20) short 
term options for a Short Term Option Expiration Date, additional 
series may be opened for trading on the Exchange when the Exchange 
deems it necessary to maintain an orderly market, to meet customer 
demand or when the market price of the underlying security moves 
substantially from the exercise price or prices of the series 
already opened. Any additional strike prices listed by the Exchange 
shall be within thirty percent (30%) above or below the current 
price of the underlying security. The Exchange may also open 
additional strike prices of Short Term Option Series that are more 
than 30% above or below the current price of the underlying security 
provided that demonstrated customer interest exists for such series, 
as expressed by institutional, corporate or individual customers or 
their brokers (market-makers trading for their own account shall not 
be considered when determining customer interest under this 
provision). Supplementary Material .02(d) to Rule 504 and 
Supplementary Material .01(d) to Rule 2009.
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    The principal reason for the proposed expansion to the number of 
classes is customer demand for adding, or not removing, short term 
option classes from the STOS Program. In order that the Exchange not 
exceed the fifteen-option class restriction, from time to time the 
Exchange has had to discontinue trading one short term option class 
before it could begin trading other option classes within the STOS 
Program. This has negatively impacted investors and traders, 
particularly retail public customers. These same market participants 
also repeatedly request that the Exchange add additional classes to the 
STOS Program which the Exchange is unable to do as it has already 
reached its maximum allotment of 15 classes. The Exchange notes that 
the STOS Program has been well received by market participants, in 
particular by retail investors. The Exchange believes a modest increase 
to the number of classes that may participate in the STOS Program, such 
as the one proposed herein, will permit the Exchange to meet increased 
customer demand and provide market participants with the ability to 
hedge in a greater number of option classes.
    The principal reason for the proposed expansion to the number of 
series is market demand for additional series in STOS Options classes 
in which the maximum number of series (20) has already been reached. 
Specifically, the Exchange has observed increased demand for more 
series when market moving events, such as corporate events and large 
price swings, have occurred during the life span of an affected STOS 
Options class. Currently, in order to be able to respond to market 
demand, the Exchange is forced to delete or delist certain series in 
order to make room for more in demand series.\7\ The Exchange finds 
this method to be problematic for two reasons.
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    \7\ The Exchange deletes series with no open interest and 
delists series with open interest if those series are open for 
trading on another exchange.
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    First, the Exchange has received requests to keep series that it 
intends to delete/delist to make room for more in demand series. While 
market participants may access other markets for the deleted/delisted 
series, the Exchange would prefer that market participants trade these 
series at ISE. Second, this method can lead to competitive 
disadvantages among exchanges. If one exchange is actively responding 
to market demand by deleting/delisting and adding series, if another 
exchange is the last to list the less desirable series with open 
interest, that exchange is stuck with those series and unable to list 
the in demand series (because to do so would result in more than 20 
series being listed on that exchange). As a result, the maximum number 
of series per class of options that participate in the STOS Program 
should be increased to 30 so that exchanges can list the full panoply 
of series that other exchanges list and which the market demands.
    To affect this change, the Exchange is proposing to amend its rules 
to limit the initial number of series that may be opened for trading to 
20 series and to limit the number of additional series that may be 
opened for trading to 10 series.
    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it and the 
Options Price Reporting Authority (``OPRA'') have the necessary systems 
capacity to handle the potential additional traffic associated with 
trading an expanded number of classes and series in the STOS Program.
    The Exchange believes that the STOS 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. The Exchange further believes this proposed rule change will 
provide investors with additional short term option classes and series 
for investment, trading, and risk management purposes.
    Finally, the Commission has requested, and the Exchange has agreed 
for the purposes of this filing, to submit one report to the Commission 
providing an analysis of the STOS Program (the

[[Page 63693]]

``Report''). The Report will cover the period from July 2, 2010, the 
date the Exchange first began to list and trade short term options, 
through August 31, 2011. The Report will describe the Exchange's 
experience with the STOS Program in respect of the option classes 
included by the Exchange in the STOS Program. The Report will be 
submitted to the Commission on a confidential basis under separate 
cover.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 \8\ (the ``Act'') in 
general, and furthers the objectives of Section 6(b)(5) of the Act \9\ 
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. The Exchange believes 
that expanding the current short term options program will result in a 
continuing benefit to investors by giving them more flexibility to 
closely tailor their investment decisions and hedging decisions in 
greater number of securities. The Exchange believes that expanding the 
current program would provide the investing public and other market 
participants increased opportunities because an expanded program would 
provide market participants additional opportunities to hedge their 
investment thus allowing these investors to better manage their risk 
exposure. While the expansion of the STOS Program will generate 
additional quote traffic, the Exchange does not believe that this 
increased traffic will become unmanageable since the proposal remains 
limited to a fixed number of classes. Further, the Exchange does not 
believe that the proposed rule change will result in a material 
proliferation of additional series because it is limited to a fixed 
number of series per class and the Exchange does not believe that the 
additional price points will result in fractured liquidity. Moreover, 
the Exchange believes the proposed rule change would benefit investors 
by giving them more flexibility to closely tailor their investment 
decisions in a greater number of securities.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

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-ISE-2011-60 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-2011-60. 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 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 publicly available. All 
submissions should refer to File Number SR-ISE-2011-60 and should be 
submitted on or before November 3, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-26438 Filed 10-12-11; 8:45 am]
BILLING CODE 8011-01-P