Document ID: SEC-2010-1777-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2010-11-22T05:00Z

[Federal Register Volume 75, Number 224 (Monday, November 22, 2010)]
[Notices]
[Pages 71168-71170]
From the Federal Register Online via the Government Printing 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 rule-comments@sec.gov. 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