Document ID: SEC-2009-1365-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Strike Price Intervals of $0.50 for Options on Stocks Trading At or Below $3.00
Posted Date: 2009-09-25T04:00Z

[Federal Register: September 25, 2009 (Volume 74, Number 185)]
[Notices]               
[Page 49053-49055]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25se09-149]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60696; File No. SR-ISE-2009-65]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Strike Price Intervals of $0.50 for Options on 
Stocks Trading At or Below $3.00

September 18, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 17, 2009, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission the proposed rule change as described in Items I 
and II below, which items have been prepared by the self-regulatory 
organization. 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 theTerms of Substance of 
the Proposed Rule Change

    The ISE proposes to amend its rules in order to establish strike 
price intervals of $0.50, beginning at $1, for certain options classes 
whose underlying security closed at or below $3 in its primary market 
on the previous trading day. 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 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 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.

[[Page 49054]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to expand the ability of 
investors to hedge risks associated with stocks trading at or under $3. 
Currently, ISE Rule 504(d) provides that the interval of strike prices 
of series of options on individual stocks may be $2.50 or greater where 
the strike price is $25 or less. Additionally, Supplementary Material 
.01 to ISE Rule 504 allows the Exchange to establish $1 strike price 
intervals (the ``$1 Strike Program'') on options classes overlying no 
more than 55 individual stocks designated by the Exchange. 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 $1 Strike Program 
its own rules.\3\ The Exchange is restricted from listing any series 
that would result in strike prices being within $0.50 of a strike price 
set pursuant to Supplementary Material .01 to ISE Rule 504 at intervals 
of $2.50.
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    \3\ The Exchange may not list long-term option series 
(``LEAPS'') at $1 strike price intervals for any class selected for 
the $1 Strike Program.
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    The Exchange is now proposing to establish strike prices of $1, 
$1.50, $ 2, $2.50, $3 and $3.50 for certain stocks that trade at or 
under $3.00.\4\ The listing of these strike prices will be limited to 
options classes whose underlying security closed at or below $3 in its 
primary market on the previous trading day, and which have national 
average daily volume that equals or exceeds 1000 contracts per day as 
determined by The Options Clearing Corporation during the preceding 
three calendar months. The listing of $0.50 strike prices would be 
limited to options classes overlying no more than five (5) individual 
stocks (the ``$0.50 Strike Program'') as specifically designated by the 
Exchange. The Exchange would also be able to list $0.50 strike prices 
on any other option classes if those classes were specifically 
designated by other securities exchanges that employed a similar $0.50 
Strike Program under their respective rules.
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    \4\ The Exchange recently amended ISE Rule 503, Withdrawal of 
Approval of Underlying Securities, to eliminate the $3 market price 
per share requirement for continued approval for an underlying 
security. The amendment eliminated the prohibition against listing 
additional series or options on an underlying security at any time 
when the price per share of such underlying security is less than 
$3. The Exchange explained in that proposed rule change that the 
market price for a large number of securities has fallen below $3 in 
the current volatile market environment. See Securities Exchange Act 
Release No. 59347 (February 3, 2009), 74 FR 6678 (February 10, 
2009).
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    Currently, the Exchange may list options on stocks trading at $3 at 
strike prices of $1, $2, $3, $4, $5, $6, $7 and $8 if they are 
designated to participate in the $1 Strike Program.\5\ If these stocks 
have not been selected for the Exchange's $1 Strike Program, the 
Exchange may list strike prices of $2.50, $5, $7.50 and so forth as 
provided in Supplementary Material .01 to ISE Rule 504, but not strike 
prices of $1, $2, $3, $4, $6, $7 and $8.\6\
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    \5\ Additionally, market participants may be able to trade $2.50 
strikes on the same option at another exchange, if that exchange has 
elected not to select the stock for participation in its own similar 
$1 Strike Program.
    \6\ Again, market participants may also be able to trade the 
option at $1 strike price intervals on other exchanges, if those 
exchanges have selected the stock for participation in their own 
similar $1 Strike Program.
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    The Exchange is now proposing to amend Supplementary Material .01 
to ISE Rule 504 by adding new language that will permit the Exchange to 
list strike prices on options on a number of qualifying stocks that 
trade at or under $3.00, not simply those stocks also participating in 
the $1 Strike Program, in finer intervals of $0.50, beginning at $1 up 
to $3.50. Thus, a qualifying stock trading at $3 would have option 
strike prices established not just at $2.50, $5.00, $7.50 and so forth 
(for stocks not in the Exchange's $1 Strike Program) or just at $1, $2, 
$3, $4, $5, $6, $7 and $8 (for stocks designated to participate in the 
$1 Strike Program), but rather at strike prices established at $1, 
$1.50, $2, $2.50, $3 and $3.50.\7\
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    \7\ The option on the qualifying stock could also have strike 
prices set at $5, $7.50 and so forth at $2.50 intervals (pursuant to 
Supplementary Material .01 to ISE Rule 504) or, if it has been 
selected for the $1 Strike Program, at $4, $5, $6, $7 and $8.
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    The Exchange believes that current market conditions demonstrate 
the appropriateness of the new strike prices. Recently the number of 
securities trading below $3.00 has increased dramatically.\8\ Unless 
the underlying stock has been selected for the $1 Strike Program, there 
is only one possible in-the-money call (at $2.50) to be traded if an 
underlying stock trades at $3.00. Similarly, unless the underlying 
stock has been selected for the $1 Strike Program, only one out-of-the-
money strike price choice within 100% of a stock price of $3 is 
available if an investor wants to purchase out-of-the-money calls. 
Stated otherwise, a purchaser would need over a 100% move in the 
underlying stock price in order to have a call option at any strike 
price other than the $5 strike price become in-the-money. If the stock 
is selected for the $1 Strike Program, the available strike price 
choices are somewhat broader, but are still greatly limited by the 
proximity of the $3 stock price to zero, and the very large percent 
gain or loss in the underlying stock price, relative to a higher priced 
stock, that would be required in order for strikes set at $1 or away 
from the stock price to become in-the-money and serve their intended 
hedging purpose.
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    \8\ As of July 31, 2009, stocks trading at or below $3 include 
E*Trade Financial Corporation, Ambac Financial Group, Inc., Alcatel-
Lucent, Federal Home Loan Mortgage Corporation (Freddie Mac) and 
Federal National Mortgage Association (Fannie Mae). A number of 
these stocks are widely held and actively traded equities, and the 
options overlying these stocks also trade actively on ISE.
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    As a practical matter, a low-priced stock by its very nature 
requires narrow strike price intervals in order for investors to have 
any real ability to hedge the risks associated with such a security or 
execute other related options trading strategies. The current 
restriction on strike price intervals, which prohibits intervals of 
less than $2.50 (or $1 for stocks in the $1 Strike Program) for options 
on stocks trading at or below $3, could have a negative effect on 
investors. The Exchange believes that the proposed $0.50 strike price 
intervals would provide investors with greater flexibility in the 
trading of equity options that overlie lower priced stocks by allowing 
investors to establish equity option positions that are better tailored 
to meet their investment objectives. The proposed new strike prices 
would enable investors to more closely tailor their investment 
strategies and decisions to the movement of the underlying security. As 
the price of stocks decline below $3 or even $2, the availability of 
options with strike prices at intervals of $0.50 could provide 
investors with opportunities and strategies to minimize losses 
associated with owning a stock declining in price.
    With regard to the impact on system capacity, ISE has analyzed its 
capacity and represents that it and the Options Price Reporting 
Authority have the necessary systems capacity to handle the additional 
traffic associated with the listing and trading of an expanded

[[Page 49055]]

number of series as proposed by this filing.
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, by expanding the ability of investors to hedge risks 
associated with stocks trading at or under $3. The proposal should 
create greater trading and hedging opportunities and flexibility, and 
provide customers with the ability to more closely tailor investment 
strategies to the price movement of the underlying stocks, trading in 
many of which is highly liquid.
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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 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: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, if consistent with the 
protection of investors and the public interest, it has become 
effective pursuant to 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) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay to permit the Exchange to respond promptly to demand by 
market participants to list qualifying options series at $0.50 
intervals at about the same time that NASDAQ OMX PHLX, Inc. does once 
that exchange receives Commission approval of its proposed rule change. 
The Commission today has approved SR-Phlx-2009-65,\13\ and therefore 
finds that waiver of the operative delay is consistent with the 
protection of investors and the public interest because such waiver 
will encourage fair competition among the exchanges. Therefore, the 
Commission designates the proposal operative upon filing.\14\
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    \13\ See Securities Exchange Act Release No. 60694 (September 
18, 2009) (SR-Phlx-2009-65) (order approving a $0.50 strike program 
substantially the same as the $0.50 Strike Program proposed by 
CBOE).
    \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 may summarily abrogate 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-ISE-2009-65 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-2009-65. 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 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-ISE-2009-65 and should be 
submitted on or before October 16, 2009.

    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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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23113 Filed 9-24-09; 8:45 am]

BILLING CODE 8010-01-P