Document ID: SEC-2010-1043-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2010-07-09T04:00Z

[Federal Register: July 9, 2010 (Volume 75, Number 131)]
[Notices]               
[Page 39608-39610]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jy10-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62443; File No. SR-CBOE-2010-064]

 
 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Expand Its $1 Strike Program

July 2, 2010.
    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 July 1, 2010, the Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') 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

    CBOE proposes to amend Rule 5.5.01 to expand the Exchange's $1 
Strike Price Program (the ``$1 Strike Program'' or ``Program'') to 
allow the Exchange to select 150 individual stocks on which options may 
be listed at $1 strike price intervals. The text of the rule proposal 
is available on the Exchange's website (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 purpose of this proposed rule change is to expand the $1 Strike 
Program.\3\
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    \3\ The Commission approved the Program as a pilot on June 5, 
2003. See Securities Exchange Act Release No. 47991 (June 5, 2003), 
68 FR 35243 (June 12, 2003). The Program was subsequently extended 
through June 5, 2008. See Securities Exchange Act Release No. 49799 
(June 3, 2004), 69 FR 32642 (June 10, 2004) (SR-CBOE-2004-34); SEC 
Release No. 51771 (May 31, 2005), 70 FR 33228 (June 7, 2005) (SR-
CBOE-2005-37); SEC Release No. 53805 (May 15, 2006), 71 FR 29690 
(May 23, 2006) (SR-CBOE-2006-31); and SEC Release No. 55673 (April 
26, 2007), 72 FR 24646 (May 3, 2007) (SR-CBOE-2007-38). The Program 
was subsequently expanded and permanently approved in 2007. See 
Exchange Act Release No. 57049 (December 27, 2007), 73 FR 528 
(January 3, 2008) (SR-CBOE-2007-125). The Program was last expanded 
in 2009. See Securities Exchange Act Release No. 59587 (March 17, 
2009), 74 FR 12414 (March 24, 2009) (SR-CBOE-2009-01).
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    The $1 Strike Program currently allows CBOE 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 
Program, the underlying stock must close below $50 in its primary 
market on the previous trading day. If selected for the 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 may not list long-
term option series (``LEAPS'') \4\ at $1 strike price intervals for any 
class selected for the Program, except as specified in subparagraph (2) 
to Interpretation and Policy .01 to Rule 5.5.\5\ The Exchange is also 
restricted from listing series with $1 intervals within $0.50 of an 
existing strike price in the same series, except that strike prices of 
$2, $3, and $4 shall be permitted within $0.50 of an existing strike 
price for classes also selected to participate in the $0.50 Strike 
Program.\6\
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    \4\ LEAPS are long-term options that generally have up to 
thirty-nine months from the time they are listed until expiration. 
See Rule 5.8, Long-Term Equity Option Series (LEAPS [supreg]). Long-
term FLEX options and index options are considered separately in 
Rules 24A.4, 24B.4 and 24.9(b), respectively.
    \5\ Interpretation and Policy .01(a)(3) states that the Exchange 
may list $1 strike prices up to $5 in LEAPS in up to 200 option 
classes in individual stocks. See Securities Exchange Act Release 
No. 60978 (November 10, 2009), 74 FR 59296 (November 17, 2009) (SR-
CBOE-2009-068).
    \6\ Regarding the $0.50 Strike Program, which allows $0.50 
strike price intervals for options on stocks trading at or below 
$3.00, see Interpretation and Policy .01(b) to Rule 5.5 and 
Securities Exchange Act Release No. 60695 (September 18, 2009), 74 
FR 49055 (September 25, 2009) (SR-CBOE-2009-069). See also 
Securities Exchange Act Release No. 61331 (January 12, 2010), 75 FR 
2911 (January 19, 2010) (SR-CBOE-2010-002) (allowing concurrent 
listing of $3.50 and $4 strikes for classes that participate in both 
the $0.50 Strike Program and the $1 Strike Program).
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    The Exchange now proposes to expand the Program to allow CBOE 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 CBOE 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).
    As stated in the Commission order that initially approved CBOE's 
Program and in subsequent extensions and expansions of the Program,\7\ 
CBOE believes that $1 strike price intervals provide investors with 
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 objectives.
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    \7\ See supra note 1.
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    During the time that the $1 Strike Program was a pilot, the 
Exchange submitted three pilot reports to the Commission in which the 
Exchange discussed, among other things, the strength and efficacy of 
the Program based upon the steady increase in volume and open interest 
of options traded on the Exchange at $1 strike price intervals; and 
that the Program had not and, in the future, should not create capacity 
problems for CBOE or the Options Price Reporting Authority (``OPRA'') 
systems.\8\ This has not changed. Moreover, the number of $1 strike 
options traded on the Exchange has continued to increase since the 
inception of the Program such that these options are now among some of 
the

[[Page 39609]]

most popular products traded on the Exchange.
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    \8\ See Securities Exchange Act Release Nos. 49799 (June 3, 
2004), 69 FR 32642 (June 10, 2004) (SR-CBOE-2004-34); 51771 (May 31, 
2005), 70 FR 33228 (June 7, 2005) (SR-CBOE-2005-37); 53805 (May 15, 
2006), 71 FR 29690 (May 23, 2006) (SR-CBOE-2006-31); and 55673 
(April 26, 2007), 72 FR 24646 (May 3, 2007) (SR-CBOE-2007-38).
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    The Exchange believes that market conditions have led to an 
increase in the number of securities trading below $50 warranting the 
proposed expansion of the $1 Strike Program.\9\ In addition, the 
Exchange notes that this filing is based on a filing previously 
submitted by NASDAQ OMX PHLX, Inc (``PHLX'') that the Commission 
recently noticed.\10\ With regard to previous expansions of the 
Program, the Commission has approved proposals from the options 
exchanges that employ a $1 Strike Program in lockstep.
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    \9\ See, e.g., Securities Exchange Act Release No. 59590 (March 
17, 2009), 74 FR 12412 (March 24, 2009) (SR-CBOE-2009-21) (more than 
five-fold increase in the number of individual stocks on which 
options may be listed at $1 intervals).
    \10\ See Securities Exchange Act Release No. 62151 (May 21, 
2010), 75 FR 30078 (May 28, 2010) (SR-Phlx-2010-72).
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    The Exchange notes that, in addition to options classes that are 
trading pursuant to the $1 strike programs of options exchanges, there 
are also options trading at $1 strike intervals on approximately 282 
exchange-traded fund shares (``ETFs''),\11\ ETF options trading at $1 
intervals has not, however, negatively impacted the system capacity of 
the Exchange or OPRA.
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    \11\ Options on ETFs have been trading for more than a decade. 
See Securities Exchange Act Release Nos. 37340 (July 2, 1998), 63 FR 
37430 (July 10, 1998) (SR-CBOE-97-03) (original filing to list 
options on ETFs); and 46507 (September 25, 2002), 67 FR 60266 
(September 25, 2002) (SR-CBOE005-54) ($1 strike price intervals for 
ETF options). See also Interpretation and Policy .08 to Rule 5.5 
allowing $1 strike price intervals for ETF options where the strike 
price is $200 or less.
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    With regard to the impact of this proposal on system capacity, CBOE 
has analyzed its capacity and represents that it and OPRA have the 
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 Program and the opportunity to provide investors with 
additional strikes for investment, trading, and risk management 
purposes.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations under the Act applicable to a 
national securities exchange and, in particular, the requirements of 
Section 6(b) of the Act. Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) Act \12\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and, in general, to protect investors and the public 
interest. 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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    \12\ 15 U.S.C. 78f(b)(5).
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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 \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 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 the pre-filing requirement.
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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 a rule of 
another exchange that has been approved by the Commission.\15\ 
Therefore, the Commission designates the proposal operative upon 
filing.\16\
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    \15\ See Securities Exchange Act Release No. 62420 (June 30, 
2010) (SR-Phlx-2010-72) (order approving expansion of $1 strike 
program to 150 classes).
    \16\ 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-CBOE-2010-064 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-2010-064. 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

[[Page 39610]]

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 available publicly. All submissions should refer to 
File Number SR-CBOE-2010-064 and should be submitted on or before July 
30, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Elizabeth M. Murphy,
Secretary.
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    \17\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-16688 Filed 7-8-10; 8:45 am]
BILLING CODE 8010-01-P