Document ID: SEC-2010-1690-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2010-11-03T04:00Z

[Federal Register Volume 75, Number 212 (Wednesday, November 3, 2010)]
[Notices]
[Pages 67799-67801]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-27701]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63206; File No. SR-BX-2010-073]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Expand 
the $0.50 Strike Program

October 28, 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 October 27, 2010, NASDAQ OMX BX, Inc. (the ``Exchange'') filed 
with the Securities and Exchange Commission (the ``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 Chapter IV, Section 6 (Series of 
Options Contracts Open for Trading) of the Rules of the Boston Options 
Exchange Group, LLC (``BOX''), specifically BOX's $0.50 Strike Price 
Program (the ``$0.50 Strike Program'' or ``Program'') \3\ to: (i) 
Expand the $0.50 Strike Program for strike prices below $1.00; (ii) 
extend the $0.50 Strike Program to strike prices that are $5.50 or 
less; (iii) extend the prices of the underlying security to at or below 
$5.00; and (iv) extend the number of options classes to those overlying 
20 individual stocks. The text of the proposed rule change is available 
from the principal office of the Exchange, on the Commission's Web site 
at http://www.sec.gov, at the Commission's Public Reference Room, and 
also on the

[[Page 67800]]

Exchange's Internet Web site at http://nasdaqomxbx.cchwallstreet.com/NASDAQOMXBX/Filings/.
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    \3\ See Securities Exchange Act Release Nos. 60814 (October 13, 
2009), 74 FR 53535 (October 19, 2009) (SR-BX-2009-63); and 61811 
(March 31, 2010), 75 FR 17802 (April 7, 2010) (SR-BX-2010-25) 
(notice of filing and immediate effectiveness permitting concurrent 
listing of $3.50 and $4 strikes for classes in the $0.50 Strike and 
$1 Strike Programs).
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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.

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 modify Chapter IV, 
Section 6, Supplementary Material .06 of the BOX Rules to expand the 
$0.50 Strike Program in order to provide investors with opportunities 
and strategies to minimize losses associated with owning a stock 
declining in price.
    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 BOX.
    Currently, Chapter IV, Section 6, Supplementary Material .06 of the 
BOX Rules permits strike price intervals of $0.50 or greater beginning 
at $1.00 where the strike price for the class is $3.50 or less, but 
only for options classes whose underlying security closed at or below 
$3.00 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 OCC during the preceding three calendar 
months. Further, the listing of $0.50 strike prices is limited to 
options classes overlying no more than 5 individual stocks as 
specifically designated by BOX. BOX is currently 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.\4\
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    \4\ See Chapter IV, Section 6, Supplementary Material .02(b) 
referring to the $1 Strike Program.
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    The number of $0.50 strike options traded on BOX has continued to 
increase since the inception of the Program. There are now 
approximately 25 options classes in the $0.50 Strike Program and they 
are listed, and traded, across all options exchanges including BOX; two 
of which are classes chosen by BOX for the $0.50 Strike Program. This 
proposed rule change would expand $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, suppose an investor wanted to invest in 5,000 
shares of Sirius Satellite (``SIRI'') on July 13, 2010. The closing 
price for SIRI on that day was $ 0.9678. If the investor wanted to buy 
a call option as an alternative to purchasing the shares outright for 
about $4,800, the lowest strike price available was the $1 strike, an 
out-of-the-money option. However, if a $0.50 strike series had been 
available, the investor would have been able to control 5,000 shares by 
purchasing 50 exercisable in-the-money $0.50 strike call options. BOX 
notes that a 3-month SIRI call option with an implied volatility of 50 
has a theoretical value of $0.47,\5\ or $47 per contract. Thus, by 
investing in options with a $0.50 strike price, the investor could have 
benefited from the same upside potential as the stock purchase, but at 
a cost of only $2,350 (50 contracts at $47 per contract).
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    \5\ Using a Black Scholes pricing model.
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    Similarly, if an investor wanted to hedge a position in SIRI stock 
with put options, the lowest available strike price at the time was $1, 
an in-the-money option. If a $0.50 strike series had been available, 
the investor could have used 50 out-of-the-money puts for a fraction of 
the cost of buying 50 put options with a $1 strike price. BOX believes 
that investors deserve the opportunity to hedge downside risk in stocks 
trading less than $1.00 in the same manner as investors have with 
stocks trading greater than $1.00.
    Increasing the threshold for the price of the underlying security 
from $3.00 to $5.00 and expanding the number of $0.50 strikes available 
for stocks priced under $5.00 further aids 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, that investor would be able to choose the $4.50 strike which is 
6% out-of-the- money or 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 the 
position with a $5.50 strike option, the investor would have the 
opportunity to sell the option at only 29% out-of-the-money, as 
compared to 41%, and would improve her return by gaining more premium, 
while also benefiting from 29% of upside return in the underlying 
equity.
    By increasing the number of securities underlying options classes 
in the Program from 5 individual stocks to 20 individual stocks would 
allow BOX to offer investors additional opportunities to use the $0.50 
Strike Program. BOX notes that $0.50 strikes have had no material 
impact on capacity. Further, BOX has observed the popularity of $0.50 
strikes. Expanding the $0.50 Strike Program will allow investors to 
better enhance returns and manage risk because they are provided 
significantly greater flexibility in trading options that overlie lower 
priced stocks. Expanding the Program will also allow investors to 
establish equity options positions that are better tailored to meet 
their investment, trading and risk needs.
    The Exchange also proposes making a corresponding amendment to 
Chapter IV, Section 6, Supplementary Material .02(b) of the BOX Rules 
to add $5 and $6 to $1 Strike Program language that addresses listing 
series with $1 intervals within $0.50 of an existing strike price in 
the same series. Currently, and to account for the overlap with the 
$0.50 Strike Program, the following series are excluded from this 
prohibition: strike prices of $2, $3, and $4. BOX proposes to add $5 
and $6 to that list to account for the proposal to expand the $0.50 
Strike Program to strike prices of up to $5.50.
    Finally, the Exchange proposes to remove the following sentence: 
Additionally, for an option class selected for the $1 Strike Price 
Program, BOX may not list $1 Strike Prices on any series having greater 
than nine (9)

[[Page 67801]]

months until expiration. This sentence should have been removed when 
the Exchange expanded the $1 Strike Price Program in a limited fashion 
to allow BOX to list new series in $1 intervals up to $5 in long-term 
option series in up to 200 option classes on individual stocks.\6\
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    \6\ See Securities Exchange Act Release No. 61041 (November 20, 
2009), 74 FR 53535 (November 30, 2009) (SR-BX-2009-73).
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\7\ in general, and Section 
6(b)(5) of the Act,\8\ in particular, in that it is designed to promote 
just and equitable principles of trade, to prevent fraudulent and 
manipulative acts, to remove impediments to and perfect the mechanism 
for a free and open market and a national market system and, in 
general, to protect investors and the public interest. In particular, 
the Exchange believes that amending the current $0.50 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. Investors would be provided with an opportunity, 
which does not exist today, to minimize losses associated with 
declining stock prices. With the increase in actively traded, low-
priced securities, BOX believes that amending 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 investors additional opportunity to 
minimize and manage risk.
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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 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

    The Exchange has neither solicited nor received 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 prefiling 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).
    \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-BX-2010-073 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-BX-2010-073. 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 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-BX-2010-073 and should be 
submitted on or before November 24, 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. 2010-27701 Filed 11-2-10; 8:45 am]
BILLING CODE 8011-01-P