[Federal Register Volume 68, Number 86 (Monday, May 5, 2003)]
[Notices]
[Pages 23784-23787]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10957]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47753; File No. SR-CBOE-2001-60]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1, 2, 3, 4, 5, 6, 7, and 8 by the Chicago 
Board Options Exchange, Inc. To Initiate a Pilot Program That Allows 
the Listing of Strike Prices at One-Point Intervals for Stocks Trading 
Under $20

April 29, 2003.
    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 December 12, 2001, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
items I, II, and III below, which items have been prepared by the 
Exchange. The Exchange filed Amendments No. 1, 2, 3, 4, 5, 6, 7, and 8 
to the proposed rule change on March 13, 2002,\3\ June 21, 2002,\4\ 
December 6, 2002,\5\ March 7, 2003,\6\ March 25, 2003,\7\ April 16, 
2003,\8\ April 24, 2003,\9\ and April 25, 2003,\10\ respectively. The 
Commission is publishing this notice, as amended, 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\ See letter from Steve Youhn, Attorney, CBOE, to Deborah 
Flynn, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated March 12, 2002 (``Amendment No. 
1''). In Amendment No. 1, the Exchange provides additional 
information on the proposal, including information regarding Options 
Price Reporting Authority (``OPRA'') capacity.
    \4\ See letter from James M. Flynn, Attorney II, Legal Division, 
CBOE, to Elizabeth King, Associate Director, Division, Commission, 
dated June 20, 2002 (``Amendment No. 2''). Amendment No. 2 discusses 
the need for $1 strikes and provides information regarding market 
data vendor capacity.
    \5\ See letter from Steve Youhn, Attorney, Legal Division, CBOE, 
to Deborah Flynn, Assistant Director, Division, Commission, dated 
December 5, 2002 (``Amendment No. 3''). In Amendment No. 3, the 
Exchange proposed to reduce the number of underlying stocks included 
in the pilot program to 25 and list only $1 strikes that fall within 
a $5 range of the underlying stock price.
    \6\ See letter from James M. Flynn, Attorney II, Legal Division, 
CBOE, to Deborah Flynn, Assistant Director, Division, Commission, 
dated March 6, 2003 (``Amendment No. 4''). In Amendment No. 4, the 
Exchange proposed to: (1) Reduce the number of underlying stocks 
included in the pilot program to five stocks; (2) list $1 strike 
prices on options classes include in the $1 strike price program of 
other options exchanges; and (3) provide that the CBOE would not 
list Long Term Equity Option Series (``LEAPS'') in equity option 
classes at $1 strike price intervals.
    \7\ On March 25, 2003, the Exchange filed Amendment No. 5, which 
supercedes the original filing and Amendments No. 1, 2, 3, and 4 in 
their entirety.
    \8\ See letter from James M. Flynn, Attorney II, Legal Division, 
CBOE, to Deborah Flynn, Assistant Director, Division, Commission, 
dated April 15, 2003 (``Amendment No. 6''). In Amendment No. 6, the 
Exchange made a correction to the proposed rule text and to the 
purpose section of the proposal.
    \9\ See letter from James M. Flynn, Attorney II, Legal Division, 
CBOE, to Deborah Flynn, Assistant Director, Division, Commission, 
dated April 22, 2003 (``Amendment No. 7''). In Amendment No. 7, the 
Exchange submitted a revised Exhibit A to the proposed rule change, 
which replaces all previous versions of Exhibit A.
    \10\ See letter from James M. Flynn, Attorney II, Legal 
Division, CBOE, to Deborah Flynn, Assistant Director, Division, 
Commission, dated April 25, 2003 (``Amendment No. 8''). In Amendment 
No. 8, the Exchange submitted a revised Exhibit A to the proposed 
rule change, which replaces all previous versions of Exhibit A.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to initiate a one-year pilot program that would 
allow the listing of strike prices at one-point intervals where the 
underlying stock trades under $20 (``$1 Strike Pilot Program'' or 
``Pilot Program''). The text of the proposed rule change appears below. 
Additions are in italics. Deleted text is in [brackets].
* * * * *

[[Page 23785]]

CBOE Rule 5.5: Series of Option Contracts Open for Trading

* * * Interpretations and Policies

    .01: The interval between strike prices of series of options on 
individual stocks [will] may be: a. $1.00 or greater (``$1 Strike 
prices'') provided the strike price is $20.00 or less, but not less 
than $3. The listing of $1 strike prices shall be limited to options 
classes overlying no more than 5 individual stocks (``The $1 Strike 
Pilot Program'') as specifically designated by the Exchange. The 
Exchange may list $1 strike prices on any other option classes if those 
classes are specifically designated by other securities exchanges that 
employ a similar $1 Strike Pilot Program under their respective rules.
    To be eligible for inclusion into the $1 Strike Pilot Program, an 
underlying stock must close below $20 in its primary market on the 
previous trading day. After a stock is added to the $1 Strike Pilot 
Program, the Exchange may list $1 strike prices from $3 to $20 that are 
no more than $5 from the closing price of the underlying on the 
preceding day. For example, if the underlying stock closes at $13, the 
Exchange may list strike prices from $8 to $18. The Exchange may not 
list series with $1.00 intervals within $0.50 of an existing $2.50 
strike price (e.g., $12.50, $17.50) in the same series. Additionally, 
the Exchange may not list long-term option series (``LEAPS[reg]'') at 
$1 strike price intervals for any option class selected for the $1 
Strike Pilot Program.
    A stock shall remain in the $1 Strike Pilot Program until otherwise 
designated by the Exchange. The $1 Strike Pilot Program shall expire on 
(insert date one-year from approval).
    [a.]b. $2.50 or greater where the strike price is $25.00 or less, 
or where the stock represents an interest in a registered investment 
company that satisfies the criteria set forth in Interpretation and 
Policy .06 under rule 5.3 and where the strike price is $200.00 or 
less; provided, however, that the Exchange may not list $2.50 intervals 
below $20 (e.g., $12.50, $17.50) for any class included within the $1 
Strike Pilot Program if the addition of $2.50 intervals would cause the 
class to have strike price intervals that are $0.50 apart.
    [b.]c. $5.00 or greater where the strike price is greater than 
$25.00, or where the stock represents an interest in a registered 
investment company that satisfies the criteria set forth in 
Interpretation and Policy .06 under Rule 5.3 and where the strike price 
is more than $200.[,]00;
    [c.]d. $10.00 or greater where the strike price is greater than 
$200.00.
* * * * *

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 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
    CBOE rule 5.5 establishes the guidelines regarding the addition of 
series for trading on the Exchange. Under CBOE rule 5.5, the Exchange 
currently has the ability to list $2.50 intervals for strike prices 
under $25, $5.00 intervals for strikes between $25 and $200, and $10 
intervals for strikes above $200.\11\ The CBOE notes that stock prices 
in general have dropped over the past couple of years, with many 
individual listings registering precipitous declines. As a result, the 
CBOE currently lists options on more than 800 stocks trading under $20, 
including Cisco, Oracle, SunMicrosystems, Lucent, Nortel, JDS Uniphase, 
Amazon, Nextel, AT&T, Motorola, and Compaq. According to the CBOE, 
these stocks are among the most widely held and actively traded 
equities listed on the New York Stock Exchange, Inc. (``NYSE'') or 
Nasdaq and the options overlying these stocks also trade actively.
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    \11\ Interpretation and Policy .01 to CBOE rule 5.5. 
Additionally, Interpretation and Policy .05 to CBOE rule 5.5 
establishes guidelines for listing $2.50 strikes for a set number of 
classes with series trading between $25 and $50.
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    The CBOE notes that when a stock underlying an option trades at a 
lower price, it takes a larger percentage gain in the stock for an 
option to become in-the-money. For example, when a stock trades at $8 
an investor who wants to buy a slightly out-of-the-money call option 
would have to buy the $10 call. At these levels, the stock price would 
need to register a 25% change before it reached $10 (i.e., in-the-money 
status). According to the CBOE, a 25% gain in the underlying is 
especially large given the lessened degree of volatility that has 
accompanied many stocks and options over the past several months. Due 
to the recent preponderance of low priced stocks, member firms have 
expressed an interest in listing additional strike prices on these 
classes so that they can provide their customers with greater 
flexibility in their investment choices. For this reason, the Exchange 
proposes to implement a one-year Pilot Program, as described below.
    Pilot Program Eligibility: The Exchange proposes to amend 
Interpretation and Policy .01 to CBOE rule 5.5 to allow the CBOE to 
list series with $1 strike price intervals on equity option classes 
that overlie up to five individual stocks, provided that the strike 
prices are $20 or less, but not less than $3. The appropriate Exchange 
committee would make the determination of which underlying stocks are 
to be included in the Pilot Program. A class becomes eligible for 
inclusion in the Pilot Program when the underlying stock price closes 
below $20 in its primary market on the previous business day. 
Underlying stocks trading under $20 that are not a part of the Pilot 
Program would continue to be eligible for trading in $2.50 and $5.00 
intervals.
    Although CBOE may select only up to five individual stocks to be 
included in the Pilot Program, the Exchange would not be precluded from 
also listing options on other individual stocks at $1 strike price 
intervals if other options exchanges listed those series pursuant to 
their respective $1 strikes pilot programs.
    Procedures for Adding $1 Strike Price Intervals: The procedures for 
adding $2.50 or $5.00 strikes currently are provided in Exchange rule 
5.5.\12\ The Exchange proposes to amend CBOE rule 5.5 to delineate 
these standards to accommodate the addition of $1 strike price 
intervals. Under this proposal, the closing price of the underlying 
stock serves as the reference point for determining which $1 strike 
prices the Exchange may open for trading.
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    \12\ CBOE rule 5.5(c) provides for the addition of series ``when 
the Exchange deems it necessary to maintain an orderly market, to 
meet customer demand, or when the market price of the underlying 
stock moves substantially from the initial exercise price or 
prices.'' If the Exchange initiates options trading on a new class 
whose underlying stock is below $20, rule 5.5(b) governs the 
establishment of strike prices.
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    To minimize the unnecessary proliferation of series, the Exchange 
will only list $1 strike prices that fall within a $5 range of the 
underlying stock price, and no strike prices will be added outside of 
the $5 range. For example, if

[[Page 23786]]

the underlying stock trades at $6, the Exchange could list $1 strikes 
from $3 to $11.\13\ The CBOE believes that this proposed range-format 
will significantly restrict the number of series that may be added at 
any one time.
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    \13\ As indicated above, strike prices for options included in 
the Pilot Program may not be greater than $20 or less than $3.
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    Under existing Interpretation and Policy .01(a) to CBOE rule 5.5, 
the Exchange may list strike prices with $2.50 intervals when an 
underlying stock trades below $25. Accordingly, several option classes 
have $7.50, $12.50, and $17.50 strike prices (the ``$2.50 series'' or 
``$2.50 intervals''). To further avoid the proliferation of series, the 
Exchange does not intend to list $1 strike prices at levels that 
``bracket'' existing $2.50 intervals (e.g., $7 and $8 strikes around a 
$7.50 strike). Accordingly, the Exchange does not intend to list $7, 
$8, $12, $13, $17, and $18 levels in an expiration month where there is 
a corresponding $2.50 level. As the $2.50 intervals are ``phased-out,'' 
as described below, the Exchange would introduce the $1 levels that 
bracket the phased-out price. For example, when the $7.50 series 
expires, the Exchange would replace it by issuing a new month with $7 
and $8 intervals.
    Procedures for Phasing-out $2.50 Strike Price Intervals: When a 
stock becomes part of the $1 Strike Pilot Program, the Exchange will 
begin the corresponding process of phasing-out the existing $2.50 
intervals on the same stock in favor of $1 intervals. To phase-out the 
$2.50 intervals, the Exchange would first delist those $2.50 series for 
which there is no open interest. Second, the Exchange would no longer 
add new expiration months at $2.50 intervals below $20 when the 
existing months expire. This would cause the $2.50 strike price 
intervals below $20 to be phased-out when the farthest-out month with a 
$2.50 interval eventually expires.
    $1 Strikes for LEAPS: CBOE will not list LEAPS in equity option 
classes at $1 strike price intervals.
    Procedures for Adding Expiration Months: Interpretation and Policy 
.03 to CBOE rule 5.5 will govern the addition of expiration months for 
$1 strike series. Pursuant to this rule, the Exchange generally opens 
up to four expiration months for each class upon initial listing of an 
options class for trading. Upon expiration of the near-term month, the 
Exchange may list an additional expiration month provided, however, 
that the underlying stock price closes below $20 on its primary market 
on expiration Friday. If the underlying closes at or above $20 on 
expiration Friday, the Exchange would not list an additional month for 
a $1 strike series until the stock again closes below $20.
    Procedures for Deleting $1 Strike Price Intervals: At any time, the 
Exchange may cease listing $1 strike prices on existing series by 
submitting a cessation notice to the Options Clearing Corporation 
(``OCC'').\14\ As discussed above, if the underlying closes at or above 
$20 on expiration Friday, the Exchange would not list any additional 
months with $1 strike prices until the stock subsequently closed below 
$20. If the underlying does not subsequently close below $20, thereby 
precluding the listing of additional strike prices and months, the 
existing $1 series will eventually expire. When the near-term month is 
the only series available for trading, the Exchange may submit a 
cessation notice to OCC. Upon submission of that notice, the underlying 
stock would no longer count towards the 5 stock Pilot Program, thereby 
allowing the Exchange to list classes on an additional stock. Once the 
Exchange submits the cessation notice, it would not list any additional 
months for trading with strikes below $20 (unless the underlying once 
again closed below $20).\15\
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    \14\ Among the reasons for submitting a cessation notice are the 
expiration of available $1 strikes (i.e., underlying stock price 
remains at or above $20), series proliferation concerns, and 
delisting because of low price, merger, takeover, or other events. 
In any event, with prior notice to the membership and customers, 
CBOE would continue to have the ability to cease trading series that 
become inactive and have no open interest.
    \15\ If the underlying stock trades below $20 after submission 
of the cessation notice by the Exchange, CBOE could list $1 strike 
prices again provided it included the class as one of the five 
classes permitted under the Pilot Program.
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    OPRA Capacity: CBOE represents that OPRA has the capacity to 
accommodate the increase in the number of series added pursuant to the 
Pilot Program. The Exchange notes that in December 2000 it listed 
approximately 109,000 series. By September 2001, this number declined 
almost 10% to approximately 100,000. The increase in the number of 
series quoted would be substantially below the 9,000 series decrease 
the CBOE experienced.
2. Statutory Basis
    The Exchange believes that the addition of $1 strike prices would 
stimulate customer interest in options overlying lower-priced stocks by 
creating greater trading opportunities and flexibility. The Exchange 
further believes that $1 strike prices would provide customers with the 
ability to more closely tailor investment strategies to the precise 
movement of the underlying security. For these reasons, the Exchange 
believes the proposed rule change is consistent with the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange and, in particular, the requirements of section 6(b) of the 
Act.\16\ Specifically, the Exchange believes the proposed rule change 
is consistent with the section 6(b)(5)\17\ 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.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78(f)(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

    No written comments were solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 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 will:
    (A) By order approve 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, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. 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

[[Page 23787]]

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 at the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-CBOE-2001-60 and should be 
submitted by May 27, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-10957 Filed 5-2-03; 8:45 am]
BILLING CODE 8010-01-P