[Federal Register Volume 69, Number 38 (Thursday, February 26, 2004)]
[Notices]
[Pages 8993-8995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4269]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49292; File No. SR-BSE-2004-01]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Boston Stock Exchange, 
Inc. Proposing to Initiate a Pilot Program that Allows the Listing of 
Strike Prices at One-Point Intervals for Certain Stocks Trading under 
$20

February 20, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on February 19, 2004, the Boston Stock Exchange, 
Inc. (``BSE'' or ``Exchange'') 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

    The BSE proposes to initiate a pilot program (``Pilot Program'') 
that will allow for the listing of options on selected stocks trading 
below $20 at one-point intervals. The text of the proposed rule change 
appears below. Additions are in italics.
* * * * *

RULES OF THE BOSTON STOCK EXCHANGE

RULES OF THE BOSTON OPTIONS EXCHANGE FACILITY

Trading of options contracts on BOX

Chapter IV Securities Traded on the Boston Options Exchange Facility

Sec. 6 Series of Options Contracts Open for Trading

    (a)-(f) no change
    The following rules are in effect until June 5, 2004

Supplementary Material to Section 6

    .01 The interval between strike prices of series of options on 
individual stocks may be $2.50 or greater where the strike price is $25 
or less, provided however, that BOX may not list $2.50 intervals below 
$20 (e.g. $12.50, $17.50) for any class included within the $1 Strike 
Price Pilot Program, as detailed below in Supplementary Material .02, 
if the addition of $2.50 intervals would cause the class to have strike 
price intervals that are $0.50 apart. Exceptions to the strike price 
intervals above are set forth in Supplementary Material .02 below.
    .02 $1 Strike Price Pilot Program:
    a. The interval between strike prices of series of options on 
individual stocks may be $1.00 or greater (``$1 Strike Prices'') 
provided the strike price is $20 or less, but not less than $3. The 
listing of $1 strike prices shall be limited to option classes 
overlying no more than five (5) individual stocks (the ``$1 Strike 
Price Pilot Program'') as specifically designated by BOXR. BOXR may 
list $1 Strike Prices on any other option classes if those classes are 
specifically designated by other national securities exchanges that 
employ a similar $1 Strike Price Pilot Program under their respective 
rules.
    b. To be eligible for inclusion into the $1 Strike Price Pilot 
Program, an underlying security must close below $20 in the primary 
market on the previous trading day. After a security is added to the $1 
Strike Price Pilot Program, BOXR 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 security closes at 
$13, BOXR may list strike prices from $8 to $18. BOXR may not list 
series with $1 intervals within $0.50 of an existing $2.50 strike price 
(e.g. $12.50, $17.50) in the same series. Additionally, for an option 
class selected for the $1 Strike Price Pilot Program, BOXR may not list 
$1 Strike Prices on any series having greater than five (5) months 
until expiration.
    c. A security shall remain in the $ 1 Strike Price Pilot Program 
until otherwise designated by BOXR. The $1 Strike Price Pilot Program 
shall expire on June 5, 2004.

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 BSE 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 III below. The BSE 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 the proposed rule change is to amend a section of 
the Rules of the Boston Options Exchange (the ``BOX Rules'') relating 
to the interval between strike prices of series of options on 
individual stocks. Chapter IV, Securities Traded on the Boston Options 
Exchange Facility, Section 6, Series of Contracts Open for Trading, of 
the Box Rules establishes guidelines regarding the addition of series 
for trading on BOX. The BSE proposes to amend this section of the BOX 
Rules to implement a pilot program, which will operate until June 5, 
2004, and which will allow Boston Options Exchange Regulation, LLC 
(``BOXR''), the wholly owned subsidiary of the BSE that has been 
delegated regulatory authority over BOX,\3\ to list options on up to 
five underlying equities trading below $20 at one-point intervals and 
to list $1 strike prices on any equity option included in the $1 strike 
price pilot program of any other options exchange (``Pilot Program'').
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    \3\ See Securities Exchange Act Release No. 49065 (January 13, 
2004) 69 FR 2768 (January 20, 2004).
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    Pilot Program: The BSE notes that stock prices in general have 
dropped over the past few years, with many listings suffering severe 
declines. As a result, there has been a proliferation of stocks trading 
below $20. Some of these stocks are among the most widely held and 
actively traded equity securities listed on the New York Stock 
Exchange, Inc., the American Stock Exchange LLC (``Amex''), and Nasdaq, 
including, for example, Cisco, Oracle, Lucent, JDS Uniphase, AT&T, and 
Motorola.

[[Page 8994]]

Accordingly, the options overlying these stocks are among the most 
actively traded options.
    When a stock underlying an option trades at a lower price, it 
requires a larger percentage gain in the price of the stock for an 
option to become in-the-money. For example, when a stock trades at $10 
an investor that wants to purchase a slightly out-of-the-money call 
option would have to buy the $12.50 call. At these levels, the stock 
price would need to increase by 25% to reach in-the-money status. A 25% 
or higher gain in the price of the underlying stock is especially large 
given the lessened degree of volatility that has recently accompanied 
many stocks and options. Accordingly, BOX Participants have expressed 
an interest in listing additional strike prices on these classes so 
that they can provide their customers with greater flexibility in 
achieving their investment strategies. For this reason, the Exchange 
proposes to implement the proposed Pilot Program for BOX.
    Pilot Program Eligibility: The BSE proposes to amend Chapter IV, 
Section 6 of the BOX Rules to allow BOXR to list options on selected 
stocks trading below $20 at one-point intervals, provided that the 
strike prices are $20 or less, but not less than $3. An option would 
become eligible for inclusion in the Pilot Program provided that the 
underlying stock closed below $20 in its primary market on the 
preceding trading day. Once the underlying stock is part of the Pilot 
Program, BOXR may continue to list $1 strike prices provided the 
underlying stock remains below $20. As described more fully below, 
although an option class will not be removed automatically from the 
Pilot Program if the underlying stock trades at or above $20, BOXR will 
not add $1 strike prices when the underlying stock closes above $20. 
Once the stock closes below $20, it will again be eligible for the 
addition of $1 strike prices. An underlying stock will remain in the 
Pilot Program until BOXR removes it from the Pilot Program. Options on 
stocks trading under $20 that are not included in the Pilot Program may 
continue to trade in $2.50 and $5.00 strike price intervals. Although 
BOXR may only select up to five individual stock options for its Pilot 
Program, BOXR will not be precluded from also listing at $1 strike 
price intervals equity options included in the $1 strike price programs 
of other option exchanges.
    Procedure for Adding $1 Strike Price Intervals: Chapter IV, Section 
6 of the Box Rules will be amended to set forth the standards regarding 
the addition of $1 strike price intervals. Under the Pilot Program, the 
closing price of the underlying stock serves as the reference point for 
determining which $1 strike prices BOXR may open for trading. To 
minimize the proliferation of options series, BOXR intends to restrict 
the number of $1 strike prices that may be added to those strikes that 
fall within a $5 range of the price of the underlying stock. BOXR will 
not add strike prices outside of the $5 range. For example, if the 
underlying stock trades at $6, BOXR could list $1 strike prices from $3 
to $11, while if the underlying stock trades at $10, BOXR could list $1 
strikes from $5 to $15. By restricting the number of strike prices that 
may be listed to a predetermined $5 range, BOXR believes it will be 
able to provide investors with more flexibility without burdening the 
Options Price Reporting Authority (``OPRA'') capacity by bringing up 
strike prices that are not reasonably related to the price of the 
underlying stock.
    Currently, when an underlying stock trades below $25, BOXR may list 
strike prices with $2.50 intervals. For this reason, several classes 
may have $7.50, $12.50, and $17.50 strike prices. To further avoid the 
proliferation of series, BOXR 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, BOXR 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, BOXR will introduce the $1 levels 
that bracket the phased-out price. For example, when a $7.50 series 
expires, BOXR will replace it by issuing a new expiration month with $7 
and $8 strike price intervals.
    Procedures for Phasing Out $2.50 Strike Price Intervals: When an 
individual stock becomes a part of the Pilot Program, BOXR will begin 
to phase out the existing $2.50 strike price intervals for options on 
that stock in favor of the $1 strike price intervals. To phase-out the 
$2.50 strike price intervals, BOXR first will delist any $2.50 series 
for which there is no open interest. Second, BOXR will no longer add 
new expiration months at $2.50 strike price intervals below $20 when 
existing months expire. This will cause the $2.50 strike price 
intervals below $20 to be phased out when the farthest-out month with a 
$2.50 interval expires.
    $1 Strikes for Longer Dated Options: BOXR will not list $1 strikes 
on any series of individual equity option classes that have greater 
than five months until expiration.
    Procedures for Adding Expiration Months: Chapter IV, Section 6(e) 
of the BOX Rules will govern the addition of expiration months for $1 
strike series. Pursuant to this section, BOXR generally opens up to 
four expiration months for each class upon the initial listing of an 
options class for trading. Thus, for options included in the Pilot 
Program, BOXR will list an additional expiration month upon expiration 
of the near-term month, provided that the underlying stock prices 
closes below $20 on Expiration Friday. If the underlying closes at or 
above $20 on its primary market on Expiration Friday, BOXR will not 
list an additional month of $1 strike price series until the stock 
again closes below $20.
    Procedures for Delisting $1 Strike Price Intervals: At any time, 
BOXR may cease listing $1 strike prices on existing series by 
submitting a cessation notice to The Options Clearing Corporation 
(``OCC'').\4\ As discussed above, if the underlying closes at or above 
$20 on its primary market on Expiration Friday, BOXR will not list any 
additional months with $1 strike prices until the stock subsequently 
closes below $20. If the underlying stock does not subsequently close 
below $20, thereby precluding the listing of additional strike prices 
and months, the existing $1 series eventually will expire. When the 
near-term month is the only series available for trading, BOXR may 
submit a cessation notice to OCC. Upon submission of that notice, the 
underlying stock would no longer count towards the five option classes 
available on BOX pursuant to the Pilot Program, thereby allowing BOXR 
to list options on an additional stock at $1 strike price intervals. 
Once BOXR submits the cessation notice it will not list any additional 
months pursuant to the Pilot Program for trading with strikes below 
$20, unless the underlying stock again closes below $20.\5\
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    \4\ The reasons for submitting a cessation notice are as 
follows: (1) Expiration of available $1 strikes (i.e., the 
underlying stock price remains at or above $20); (2) series 
proliferation concerns; and (3) delisting because of, among other 
things, low price, merger, or takeover. In any event, with prior 
notice to BOX Participants and customers, BOXR will continue to have 
the ability to cease trading any series that has become inactive and 
has no open interest.
    \5\ If the underlying stock trades below $20 after BOXR submits 
a cessation notice, BOXR could again list options on that stock at 
$1 strike prices provided BOXR included the class as one of its five 
allowable classes.
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    OPRA Capacity: BOXR believes that OPRA has the capacity to 
accommodate the increase in the number of series that could be added 
pursuant to the Pilot Program. On a daily basis, the options exchanges 
use an average of less than 7,000 messages per second (``mps'') during 
peak periods, which is less than

[[Page 8995]]

25% of the total system capacity of 32,000 mps. Furthermore, to date, 
the options exchanges have not exceeded 11,000 mps for any extended 
period of time. Therefore, the Exchange believes that implementing the 
Pilot Program would not have a negative impact on OPRA system capacity.
2. Statutory Basis
    The BSE believes that the proposed rule change is consistent with 
section 6(b) of the Act \6\ in general and furthers the objectives of 
section 6(b)(5)\7\ 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 protect investors and the public interest by granting the Exchange 
authority to implement a Pilot Program to list options under certain 
circumstances at one-point intervals.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The BSE does not believe that the proposed rule change will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The BSE 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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \8\ and subparagraph (f)(6) of Rule 19b-4\9\ 
thereunder because it does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; (iii) become operative for 30 days from the date on 
which it was filed, or such shorter time as the Commission may 
designate; and the Exchange has given the Commission written notice of 
its intention to file the proposed rule change at least five business 
days prior to filing. At any time within 60 days of the filing of such 
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.
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
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    Under Rule 19b-4(f)(6)(iii) of the Act,\10\ the proposal does not 
become operative for 30 days after the date of its filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest. The Exchange has 
requested that the Commission waive the 30-day operative date so that 
the Exchange may remain competitive with other exchanges that currently 
have similar rules in effect. The proposed rule change is virtually 
identical to a CBOE pilot program (``CBOE Pilot'') that the Commission 
approved.\11\ Notice of the CBOE Pilot was published for comment \12\ 
and the Commission received one comment letter, which supported the 
CBOE's proposal. Accordingly, the Commission believes that the proposed 
rule change raises no new issues of regulatory concern. The Commission, 
consistent with the protection of investors and the public interest, 
has determined to waive the 30-day operative period,\13\ and, 
therefore, the proposal is effective and operative upon filing with the 
Commission.
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    \10\ 17 CFR 240.19b-4(f)(6)(iii).
    \11\ See Securities Exchange Act Release No. 47991 (June 5, 
2003), 68 FR 35243 (June 12, 2003) (order approving File No. SR-
CBOE-2001-60).
    \12\ See Securities Exchange Act Release No. 47753 (April 29, 
2003), 68 FR 23784 (May 5, 2003).
    \13\ For purposes only of waiving the 30-day operative period 
for this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-BSE-2004-01. 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, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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 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-BSE-2004-01 and should be 
submitted by March 18, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4269 Filed 2-25-04; 8:45 am]
BILLING CODE 8010-01-P