[Federal Register Volume 69, Number 112 (Thursday, June 10, 2004)]
[Notices]
[Pages 32642-32644]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13085]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49799; File No. SR-CBOE-2004-34]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Chicago Board Options Exchange, Inc. to Extend a Pilot Program 
Under Which it Lists Options on Selected Stocks Trading Below $20 at 
One-Point Intervals Until June 5, 2005

June 3, 2004.
    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 May 24, 2004, 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 and 
II below, which Items have been prepared by CBOE. CBOE filed Amendment 
No. 1 the proposal on May 28, 2004.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, 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 James M. Flynn, Attorney II, Legal Division, 
CBOE, to Christopher Solgan, Attorney, Division, Commission, dated 
May 26, 2004 (``Amendment No. 1''). In Amendment No. 1, CBOE changed 
the file number of the proposed rule change from SR-CBOE-2004-32 to 
SR-CBOE-2004-34.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to extend its pilot program under which it lists 
options on selected stocks trading below $20 at $1 strike price 
intervals (``Pilot Program'') until June 5, 2005. The text of the 
proposed rule change is available at the Office of the Secretary, CBOE, 
and the Commission.

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

    In its filing with the Commission, CBOE 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. CBOE 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 proposes to extend the Pilot Program for an additional year 
until June 5, 2005.\4\ The current Pilot Program allows CBOE to select 
a total of 5 individual stocks on which option series may be listed at 
$1 strike price intervals. To be eligible for selection into the Pilot 
Program, the underlying stock must close below $20 in its primary 
market on the previous trading day. If selected for the Pilot Program, 
CBOE may list strike prices at $1 intervals from $3 to $20, 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. CBOE 
also may list $1 strikes on any other option class designated by 
another securities exchange that employs a similar Pilot Program under 
their respective rules. CBOE cannot list long-term option series 
(``LEAPS''[reg]) at $1 strike price intervals for any class selected 
for the Pilot Program. CBOE also is restricted from listing any series 
that would result in strike prices being $0.50 apart.
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    \4\ The Commission approved the Pilot Program on June 5, 2003. 
See Securities Exchange Act Release No. 47991 (June 5, 2003); 68 FR 
35243 (June 12, 2003). Under Interpretation and Policy .01(a) to 
CBOE Rule 5.5, the Pilot Program is scheduled to expire on June 5, 
2004.
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    CBOE believes that listing of one point strike price intervals in 
selected equity options provides investors with more flexibility in the 
trading of equity options overlying stocks trading at less than $20 by 
allowing investors to establish equity options positions that are 
better tailored to meet their investment objectives. CBOE has conducted 
a study into the impact that $1 strikes has made on the participating 
Pilot Program classes (``Pilot Program Report'').\5\ Specifically, in 
the Pilot Program Report, CBOE compared the average daily trading 
volume (``ADV'') for the three month period immediately preceding the 
listing of $1 strikes to the most recent three month period (ending 
March 31, 2004) for each of the classes selected to the Pilot Program 
to date. According to CBOE's Pilot Program Report, the trading volume 
in a wide majority of the classes selected to the Pilot Program has 
increased. In ten of the twenty-two classes selected since the 
inception of the program, the ADV has increased over 100%, while in 
some

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classes, the ADV has more than tripled since the respective selection 
date. The Pilot Program Report also suggests that the impact on CBOE's, 
the Options Price Reporting Authority's (``OPRA''), and market data 
vendors'' respective automated systems has been minimal. Specifically, 
in May 2003, activity in the 22 Pilot classes represented 2.01% of all 
OPRA quotes and 3.22% of all OPRA series being quoted. In March 2004, 
those same classes represented 3.00% of all quotes and 3.31% of all 
series being quoted. In addition to $1 strikes, CBOE believes that 
other factors may have an impact on capacity, including the 
implementation of CBOE's Hybrid trading system and quoting in strike 
prices other than $1 strike price intervals.
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    \5\ CBOE attached the Pilot Program Report as an exhibit to this 
proposed rule change. Copies of the Pilot Program Report are 
available at CBOE and the Commission's Public Reference Room.
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2. Statutory Basis
    According to CBOE, an extension of the Pilot Program is warranted 
because it believes the data provided in its Pilot Program Report 
indicates that there is strong investor demand for $1 strikes and that 
the Pilot Program has not adversely impacted capacity. For these 
reasons, CBOE 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.\6\ Specifically, CBOE believes the proposed 
rule change is consistent with the requirement of Section 6(b)(5)\7\ 
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, protect investors and the public interest.
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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

    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.

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

    The foregoing rule change, as amended, 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 CBOE 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.\10\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
    \10\ For purposes of calculating the 60-day abrogation date, the 
Commission considers the 60-day period to have commenced on May 28, 
2004, the date CBOE filed Amendment No. 1.
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    Under Rule 19b-4(f)(6)(iii) of the Act,\11\ 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 and CBOE is required to 
give the Commission written notice of its intention to file the 
proposed rule change at least five business days prior to filing. CBOE 
has requested that the Commission waive the requirement that the 
proposal not become operative for 30 days after the date of its filing 
so that the Pilot Program may continue without interruption after it 
would have otherwise expired on June 5, 2004. For this reason, the 
Commission, consistent with the protection of investors and the public 
interest, has determined to waive requirement that the proposal not 
become operative for 30 days after the date of its filing,\12\ and, 
therefore, the proposal is effective and operative upon filing with the 
Commission.\13\
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    \11\ 17 CFR 240.19b-4(f)(6)(iii).
    \12\ For purposes only of accelerating 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).
    \13\ In the event that CBOE proposes to extend the Pilot Program 
beyond June 5, 2005, expand the number of options eligible for 
inclusion in the Pilot Program, or seek permanent approval of the 
Pilot Program, it should submit a Pilot Program report to the 
Commission along with the filing of such proposal. The report must 
cover the entire time the Pilot Program was in effect, and must 
include: (1) Data and written analysis on the open interest and 
trading volume for options (at all strike price intervals) selected 
for the Pilot Program; (2) delisted options series (for all strike 
price intervals) for all options selected for the Pilot Program; (3) 
an assessment of the appropriateness of $1 strike price intervals 
for the options the CBOE selected for the Pilot Program; (4) an 
assessment of the impact of the Pilot Program on the capacity of the 
CBOE's, OPRA's, and vendors' automated systems; (5) any capacity 
problems or other problems that arose during the operation of the 
Pilot Program and how the CBOE addressed them; (6) any complaints 
that the CBOE received during the operation of the Pilot Program and 
how the CBOE addressed them; and (7) any additional information that 
would help to assess the operation of the Pilot Program. The 
Commission expects the CBOE to submit a proposed rule change at 
least 60 days before the expiration of the Pilot Program in the 
event the CBOE wishes to extend, expand, or seek permanent approval 
of the Pilot Program.
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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, as amended, 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 [email protected]. Please include 
File Number SR-CBOE-2004-34 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2004-34. 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, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of CBOE. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from

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submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
CBOE-2004-34 and should be submitted on or before July 1, 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. 04-13085 Filed 6-9-04; 8:45 am]
BILLING CODE 8010-01-P