[Federal Register Volume 69, Number 116 (Thursday, June 17, 2004)]
[Notices]
[Pages 33966-33968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13638]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49827; File No. SR-ISE-2004-21]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the International Securities 
Exchange, Inc. To Extend a Pilot Program Under Which It Lists Options 
on Selected Stocks Trading Below $20 at One-Point Intervals Until 
August 5, 2004

June 8, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 33967]]

notice is hereby given that on June 4, 2004, the International 
Securities Exchange, Inc. (``ISE'' 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 ISE. 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

    ISE proposes to extend its pilot program under which it lists 
options on selected stocks trading below $20 at $1 strike price 
intervals (``$1 Pilot Program'') until August 5, 2004. The text of the 
proposed rule change is available at the Office of the Secretary, ISE, 
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, ISE 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. ISE 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
    On June 16, 2003, the Commission approved the ISE's $1 Strike Pilot 
Program enabling it 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.\3\ Although ISE may select only up to five individual stocks to be 
included in the Pilot Program, ISE is also permitted to list options on 
other individual stocks at $1 strike price intervals if other options 
exchanges listed those series pursuant to their respective rules. ISE 
selected the following five options classes to participate in the Pilot 
Program: AMR Corp. [AMR], Calpine Corp. [CPN], EMC Corp. [EMC], El Paso 
Corp. [EP], and Sun Microsystems Inc. [SUNW]. The Pilot Program is set 
to expire on June 5, 2004.
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    \3\ See Securities Exchange Act Release No. 48033 (June 13, 
2003), 68 FR 37036 (June 20, 2004) (``Pilot Program Approval 
Order'').
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    The Pilot Program Approval Order requires ISE to provide the 
Commission with certain information and data covering the entire time 
the Pilot Program was in effect in the event ISE proposes to, among 
other things, extend the $1 Pilot Program beyond June 5, 2004.\4\ ISE 
has conducted a study into the impact that $1 strikes have made on the 
participating $1 Pilot Program classes (``Pilot Program Report'') which 
provides certain data and written analysis relating to the five options 
classes the exchange selected to participate in the $1 Pilot Program. 
Generally, this data shows that there is meaningful trading volume and 
open interest in the $1 strikes, as compared to the non-$1 strikes in 
the same class. For example, an analysis of the trading in AMR options 
for the November 2003 series with the April 2004 series indicates that 
there is a growing interest by investors in the $1 Pilot Program. In 
AMR, for the November 2003 series, the collective open interest and 
trading volume among the $1 strikes (e.g., $6, $9, $11 and $14) was 
48,122 contracts and 8,872 contracts, respectively, compared to the 
collective open interest and trading volume among the non-$1 strikes 
(e.g., $7.50, $10, $12.50 and $15) of 134,221 contracts and 23,259 
contracts, respectively. For the April 2004 series, the collective open 
interest and trading volume among the $1 strikes, (e.g., $11, $12, $13 
and $14) was 36,882 contracts and 45,415 contracts, respectively, 
compared to the collective open interest and trading volume among the 
non-$1 strikes, (e.g., $10 and $15) of 49,145 contracts and 9,860 
contracts, respectively.
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    \4\ ISE attached the Pilot Program Report as an exhibit to this 
proposed rule change. Copies of the Pilot Program Report are 
available at ISE and the Commission's Public Reference Room.
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    A similar analysis of the trading in CPN options for the October 
2003 series with the March 2004 series further lends support for 
extending the $1 Pilot Program. For example, in CPN, for the October 
2003 series, the collective open interest and trading volume among the 
$1 strikes (e.g., $4, $6 and $9) was 22,855 contracts and 3,397 
contracts, respectively, compared to the collective open interest and 
trading volume among the non-$1 strikes (e.g., $5, $7.50 and $10) of 
69,983 contracts and 13,686 contracts, respectively. For the March 2004 
series, the collective open interest and trading volume among the $1 
strikes (e.g., $4, $6 and $7) was 54,853 contracts and 16,153 
contracts, respectively, compared to the collective open interest and 
trading volume among the non-$1 strikes (e.g., $5) of 16,441 contracts 
and 13,848 contracts, respectively. An analysis of the trading in the 
options for EMC, EP and SUNW revealed similar findings.
    While the trading volume and open interest in the $1 strikes is not 
always as high as it is the non-$1 strikes, ISE believes that this can 
at least partially be attributed to the industry convention of $2.50 
strikes in low priced stocks, and that, over time, this convention will 
break down and result in a more even distribution in volume and open 
interest in $1 strikes. ISE believes that this information and data 
demonstrates that the five classes it selected to participate were 
appropriate for the $1 Pilot Program. The underlying stocks are highly 
capitalized with low stock prices and generally in different 
industries, yet the $1 strike data appears relatively consistent across 
all five stocks. Moreover, ISE did not experience any capacity issues 
related to the $1 Pilot Program, nor does it believe there has been any 
negative impact on OPRA's capacity as a result of the $1 Pilot Program. 
In general, ISE states the $1 Pilot Program was well received by its 
Members, and ISE did not receive any complaints from Members or 
investors regarding the listing of $1 strikes.
    ISE believes that this information and data shows that there is 
sufficient investor interest and demand to justify extending the $1 
Pilot Program until August 5, 2004. ISE continues to believe that the 
$1 Pilot Program has provided investors with greater trading 
opportunities and flexibility. ISE further believes the $1 Pilot 
Program has provided investors with the ability to more closely tailor 
their investment strategies and decisions to the movement of the 
underlying security. ISE has not detected any material proliferation of 
illiquid options series resulting from the narrower strike price 
intervals.
2. Statutory Basis
    ISE believes the proposed rule change is consistent with the Act 
and the rules and regulations thereunder and, in particular, the 
requirements of section 6(b) of the Act.\5\ Specifically, ISE believes 
the proposed rule change is consistent with requirements under Section 
6(b)(5) of the Act \6\ that the rules of an exchange be 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

[[Page 33968]]

open market and a national market system, and, in general, to protect 
investors and the public interest. ISE believes that extension of the 
$1 Pilot Program until August 5, 2004 will result in a continuing 
benefit to investors, by allowing them to more closely tailor their 
investment decisions, and will allow ISE to further study investor 
interest in $1 strike price intervals.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ISE 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 ISE has not solicited, and does not intend to solicit, comments 
on this proposed rule change. The ISE has not received any unsolicited 
written comments from its members of other interested persons.

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 \7\ and subparagraph (f)(6) of Rule 19b-4 \8\ 
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 ISE 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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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6).
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    Under Rule 19b-4(f)(6)(iii) of the Act,\9\ 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 ISE 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. ISE 
has requested that the Commission waive 30-day operative delay so that 
the $1 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 the 30-day operative delay,\10\ and, 
therefore, the proposal is effective and operative upon filing with the 
Commission.\11\
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    \9\ 17 CFR 240.19b-4(f)(6)(iii).
    \10\ For purposes only of waiving the 30-day operative delay for 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \11\ In its Pilot Program Approval Order, the Commission stated 
that if ISE proposed to (1) extend the $1 Pilot Program beyond June 
5, 2004; (2) expand the number of options eligible for inclusion in 
the $1 Pilot Program; or (3) seek permanent approval of the $1 Pilot 
Program, the ISE would be required to submit a Pilot Program Report 
to the Commission along with the filing of such proposal. The Pilot 
Program Approval Order required the ISE to submit a proposed rule 
change with the Pilot Program Report at least 60 days prior to the 
expiration of the $1 Pilot Program. Because ISE failed to provide 
its Pilot Program Report to the Commission with sufficient time for 
the Commission staff to review the report, the Commission is 
extending the ISE's $1 Pilot Program only until August 5, 2004, to 
provide the Commission staff with time to review the ISE's Pilot 
Program Report.
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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. 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-ISE-2004-21 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-ISE-2004-21. 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 ISE. 
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-ISE-2004-21 
and should be submitted on or before July 8, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-13638 Filed 6-16-04; 8:45 am]
BILLING CODE 8010-01-P