[Federal Register Volume 69, Number 146 (Friday, July 30, 2004)]
[Notices]
[Pages 45864-45866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17393]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50060; File No. SR-ISE-2004-26]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the International Securities 
Exchange, Inc. To Extend Until June 5, 2005, a Pilot Program Under 
Which It Lists Options on Selected Stocks Trading Below $20 at One-
Point Intervals

July 22, 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 July 16, 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 the 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

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

[[Page 45865]]

series with $1 strike price intervals on equity options classes that 
overlie up to five individual stocks, provided that the strike prices 
are $20 or less, but not less than $3, and subject to the terms of the 
$1 Strike Pilot Program.\3\ Although the ISE may select only up to five 
individual stocks to be included in the $1 Strike Pilot Program, the 
ISE also is permitted to list options on other individual stocks at $1 
strike price intervals if other options exchanges list those series 
pursuant to their respective rules. The ISE selected the following five 
options classes to participate in the $1 Strike Pilot Program: AMR 
Corp. [AMR], Calpine Corp. [CPN], EMC Corp. [EMC], El Paso Corp. [EP], 
and Sun Microsystems Inc. [SUNW]. The $1 Strike Pilot Program expires 
on August 5, 2004.\4\
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    \3\ See Securities Exchange Act Release No. 48033 (June 16, 
2003), 68 FR 37036 (June 20, 2003) (order approving File No. SR-ISE-
2003-17) (``Pilot Program Approval Order''). See also Securities 
Exchange Act Release No. 49827 (June 8, 2004), 69 FR 33966 (June 17, 
2004) (notice of filing and immediate effectiveness of File No. SR-
ISE-2004-21) (extending the $1 Strike Pilot Program until August 5, 
2004) (``Pilot Extension Notice'').
    \4\ See Pilot Extension Notice, supra note 3.
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    The Pilot Program Approval Order and the Pilot Extension Notice 
required the ISE to provide the Commission with certain information and 
data covering the entire time the $1 Strike Pilot Program was in effect 
in the event that the ISE proposed to, among other things, extend the 
$1 Strike Pilot Program. Accordingly, the ISE has prepared and 
submitted a report (``Pilot Program Report'') that provides data and 
written analysis relating to the five options classes the ISE selected 
to participate in the $1 Strike Pilot Program.
    According to the ISE, the Pilot Program Report data shows, 
generally, 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, the ISE notes that an analysis of the trading in AMR 
options for the November 2003 series compared with the April 2004 
series indicates that there is a growing interest by investors in the 
$1 Strike Pilot Program. In AMR, for the November 2003 series, the 
collective open interest and trading volume among all $1 strikes ($6, 
$9, $11, $14, $16 and $17), was 60,026 contracts and 8,872 contracts, 
respectively, compared to the collective open interest and trading 
volume among all non-$1 strikes ($2.50, $5, $7.50, $10, $12.50 and 
$15), of 193,625 contracts and 31,468 contracts, respectively. For the 
April 2004 series, the collective open interest and trading volume 
among all $1 strikes ($6, $7, $8, $9, $11, $12, $13, $14, $16, $17, 
$18, and $19) was 44,422 contracts and 47,327 contracts, respectively, 
compared to the collective open interest and trading volume among all 
non-$1 strikes ($5, $10, $15, $20, $22.50 and $25) of 49,276 contracts 
and 9,900 contracts, respectively.
    The ISE believes that a similar analysis of the trading in CPN 
options for the October 2003 series compared with the March 2004 series 
further lends support for extending the $1 Strike Pilot Program. For 
example, in CPN, for the October 2003 series, the collective open 
interest and trading volume among all $1 strikes ($4, $6, $9 and $11) 
was 23,004 contracts and 3,407 contracts, respectively, compared to the 
collective open interest and trading volume among all non-$1 strikes 
($2.50, $5, $7.50, $10 and $12.50) of 84,537 contracts and 13,738 
contracts, respectively. For the March 2004 series, the collective open 
interest and trading volume among all $1 strikes ($3, $4, $6, $7, $8 
and $9) was 55,884 contracts and 16,329 contracts, respectively, 
compared to the collective open interest and trading volume among all 
non-$1 strikes ($5 and $10) of 16,441 contracts and 13,848 contracts, 
respectively. According to the ISE, 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 in the non-$1 strikes, the 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. The ISE believes that this 
information and data demonstrate that the five classes it selected to 
participate were appropriate for the $1 Strike Pilot Program. The ISE 
notes that the underlying stocks are highly capitalized with low stock 
prices and generally are in different industries, yet the $1 strike 
data appears relatively consistent across all five stocks. Moreover, 
the ISE did not experience any capacity issues related to the $1 Strike 
Pilot Program, nor does it believe there has been any negative impact 
on the capacity of the Options Price Reporting Authority (``OPRA'') as 
a result of the $1 Strike Pilot Program. According to the ISE, the $1 
Strike Pilot Program was, in general, well received by the ISE's 
members, and the ISE did not receive any complaints from its members or 
investors regarding the listing of $1 strikes.
    The ISE believes that this information and data shows that there is 
sufficient investor interest and demand to justify extending the $1 
Strike Pilot Program until June 5, 2005. The ISE continues to believe 
that the $1 Strike Pilot Program has provided investors with greater 
trading opportunities and flexibility. The ISE further believes the $1 
Strike Pilot Program has provided investors with the ability to more 
closely tailor their investment strategies and decisions to the 
movement of the underlying security. The ISE has not detected any 
material proliferation of illiquid options series resulting from the 
narrower strike price intervals.
2. Statutory Basis
    The 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, the 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 open market and a national market system, 
and, in general, to protect investors and the public interest. The ISE 
believes that extension of the $1 Strike Pilot Program until June 5, 
2005, will result in a continuing benefit to investors by allowing them 
to more closely tailor their investment decisions, and will allow the 
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

    The 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 or other interested persons.

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

    The ISE has filed the proposed rule change pursuant to section 
19(b)(3)(A)

[[Page 45866]]

of the Act \7\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\8\ 
Because the foregoing proposed rule change: (i) Does not significantly 
affect the protection of investors or the public interest; (ii) does 
not impose any significant burden on competition; and (iii) does not 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to section 19(b)(3)(A) of the Act 
and Rule 19b-4(f)(6) thereunder. As required under Rule 19b-
4(f)(6)(iii), the ISE provided the Commission with written notice of 
its intention to file the proposed rule change at least five business 
days prior to filing the proposal with the Commission or such shorter 
period as designated by the Commission.
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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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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The ISE has requested that the 
Commission waive the 30-day operative delay to prevent a lapse in the 
operation of the $1 Strike Pilot Program, which expires on August 5, 
2004.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it will permit the $1 Strike Pilot Program to continue without 
interruption through June 5, 2005.\9\ For this reason, the Commission 
designates that the proposal become operative immediately.\10\
    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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    \9\ 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. 15 U.S.C. 78c(f).
    \10\ If the ISE proposes to (1) extend the $1 Strike Pilot 
Program beyond June 5, 2005; (2) expand the number of options 
eligible for inclusion in the $1 Strike Pilot Program; or (3) seek 
permanent approval of the $1 Strike Pilot Program, it must submit a 
pilot program report to the Commission along with the filing of such 
proposal. The pilot program report must cover the entire time the $1 
Strike 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 $1 Strike Pilot 
Program; (2) delisted options series (for all strike price 
intervals) for all options selected for the $1 Strike Pilot Program; 
(3) an assessment of the appropriateness of $1 strike price 
intervals for the options the ISE selected for the $1 Strike Pilot 
Program; (4) an assessment of the impact of the $1 Strike Pilot 
Program on the capacity of the ISE's, OPRA's, and vendors' automated 
systems; (5) any capacity problems or other problems that arose 
during the operation of the $1 Strike Pilot Program and how the ISE 
addressed them; (6) any complaints that the ISE received during the 
operation of the $1 Strike Pilot Program and how the ISE addressed 
them; and (7) any additional information that would help to assess 
the operation of the $1 Strike Pilot Program. The Commission expects 
the ISE to submit a proposed rule change at least 60 days before the 
expiration of the $1 Strike Pilot Program in the event the ISE 
wishes to extend, expand, or seek permanent approval of the $1 
Strike Pilot Program. The Commission notes that the submission of a 
satisfactory pilot program report along with a proposed rule change 
to extend, expand, or permanently approve the $1 Strike Pilot 
Program is a condition precedent to the future operation of the 
ISE's $1 Strike 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 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-2004-26 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-2004-26. 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 the 
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-
2004-26 and should be submitted on or before August 20, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-17393 Filed 7-29-04; 8:45 am]
BILLING CODE 8010-01-P