[Federal Register Volume 69, Number 155 (Thursday, August 12, 2004)]
[Notices]
[Pages 49931-49933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18451]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50152; File No. SR-PCX-2004-61]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
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

August 5, 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 August 3, 2004, the Pacific Exchange, Inc. (``PCX'' 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 PCX. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX 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, PCX, 
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, PCX 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. PCX 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 this proposal is to extend the PCX's $1 Strike Pilot 
Program until June 5, 2003. The current $1 Strike Pilot Program expires 
on August 4, 2004. PCX states that its member firms have expressed a 
continued interest in listing additional strike prices on low priced 
stocks so that they can provide their customers with greater 
flexibility in their investment choices. For this reason, PCX proposes 
to extend the $1 Strike Pilot Program. PCX notes that all of the issues 
eligible to be included in the $1 Strike Pilot Program, the procedures 
for adding $1 strike intervals, the procedures for phasing out $2.50 
strike price intervals, the prohibition against listing long-term 
options (also known as ``LEAPS'') in equity option classes at $1 strike 
price intervals, the procedures for adding expiration months and the 
procedures for deleting $1 strike intervals will all remain the 
same.\3\
---------------------------------------------------------------------------

    \3\ The Commission approved the $1 Strike Pilot Program on June 
17, 2003. See Securities Exchange Act Release No. 48045 (June 17, 
2003); 68 FR 37549 (June 24, 2003) (``Pilot Program Approval 
Order''). See also Securities Exchange Act Release No. 49818 (June 
4, 2004), 69 FR 33440 (June 15, 2004) (notice of filing and 
immediate effectiveness of File No. SR-PCX-2004-39) (extending the 
$1 Strike Pilot Program until August 4, 2004) (``Pilot Extension 
Notice''). The Pilot Program Approval Order and the Pilot Extension 
Notice required PCX 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 PCX proposed to, among other 
things, extend the $1 Strike Pilot Program. Accordingly, PCX has 
prepared and submitted a report (``Pilot Program Report'') that 
provides data and written analysis relating to the five options 
classes PCX selected to participate in the $1 Strike Pilot Program.
---------------------------------------------------------------------------

2. Statutory Basis
    PCX believes that the continuation of the $1 Strike Pilot Program 
will stimulate customer interest in options overlying lower-priced 
stocks by creating greater trading opportunities and flexibility. PCX 
further believes that continuation of the $1 Strike Pilot Program will 
provide customers with the ability to more closely tailor investment 
strategies to the precise movement of the underlying security. For 
these reasons, PCX 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.\4\ Specifically, PCX 
believes the proposed rule change is consistent with the requirements 
under section 6(b)(5) \5\ 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

[[Page 49932]]

general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    PCX does not believe that the proposed rule change, as amended, 
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

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

III. 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-PCX-2004-61 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-PCX-2004-61. 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 PCX. 
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-PCX-2004-61 
and should be submitted on or before September 2, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\6\ 
In particular, the Commission finds that the proposed rule change is 
consistent with section 6(b)(5) of the Act,\7\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. Specifically, the Commission 
believes the proposed listing of one point strike price intervals in 
selected equity options on a pilot basis should provide investors with 
more flexibility in the trading of equity options overlying stocks 
trading at more than $3 but less than $20, thereby furthering the 
public interest by allowing investors to establish equity options 
positions that are better tailored to meet their investment objectives. 
The Commission also believes that the Exchange's limited Pilot Program 
strikes a reasonable balance between the Exchange's desire to 
accommodate market participants by offering a wide array of investment 
opportunities and the need to avoid unnecessary proliferation of 
options series. The Commission expects the Exchange to monitor the 
applicable equity options activity closely to detect any proliferation 
of illiquid options series resulting from the narrower strike price 
intervals and to act promptly to remedy this situation should it occur. 
In addition, the Commission requests that PCX monitor the trading 
volume associated with the additional options series listed as a result 
of the Pilot Program and the effect of these additional series on 
market fragmentation and on the capacity of the Exchange's, OPRA's, and 
vendors' automated systems.
---------------------------------------------------------------------------

    \6\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission finds good cause for approving the proposal prior to 
the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Accelerated approval of the proposed 
rule change is consistent with the protection of investors and the 
public interest because it will permit the $1 Strikes Pilot Program to 
continue without interruption through June 5, 2005. For these reasons, 
the Commission believes that there is good cause, consistent with 
Sections 6(b)(5) and 19(b) of the Act,\8\ to approve the PCX's 
proposal, as amended, on an accelerated basis.\9\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b)(5) and 78s(b).
    \9\ If PCX 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 PCX selected for the $1 Strike Pilot 
Program; (4) an assessment of the impact of the $1 Strike Pilot 
Program on the capacity of the PCX'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 PCX 
addressed them; (6) any complaints that PCX received during the 
operation of the $1 Strike Pilot Program and how PCX addressed them; 
and (7) any additional information that would help to assess the 
operation of the $1 Strike Pilot Program. The Commission expects PCX 
to submit a proposed rule change at least 60 days before the 
expiration of the $1 Strike Pilot Program in the event PCX 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 PCX's $1 Strike 
Pilot Program.
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-PCX-2004-61) is hereby 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2).


[[Page 49933]]


---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18451 Filed 8-11-04; 8:45 am]
BILLING CODE 8010-01-P