[Federal Register Volume 70, Number 108 (Tuesday, June 7, 2005)]
[Notices]
[Pages 33228-33230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2891]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51771; File No. SR-CBOE-2005-37]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change to Extend until June 5, 2006, a Pilot Program for 
Listing Options on Selected Stocks Trading Below $20 at One-Point 
Intervals

May 31, 2005.
    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 9, 2005, the Chicago Board Options Exchange, Incorporated 
(``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 the CBOE. The 
CBOE filed the proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ 
and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission.\5\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The CBOE has asked the Commission to waive the 30-day 
operative delay. See Rule 19b-4(f)(6)(iii), 17 CFR 240.19b-
4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend Commentary .01 to CBOE Rule 5.5, 
``Series of Option Contracts Open for Trading,'' to extend until June 
5, 2006, its pilot program for listing options series on selected 
stocks trading below $20 at one-point intervals (``Pilot Program''). 
The text of the proposed rule change is available on the CBOE's Web 
site (http://www.cboe.com), at the CBOE's principal office, and at the 
Commission's Public Reference Room.

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 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. The 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
    The purpose of the proposed rule change is to extend the Pilot 
Program for an additional year.\6\ The Pilot Program allows the CBOE to 
select a total of five individual stocks on which option series may be 
listed at $1 strike price intervals. To be eligible for inclusion in 
the Pilot Program, the underlying stock must close below $20 on its 
primary market on the previous trading day. If selected for the Pilot 
Program, the Exchange may list strike prices at $1 intervals from $3 to 
$20, but no $1 strike price may be listed that is greater than $5 away 
from the underlying stock's closing price on its primary market on the 
previous day. The Exchange also may list $1 strikes on any other 
options class designated by another options exchange that employs a 
similar pilot program under its rules. Under the terms of the Pilot 
Program, the Exchange may not list long-term option series (``LEAPS'' 
[reg] at $1 strike price intervals for any class selected for the Pilot 
Program. The Exchange also is restricted from listing any series that 
would result in strike prices being $0.50 apart.
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    \6\ 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) (order approving File No. SR-CBOE-2001-60) 
(``Pilot Approval Order''). The Pilot Program was extended for an 
additional year on June 3, 2004. See Securities Exchange Act Release 
No. 49799 (June 3, 2004), 69 FR 32642 (June 10, 2004) (notice of 
filing and immediate effectiveness of File No. SR-CBOE-2004-34) 
(``Pilot Extension Notice''). Under Interpretation and Policy .01(a) 
to CBOE Rule 5.5, the Pilot Program is scheduled to expire on June 
5, 2005.
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    As stated in its previous filings establishing and extending the 
Pilot Program,\7\ the CBOE believes that $1 strike price intervals 
provide investors with greater flexibility in the trading of equity 
options that overlie lower-priced stocks \8\ by allowing investors to 
establish equity options positions that are better tailored to meet 
their investment objectives.\9\ As reflected in the Pilot Extension 
Notice, the trading volume in a wide majority of the classes selected 
for the Pilot Program increased significantly within the first year 
after being selected for the Pilot Program.\10\ In ten of the 22 
classes originally selected, average daily trading volume (``ADV'') 
increased over 100%, and in some classes ADV more than tripled.\11\ 
Now, almost two years since the inception of the Pilot Program, the 
CBOE notes that ADV in several options classes remains significantly 
higher than immediately prior to their selection for the Pilot 
Program.\12\ It should be noted that, as reflected in the Pilot Program 
Report, ADV also has dropped in several options classes since their 
selection for the Pilot Program, although it is difficult to identify 
the specific market factors that may contribute to the increase or 
decrease in options trading volume from one particular class to 
another, especially considering the time removed since the inception of 
the Pilot Program. However, the Exchange still believes that the 
practice of offering customers strike prices for lower-priced stocks at 
$1 intervals contributes to the overall volume of the participating 
options classes.
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    \7\ See Pilot Approval Order and Pilot Extension Notice, supra 
note 6.
    \8\ To be eligible for inclusion in the Pilot Program, the 
underlying stock must close below $20 per share on its primary 
market on the previous trading day.
    \9\ See Pilot Approval Order and Pilot Extension Notice, supra 
note 6.
    \10\ See Pilot Extension Notice, supra note 6.
    \11\ See Pilot Extension Notice, supra note 6.
    \12\ Pursuant to the Pilot Extension Notice, the CBOE is 
submitting a report (the ``Pilot Program Report''), as Exhibit 3 to 
the proposal. Among other things, the Pilot Program Report contains 
analyses of the ADV and open interest (``OI'') for the options 
classes that have been selected for the Pilot Program since its 
inception.
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    With regard to the impact on system capacity, the CBOE's analysis 
of the Pilot Program also suggests that the impact on the CBOE's, the 
Options Price Reporting Authority's (``OPRA''), and market data 
vendors' respective automated systems has been minimal. Specifically, 
the CBOE notes that in February 2005, the 21 classes participating in 
the Pilot Program accounted for 8,482,369 quotes per day or 2.26% of 
the industry's 374,547,949 average quotes per day. These 21 classes 
averaged 285,509 contracts per day or 5.11% of the industry's 5,589,841 
average contracts per day. The classes involved totaled 881 series or 
2.47% of all series listed.\13\ It should be noted that these quoting 
statistics may overstate

[[Page 33229]]

the contribution of $1 strike prices because these figures also include 
quotes for series listed in intervals higher than $1 (i.e., $2.50 
strikes) in the same options classes. Even with the non-$1 strike 
series quoting being included in these figures, the CBOE believes that 
the overall impact on capacity is still minimal.
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    \13\ See Pilot Program Report, infra Exhibit 3.
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2. Statutory Basis
    The Exchange believe that an extension of the Pilot Program is 
warranted because the data indicates that there is strong investor 
demand for $1 strikes and because the Pilot Program has not adversely 
impacted systems capacity. For these reasons, the Exchange believe 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.\14\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) \15\ that the rules 
of a national securities exchange be designed to promote just and 
equitable principles of trade, to prevent fraudulent and manipulative 
acts and, in general, to protect investors and the public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believes that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in the 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 CBOE has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \16\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\17\ Because the foregoing proposed rule change: (1) Does 
not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, 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 CBOE 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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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 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 for 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 CBOE has asked the Commission to waive the 30-
day operative delay to permit the Pilot Program extension to become 
effective at the time the Commission waives the 30-day operative delay.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it will allow the Pilot Program to continue without 
interruption through June 5, 2006.\18\ For this reason, the Commission 
designates that the proposal become operative on June 5, 2005.\19\
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    \18\ 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).
    \19\ As set forth in the Commission's initial approval of the 
Pilot Program, if the CBOE proposes to: (1) Extend the Pilot 
Program; (2) expand the number of options eligible for inclusion in 
the Pilot Program; or (3) seek permanent approval of the Pilot 
Program, it must submit a Pilot Program report to the Commission 
along with the filing of its proposal to extend, expand, or seek 
permanent approval of the Pilot Program. The CBOE must file any such 
proposal and the Pilot Program report with the Commission at least 
60 days prior to the expiration of the Pilot Program. The Pilot 
Program 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. See Pilot Approval Order, supra note 6.
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    At any time within 60 days of the filing of the 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.

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 No. SR-CBOE-2005-37 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 No. SR-CBOE-2005-37. 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 will also be available 
for inspection and copying at the principal office of the CBOE. 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 No. SR-CBOE-

[[Page 33230]]

2005-37 and should be submitted on or before June 28, 2005.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2891 Filed 6-6-05; 8:45 am]
BILLING CODE 8010-01-P