[Federal Register Volume 70, Number 108 (Tuesday, June 7, 2005)]
[Notices]
[Pages 33250-33252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2900]


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SECURITITES AND EXCHANGE COMMISSION

[Release No. 34-51768; File No. SR-Phlx-2005-35]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of 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 16, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' 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 Phlx. The Phlx 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 Phlx has asked the Commission to waive the five-day pre-
filing notice requirement and 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 Phlx proposes to amend Commentary .05 to Phlx Rule 1012, 
``Series of Options 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''). As set forth in 
Phlx Rule 1012, Commentary .05, the Pilot Program allows the Phlx to 
list options classes overlying five individual stocks with strike price 
intervals of $1.00 where, among other things, the underlying stock 
closes below $20 on its primary market on the day before the Phlx 
selects the stock for the Pilot Program. The Phlx also may list $1 
strike prices on any options classes selected by other options 
exchanges that have adopted similar pilot programs.\6\ The text of the 
proposed rule change is available on the Phlx's Web site (http://www.phlx.com), at the Phlx's principal office, and at the Commission's 
Public Reference Room.
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    \6\ The Commission approved the Phlx's Pilot Program on June 11, 
2003, and extended it through June 5, 2005. See Securities Exchange 
Act Release Nos. 48013 (June 11, 2003), 68 FR 35933 (June 17, 2003) 
(order approving File No. SR-Phlx-2002-55) (approving the Pilot 
Program through June 5, 2004) (``Phlx Approval Order''); and 49801 
(June 3, 2004), 69 FR 32652 (June 10, 2004) (notice of filing and 
immediate effectiveness of File No. SR-PHLX-2004-38) (extending the 
Pilot Program through June 5, 2005) (``Phlx Pilot Extension''). The 
other options exchanges have similar pilot programs that likewise 
were extended through June 5, 2005. See, e.g., Securities Exchange 
Act Release Nos. 49813 (June 4, 2004), 69 FR 33088 (June 14, 2004) 
(notice of filing and immediate effectiveness of File No. SR-Amex-
2004-45) (extending the $1 strike price pilot program of the 
American Stock Exchange LLC, through June 5, 2005); 49799 (June 3, 
2004), 69 FR 32542 (June 10, 2004) (notice of filing and immediate 
effectiveness of File No. SR-CBOE-2004-34) (extending the $1 strike 
price pilot program of the Chicago Board Options Exchange, 
Incorporated, through June 5, 2005); 50060 (July 22, 2004), 69 FR 
45864 (July 30, 2004) (notice of filing and immediate effectiveness 
of File No. SR-ISE-2004-26) (extending the $1 strike price pilot 
program of the International Securities Exchange, Inc., through June 
5, 2005); and 50152 (August 5, 2004), 69 FR 49931 (August 12, 2004) 
(order approving File No. SR-PCX-2004-61) (extending the $1 strike 
price pilot program of the Pacific Exchange, Inc., through June 5, 
2005).

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[[Page 33251]]

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 Phlx 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 Phlx 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 one year so that the Exchange may continue to list options 
at $1 strike price intervals within the parameters specified in Phlx 
Rule 1012, Commentary .05.
    Because of the large number of stocks that have precipitously 
declined in price over the last four years and the increasing number of 
options overlying this lowest tier of stocks, the Commission approved 
the Pilot Program and extended it through June 5, 2005.\7\ The Exchange 
proposes to extend the Pilot Program for a period of one year, through 
June 5, 2006. The Pilot Program will remain unchanged so that, under 
the terms of the Pilot Program, the Phlx may establish $1 strike price 
intervals on options classes overlying no more than five individual 
stocks designated by the Exchange where the underlying stock closes 
below $20 on its primary market on the trading day before the Exchange 
selects the stock for the Pilot Program. Under the terms of the Pilot 
Program, the strike prices listed pursuant to the Pilot Program must be 
between $3 and $20 and may be no more than $5 above or below the 
closing price of the underlying stock on the preceding day. In 
addition, strike prices listed pursuant to the Pilot Program may not be 
listed within $.50 of an existing $2.50 strike price, and $1 strike 
prices are not applied to long term options series (``LEAPS''). 
Pursuant to the Pilot Program, the Exchange may list $1 strike prices 
on options classes selected by other options exchanges for inclusion in 
their $1 strike price pilot programs.
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    \7\ See Phlx Approval Order and Phlx Pilot Extension, supra note 
6.
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    In July 2003, the Phlx chose and listed five options classes with 
$1 strike price intervals, and thereafter listed $1 strike prices in 
options classes selected by other options exchanges for inclusion in 
their $1 strike price pilot programs. The Phlx currently lists 22 
options classes with $1 strike prices.\8\ According to the Phlx, the 
Exchange's ability to list options at $1 strike price intervals 
pursuant to the Pilot Program has given investors the opportunity to 
more closely and effectively tailor their options investments to the 
price of the underlying stock, has allowed the Exchange to take 
advantage of competitive opportunities to list options at $1 strike 
prices, and has stimulated price competition among the options 
exchanges in these options.
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    \8\ The Phlx continues to list the $1 strike prices in the 
options classes that it initially chose for the Pilot Program: TYCO 
International, LTD (TYC), Micron Tech. (MU), Oracle Co. (ORQ), 
Brocade Comm. (UBF), and Juniper Networks (JUP).
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    In its notice extending the Pilot Program through June 5, 2005, the 
Commission indicated that if the Phlx sought to extend, expand, or 
request permanent approval of the Pilot Program, it would be required 
to include a Pilot Program report with its filing.\9\ The Phlx's Pilot 
Program Report (``Pilot Program Report''), included as Exhibit 3 to the 
proposal, reviews the Exchange's experience with the Pilot Program. 
According to the Phlx, the Pilot Program Report clearly supports the 
Exchange's belief that extension of the Pilot Program is proper. Among 
other things, the Phlx believes that the Pilot Program Report shows the 
strength and efficacy of the Pilot Program on the Exchange, as 
reflected by the increase in the percentage of $1 strikes in comparison 
to total options volume traded on the Phlx (from 37.23% in the 2004 
report to 51.59% in 2005 Pilot Program Report) and the continuing 
robust open interest of options traded on the Phlx at $1 strike price 
intervals. The Phlx believes that the Pilot Program Report establishes 
that the Pilot Program has not created and in the future should not 
create capacity problems for the systems of the Exchange or the Options 
Price Reporting Authority (``OPRA''). In addition, the Pilot Program 
Report explains that most delistings of $1 strike price options series 
occurred to ensure that the chosen $1 strike price issues remained 
within the parameters of the Pilot Program.
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    \9\ See Phlx Pilot Extension, supra note 6.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\10\ in general, and furthers the objectives of 
Section 6(b)(5),\11\ in particular, in that it is designed to perfect 
the mechanism of a free and open market and a national market system, 
to protect investors and the public interest, and to promote just an 
equitable principles of trade. The Phlx believes the proposal would 
achieve this by allowing the continued listing of options at $1 strike 
price intervals within certain parameters, thereby stimulating customer 
interest in options overlying the lowest tier of stocks and creating 
greater trading opportunities and flexibility and providing customers 
with the ability to more closely tailor investment strategies to the 
precise movement of the underlying stocks.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    The Phlx has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \12\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\13\ 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.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 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. In addition, Rule 19b-4(f)(6)(iii) requires a 
self-regulatory organization to provide the Commission with written 
notice of its intent to file the proposed rule

[[Page 33252]]

change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Phlx has asked the Commission to waive the five-day 
pre-filing notice requirement and the 30-day operative delay to allow 
the Exchange to continue listing $1 strike prices without a lapse in 
the operation of the Pilot Program.
    The Commission waives the five-day pre-filing notice requirement. 
In addition, 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 Pilot Program to continue without 
interruption through June 5, 2006.\14\ For this reason, the Commission 
designates that the proposal become operative on June 5, 2005.\15\
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    \14\ 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).
    \15\ As set forth in the Commission's initial approval of the 
Pilot Program, if the Phlx 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 Phlx 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 Phlx selected for the 
Pilot Program; (4) an assessment of the impact of the Pilot Program 
on the capacity of the Phlx'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 Phlx addressed 
them; (6) any complaints that the Phlx received during the operation 
of the Pilot Program and how the Phlx addressed them; and (7) any 
additional information that would help to assess the operation of 
the Pilot Program. See Phlx 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-Phlx-2005-35 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-Phlx-2005-35. 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 Phlx. 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-Phlx-2005-35 and should be 
submitted on or before June 28, 2005.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2900 Filed 6-6-05; 8:45 am]
BILLING CODE 8010-01-P