[Federal Register Volume 70, Number 109 (Wednesday, June 8, 2005)]
[Notices]
[Pages 33562-33564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2940]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51778; File No. SR-BSE-2005-18]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
and Amendment No. 1 to Extend Until June 5, 2006, a Pilot Program for 
Listing Options on Selected Stocks Trading Below $20 at One-Point 
Intervals

June 2, 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 27, 2005, the Boston Stock Exchange, Inc. (``BSE'' 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 BSE. The BSE filed 
Amendment No. 1 to the proposal on June 1, 2005.\3\ The BSE filed the 
proposal pursuant to Section 19(b)(3)(A) of the Act,\4\ and Rule 19b-
4(f)(6) thereunder,\5\ which renders the proposal effective upon filing 
with the Commission.\6\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ As discussed in greater detail in note 13, infra, Amendment 
No. 1 states that the BSE will provide the Commission with a report 
assessing the operation of the $1 strikes pilot program in the event 
that the BSE seeks to extend, expand, or seek permanent approval of 
the pilot program.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ The BSE 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 BSE proposes to amend Supplementary Material .02 to Chapter IV, 
Section 6, ``Series of Options Contracts Open for Trading,'' of the 
rules of the Boston Options Exchange (``BOX'') to extend until June 5, 
2006, the 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 BSE's Web site (http://www.bostonstock.com), at the BSE'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 BSE 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 BSE 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 \7\ under the BOX Rules for an additional year, until June 5, 
2006. The Pilot Program allows the Boston Options Exchange Regulation, 
LLC (``BOXR''), the wholly owned subsidiary of the BSE with the 
delegated regulatory authority

[[Page 33563]]

over BOX, to list options on a pilot basis on up to five selected 
underlying equities trading below $20 at $1 strike price intervals, as 
provided under the terms of the Pilot Program. The Pilot Program also 
allows BOX to list $1 strike prices on any equity option included in 
the $1 strike price pilot program of any other options exchange until 
June 5, 2005. The proposed rule change retains the text of 
Supplementary Material .02 to Section 6 of Chapter IV of the BOX Rules, 
as currently established on a pilot basis, and seeks to extend the 
operation of the Pilot Program for another year.
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    \7\ The BSE implemented the Pilot Program in February 2004 and 
extended it through June 5, 2005. See Securities Exchange Act 
Release Nos. 49292 (February 20, 2004), 69 FR 8993 (February 26, 
2004) (notice of filing and immediate effectiveness of File No. SR-
BSE-2004-01) (establishing the Pilot Program); and 49806 (June 4, 
2004), 69 FR 32640 (June 10, 2004) (notice of filing and immediate 
effectiveness of File No. SR-BSE-2004-22) (extending the Pilot 
Program through June 5, 2005).
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    Chapter IV, Section 6 of the Box Rules establishes guidelines 
regarding the addition of options series for trading on BOX. Under the 
Pilot Program, to be eligible for selection into 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, BOX may list 
strike prices at $1 intervals from $3 to $20, but no $1 strike price 
may be listed that is greater than $5 from the underlying stock's 
closing price on its primary market on the previous day. BOX also may 
list $1 strikes on any other options class designated by another 
options exchange that employs a similar pilot program under its rules. 
BOX may not list long-term option series (``LEAPS'' [supreg]) at $1 
strike price intervals for any class selected for the Pilot Program. 
BOX also is restricted from listing any series that would result in 
strike prices being $0.50 apart.
    The Pilot Program initially was proposed in reaction to the general 
decrease in stock prices and the proliferation of stocks trading below 
$20, including some of the most widely held and actively traded equity 
securities listed on the New York Stock Exchange, the American Stock 
Exchange, and Nasdaq. The BSE notes that many of these stocks are still 
trading below $20, including, for example, Oracle, Micron Technology, 
EMC Corp, and Motorola.
    When a stock underlying an option trades at a lower price, it 
requires a larger percentage gain in the price of the stock for an 
option to become in-the-money. For example, if a stock trades at $10, 
an investor that wants to purchase a slightly out-of-the-money call 
option would have to buy the $12.50 call. At these levels, the stock 
price would need to increase by 25% to reach in-the-money status. The 
BSE notes that a 25% or higher gain in the price of the underlying 
stock is especially large given the lessened degree of volatility that 
recently has accompanied many stocks and options. According to the BSE, 
listing additional strike prices on these classes has allowed BOX 
Participants to provide their customers with greater trading 
flexibility in achieving their investment strategies. In further 
support of this proposed rule change, the Exchange submitted to the 
Commission a Pilot Program Report, attached as Exhibit 3, offering 
detailed data from and analysis of the Pilot Program.
2. Statutory Basis
    The Exchange believes that the data demonstrates that there is 
sufficient investor interest and demand to extend the Pilot Program for 
another year, without adversely affecting systems capacity. The 
proposed rule change is designed to provide investors with greater 
trading opportunities, and the flexibility and ability to more closely 
tailor their investment strategies and decisions to the movement of the 
underlying security. Accordingly, the Exchange believes that the 
proposal is consistent with the requirements of Section 6(b) of the 
Act,\8\ in general, and of Section 6(b)(5) of the Act,\9\ in 
particular, in that it is designed to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The BSE does not believe 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

    The BSE has neither solicited nor received comments on the proposed 
rule change.

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

    The BSE has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\11\ 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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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 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 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 BSE has asked 
the Commission to waive the five-day pre-filling notice requirement and 
the 30-day operative delay to allow the Pilot Program to continue to 
operate without interruption.
    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 allow the Pilot Program to continue without 
interruption through June 5, 2006.\12\ For this reason, the Commission 
designates that the proposal become operative on June 5, 2005.\13\
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    \12\ 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).
    \13\ In the event that the BSE proposes to: (1) extend the Pilot 
Program beyond June 5, 2006; (2) expand the number of options 
eligible for inclusion in the Pilot Program; or (3) seek permanent 
approval of the Pilot Program, the BSE will 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 
BSE will 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 will cover the entire time the 
Pilot Program was in effect and will 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 BSE 
selected for the Pilot Program; (4) an assessment of the impact of 
the Pilot Program on the capacity of the BSE's, the Options Price 
Reporting Authority's, and vendors' automated systems; (5) any 
capacity problems or other problems that arose during the operation 
of the Pilot Program and how the BSE addressed them; (6) any 
complaints that the BSE received during the operation of the Pilot 
Program and how the BSE addressed them; and (7) any additional 
information that would help to assess the operation of the Pilot 
Program. See Amendment No. 1, supra note 3.

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[[Page 33564]]

    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.\14\
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    \14\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
section 19(b)(3)(C) of the Act, the Commission considers the 
proposal to have been filed on June 1, 2005, the date the BSE filed 
Amendment No. 1 to the proposal.
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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 No. SR-BSE-2005-18 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-0609.
    All submissions should refer to File No. SR-BSE-2005-18. 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, 100 F Street, NE, 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the BSE. 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-BSE-2005-18 and should be 
submitted on or before June 29, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2940 Filed 6-7-05; 8:45 am]
BILLING CODE 8010-01-P