[Federal Register Volume 71, Number 99 (Tuesday, May 23, 2006)]
[Notices]
[Pages 29690-29692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-7800]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53805; File No. SR-CBOE-2006-31]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change to Extend Until June 5, 2007, a Pilot Program for 
Listing Options on Selected Stocks Trading Below $20 at One-Point 
Intervals

May 15, 2006.
    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 April 27, 2006, 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, II, and III below, which Items have been prepared by CBOE. 
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. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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

    CBOE proposes to amend Commentary .01 to CBOE Rule 5.5, ``Series of 
Option Contracts Open for Trading,'' to extend until June 5, 2007, 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 CBOE's Web site (http://www.cboe.com), at 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, 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. CBOE has prepared

[[Page 29691]]

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 (``Third Pilot Extension Notice'').\5\ 
The Pilot Program allows CBOE to select a total of five individual 
stocks on which option series may be listed at $1 strike price 
intervals.\6\ 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''[supreg]) 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.
---------------------------------------------------------------------------

    \5\ 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 through 
June 5, 2005 and again through June 5, 2006. See Securities Exchange 
Act Release Nos. 49799 (June 3, 2004), 69 FR 32642 (June 10, 2004) 
(notice of filing and immediate effectiveness of File No. SR-CBOE-
2004-34) (``First Pilot Extension Notice'') and 51771 (May 31, 
2005), 70 FR 33228 (June 7, 2005) (notice of filing and immediate 
effectiveness of File No. SR-CBOE-2005-37) (``Second Pilot Extension 
Notice'') (collectively, ``Pilot Extension Notices''). Under 
Interpretation and Policy .01(a) to CBOE Rule 5.5, the Pilot Program 
is scheduled to expire on June 5, 2006.
    \6\ The Pilot Program generally allows CBOE to select a total of 
five individual stocks on which option series may be listed at $1 
strike price intervals. However, the Pilot Program was recently 
amended to provide that CBOE can designate no more than four 
individual stocks for inclusion in the Pilot Program at the same 
time there are strike prices listed for $1 intervals on Mini-SPX 
options in accordance with Interpretation and Policy .14 to CBOE 
Rule 24.9. If CBOE were to determine to discontinue listing Mini-SPX 
option series at $1 strike price intervals, CBOE would again be free 
to select up to five option classes for inclusion in the Pilot 
Program. See Securities Exchange Act Release No. 52625 (October 18, 
2005), 70 FR 61479 (October 24, 2005) (File No. SR-CBOE-2005-81) 
(notice of filing and order granting accelerated approval of 
proposed rule change relating to options on a reduced-value version 
of the Standard and Poor's 500 Stock Index (``Mini-SPX options'')).
---------------------------------------------------------------------------

    As stated in its previous filings establishing and extending the 
Pilot Program,\7\ 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 First 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\ As 
reflected in the Second Pilot Extension Notice, after almost two years 
since the inception of the Pilot Program, ADV in several options 
classes remained significantly higher than immediately prior to their 
respective selection in the Pilot Program.\12\ Now, almost three years 
since the inception of the Pilot Program, CBOE notes that ADV in 
several options classes remains significantly higher than immediately 
prior to their selection for the Pilot Program.\13\ It should be noted 
that, as reflected in the Pilot Program Report for the Second Pilot 
Extension Notice and this Third Pilot Extension Notice, 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.
---------------------------------------------------------------------------

    \7\ See Pilot Approval Order and Pilot Extension Notices, supra 
note 5.
    \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 Notices, supra 
note 5.
    \10\ See First Pilot Extension Notice, supra note 5.
    \11\ See First Pilot Extension Notice, supra note 5.
    \12\  See Second Pilot Extension Notice, supra note 5.
    \13\ Pursuant to the Pilot Extension Notices, 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.
---------------------------------------------------------------------------

    With regard to the impact on system capacity, CBOE's analysis of 
the Pilot Program also suggests that the impact on CBOE's, the Options 
Price Reporting Authority's (``OPRA''), and market data vendors'' 
respective automated systems has been minimal. Specifically, CBOE notes 
that in February 2006, 22 of the 23 classes participating in the Pilot 
Program accounted for 7,002,356 quotes per day or 0.89% of the 
industry's 790,899,315 average quotes per day.\14\ The 23 classes 
averaged 268,468 contracts per day or 3.56% of the industry's 7,531,756 
average contracts per day. The classes involved totaled 1458 series or 
1.1% of all series listed.\15\ It should be noted that these quoting 
statistics may overstate 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, CBOE 
believes that the overall impact on capacity is still minimal.
---------------------------------------------------------------------------

    \14\ Quoting information is not included for CPN, which was 
delisted from the New York Stock Exchange on December 6, 2005 and 
trading in the existing option series was restricted.
    \15\ See Pilot Program Report, infra Exhibit 3.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes 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 believes 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.\16\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the requirements of section 6(b)(5) \17\ 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.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    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.

[[Page 29692]]

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

    The Exchange neither solicited nor received comments on the 
proposal.

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

    CBOE has filed the proposed rule change pursuant to section 
19(b)(3)(A) of the Act \18\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\19\ 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), 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.\20\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
    \20\ As set forth in the Commission's initial approval of the 
Pilot Program, if 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. 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 CBOE selected for the Pilot Program; (4) an assessment 
of the impact of the Pilot Program on the capacity of 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 CBOE addressed them; (6) any complaints that CBOE received 
during the operation of the Pilot Program and how 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 5.
---------------------------------------------------------------------------

    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-2006-31 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File No. SR-CBOE-2006-31. 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. Copies of such 
filing will also be available for inspection and copying at the 
principal office of 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-2006-31 and should be submitted on or before June 13, 2006.
---------------------------------------------------------------------------

    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-7800 Filed 5-22-06; 8:45 am]
BILLING CODE 8010-01-P