[Federal Register Volume 74, Number 143 (Tuesday, July 28, 2009)]
[Notices]
[Pages 37266-37268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-17883]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60365; File No. 4-443]


Joint Industry Plan; Notice of Filing of Amendment No. 3 to the 
Plan for the Purpose of Developing and Implementing Procedures Designed 
To Facilitate the Listing and Trading of Standardized Options

July 22, 2009.

I. Introduction

    On June 30, 2009, June 16, 2009, June 12, 2009, June 22, 2009, June 
12, 2009, June 18, 2009, June 23, 2009, July 8, 2009, the Chicago Board 
Options Exchange, Incorporated (``CBOE''), International Securities 
Exchange, LLC (``ISE''), NASDAQ Stock Market LLC (``NASDAQ''), NASDAQ 
OMX BX, Inc. (``BX''), NASDAQ OMX PHLX (``Phlx''), NYSE Amex LLC 
(``NYSE Amex''), NYSE Arca Inc. (``NYSE Arca''), and The Options 
Clearing Corporation (``OCC''), respectively, filed with the Securities 
and Exchange Commission (``Commission''), pursuant to Section 11A of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 608 
thereunder,\2\ Amendment No. 3 to the Plan for the Purpose of 
Developing and Implementing Procedures Designed to Facilitate the 
Listing and Trading of Standardized Options (``Plan'' or ``OLPP'').\3\ 
The amendment would apply uniform objective standards to the range of 
options series exercise (or strike) prices available for trading on the 
Plan Sponsor exchanges. This notice solicits comment on Amendment No. 3 
from interested persons.
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 242.608.
    \3\ On July 6, 2001, the Commission approved the OLPP, which was 
originally proposed by the American Stock Exchange LLC (k/n/a NYSE 
Amex), CBOE, ISE, OCC, Philadelphia Stock Exchange, Inc. (k/n/a 
Phlx), and Pacific Exchange, Inc. (k/n/a NYSE Arca). See Securities 
Exchange Act Release No. 44521, 66 FR 36809 (July 13, 2001). On 
February 5, 2004, the Boston Stock Exchange, Inc. (k/n/a BX) was 
added as a sponsor to the OLPP. See Securities Exchange Act Release 
No. 49199, 69 FR 7030 (February 12, 2004). On March 21, 2008, NASDAQ 
was added as a sponsor to the OLPP. See Securities Exchange Act 
Release No. 57546 (March 21, 2008), 73 FR 16393 (March 27, 2008).
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II. Description of the Proposed Amendment

    Amendment No. 3 proposes to apply uniform objective standards to 
the range of options series exercise (or strike) prices available for 
trading on the Plan Sponsor exchanges as a quote mitigation 
strategy.\4\ According to the Plan Sponsors, by agreeing to uniform 
standards, the Plan Sponsor exchanges intend to reduce the overall 
number of option series available for trading, which will in turn 
lessen the rate of increase in quote traffic.
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    \4\ CBOE, ISE, NASDAQ, BX, Phlx, NYSE Amex, and OCC have 
represented that the Penny Pilot Program has resulted in an 
explosion of quote traffic.
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    Specifically, the proposal applies certain ``range limitations'' to 
the addition of new series strike prices for options classes overlying 
equity securities, Exchange Traded Fund Shares, or Trust Issued 
Receipts. As proposed, if the price of the underlying security is less 
than or equal to $20, the Series Selecting Exchange would not list new 
option series with an exercise price more than 100 percent above or 
below the price of the underlying security.\5\ If the price of the 
underlying security is greater than $20, the Series Selecting Exchange 
would not list new option series with an exercise price more than 50 
percent above or below the price of the underlying security.
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    \5\ This restriction would not prohibit the listing of at least 
three options series per expiration month in an option class.
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    The proposal provides for an objective basis upon which the 
underlying prices for the price range limitations described above shall 
be determined, specifically, in regards to intra-day add-on series and 
next-day series additions, new expiration months and for option series 
to be added as a result of pre-market trading. Furthermore, 8 a.m. 
Chicago time is proposed as the earliest permissible time at which a 
Series Selecting Exchange may notify the OCC, and each other exchange 
also trading the same options class, that it has commenced trading new 
series as a result of pre-market trading. This earliest permissible 
time is established to ensure that outlier prices for the underlying 
security which occur at 6 a.m. Chicago time, for example (i.e., well in 
advance of the opening of the standard trading session), are not relied 
upon for purposes of the exercise price range limitations.

    Example: XYZ closes on Tuesday at $20, but trades in the evening 
aftermarket trading session from a range of $35-$40 on speculation 
of a merger. At 8:15 a.m. Chicago time the next day (Wednesday), the 
exchanges wish to list additional series, for trading that day, with 
strike prices that reflect the anticipated price increase in XYZ 
relative to the previous trading day. There is no official high/low 
price since the market has not yet opened for trading for Wednesday, 
so the exchanges use the most recent pre-open trade price of $40. 
The exchanges could therefore add series with strike prices from 
$20-$60 based upon the proposed exercise price range limitations.
    As of 2 p.m. Chicago time during the Wednesday standard trading 
session XYZ has traded from a range of a low price of $40 to

[[Page 37267]]

a high price of $45. An exchange wishes to add additional series 
during the standard trading session (``intra-day add-on series''). 
According to the proposed exercise price range limitations the 
exchanges may list series with strike prices between $20 and $67.50 
(i.e., $40-(40 x .50) and $45 + (45 x .50). Note that the exchanges 
were already able to list series with strike prices as low as $20 
based upon the pre-open determinations).
    As of the 3 p.m. Chicago time close on Wednesday XYZ hit a low 
price of $35 and a high price of $50 during Wednesday's standard 
trading session. The exchanges wish to add additional series for 
trading the following day (Thursday) (``next-day series 
additions''). According to the proposed exercise price range 
limitations, the exchanges may list additional series with strikes 
between $17.50-$75 (i.e., $35-(35 x .50) and $50 + (50 x .50)). The 
exchanges also wish to add XYZ series the following Monday to 
replace the series expiring this Friday (``new expiration months''), 
and would use this same range ($17.50-$75) for those additional 
series.

    The proposal also allows each Plan Sponsor exchange to designate up 
to five underlying securities to except from the aforementioned 50 
percent restriction and instead apply the 100 percent restriction. 
These designations would be made on an annual basis and cannot be 
removed during the calendar year unless the option class is delisted by 
the designating exchange, in which case the designating exchange may 
designate another class to replace the delisted class. If a designated 
class is delisted by the designating exchange but continues to trade on 
at least one other exchange, any additional series for the class which 
are added from that point forward would again be subject to the 
proposed exercise price range limitations, unless the class is 
subsequently designated by another exchange. The proposal also provides 
an exchange with a procedure to request, if conditions warrant, 
additional case-by-case exceptions even when it has already so 
designated five underlying securities.
    In addition, a procedure is created for a Series Listing Exchange 
to request an exemption, on a case-by-case basis, from the 100 percent 
range limitation, whereby, if unanimously agreed upon by all exchanges 
that list the particular options class, the Series Listing Exchange may 
list options series with strike prices that are more than 100 percent 
above or below the price of the underlying security.\6\
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    \6\ Application of any of the aforementioned exceptions and/or 
exemptions to the strike price range limitations for an underlying 
security would be available to all exchanges listing options on such 
security.
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    Example: Exchange E has designated ABC as one of its five 
classes for which the 100 percent exercise price range limitations 
shall apply despite ABC's price exceeding $20. ABC hit a low price 
of $25 and a high price of $30 during the standard trading session 
as of the 3 p.m. Chicago time market close on Wednesday. The 
exchanges are considering next-day series additions for Thursday's 
opening, and, according to the proposed exercise price range 
limitations, may list additional series with strikes ranging from 
$0-$60. However, Exchange E believes that $60 as the high strike 
available to add will be insufficient to allow for adequate customer 
demand should ABC's price fluctuate to the high side.\7\ Exchange E 
requests an exemption from the 100% range limitation for the purpose 
of adding strikes beyond $60 beginning on Thursday. If all exchanges 
that trade ABC unanimously consent then Exchange E, and all other 
exchanges that list ABC, may exceed the $60 upper strike price 
limitation when adding new series. If unanimous consent is not given 
then all exchanges will be limited to the 100 percent exercise price 
range limitations. The exchanges may add strikes beyond $60 to all 
existing series months at the time of consent. They may also add 
strikes beyond $60 in the series month that will be created at the 
next standard expiration after consent is provided, and if 
appropriate, any non-standard expiration that occurs prior to the 
standard expiration.
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    \7\ This belief could be based upon an expected announcement by 
ABC during the after or premarket hours or an impending announcement 
which would directly impact ABC's industry.

    The proposal would not allow for the listing of options series that 
would otherwise be prohibited by the rules of a Series Selecting 
Exchange or the Plan, nor does it restrict the ability of an exchange 
to list options series that have been properly listed by another 
exchange. The proposal also expressly eliminates the applicability of 
the strike price range limitations with regard to: (1) The listing of 
$1 strike prices in option classes participating in the $1 Strike 
Program, where instead, the Series Selecting Exchange shall be 
permitted to list $1 strike prices to the fullest extent as permitted 
under its rules for the $1 Strike Program; and (2) the listing of 
series of Flexible Exchange Options.
    The Commission directed the then-current options exchanges to act 
jointly to develop strategies to address overall capacity concerns in 
an Order dated September 8, 1999, as confirmed in a letter from the 
Director of the Division of Market Regulation dated September 13, 2000. 
According to the Plan Sponsors, this amendment is an additional 
strategy to meet this goal. According to one study cited by the Plan 
Sponsor exchanges, the options industry would expect an approximate 
four percent reduction in the number of series traded, with only a 
nominal reduction in trading volume, upon implementation of the changes 
proposed in this amendment.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether proposed 
Amendment No. 3 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 4-443 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number 4-443. 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, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of the filing will also be available for inspection and 
copying at principal offices of the exchanges. 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 4-443 and should be submitted on or before 
August 18, 2009.


[[Page 37268]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-17883 Filed 7-27-09; 8:45 am]
BILLING CODE 8010-01-P