[Federal Register Volume 74, Number 189 (Thursday, October 1, 2009)]
[Notices]
[Pages 50858-50861]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-23698]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60721; File No. SR-NYSEArca-2009-85]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by NYSE Arca, Inc. Amending 
Commentary .04 to Rule 6.4 Series of Options Open for Trading

September 25, 2009.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 23, 2009, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange

[[Page 50859]]

Commission (the ``Commission'') the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Commentary .04 to Rule 6.4 Series of 
Options Open for Trading in order to establish strike price intervals 
of $0.50, beginning at $1, for certain options classes whose underlying 
security closed at or below $3 in its primary market on the previous 
trading day. The text of the proposed rule change is attached as 
Exhibit 5 to the 19b-4 form. A copy of this filing is available on the 
Exchange's Web site at http://www.nyse.com, at the Exchange'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 self-regulatory organization 
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 those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change is based on a filing submitted by NASDAQ 
OMX PHLX Inc (``Phlx'') that was recently noticed for comment and 
approved by the Commission.\3\
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    \3\ See Exchange Act Release No. 60466 (August 10, 2009), 74 FR 
41475 (August 17, 2009) (SR-Phlx-2009-65). Approved in Exchange Act 
Release No. 60694 (September 18, 2009).
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    The purpose of the proposed rule change is to expand the ability of 
investors to hedge risks associated with stocks trading at or under $3. 
Currently, the interval of strike prices of series of options on 
individual stocks is $2.50 where the strike price is $25 or less. 
Commentary .04 to NYSE Arca Rule 6.4 allows the Exchange to establish 
$1 strike price intervals (the ``$1 Strike Program'') on options 
classes overlying no more than fifty-five individual stocks designated 
by the Exchange. In order to be eligible for selection into the $1 
Strike Program, the underlying stock must close below $50 in its 
primary market on the previous trading day. If selected for the $1 
Strike Program, the Exchange may list strike prices at $1 intervals 
from $1 to $50, but no $1 strike price may be listed that is greater 
than $5 from the underlying stock's closing price in its primary market 
on the previous day. The Exchange may also list $1 strikes on any other 
option class designated by another securities exchange that employs a 
similar $1 Strike Program its own rules.\4\ The Exchange is restricted 
from listing any series that would result in strike prices being within 
$0.50 of a strike price set pursuant to Rule 6.4, Commentary .04.
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    \4\ The Exchange may not list long-term option series 
(``LEAPS'') at $1 strike price intervals for any class selected for 
the Program.
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    The Exchange is now proposing to establish strike prices of $1, 
$1.50, $ 2, $2.50, $3, and $3.50 for certain stocks that trade at or 
under $3.00.\5\ The listing of these strike prices will be limited to 
options classes whose underlying security closed at or below $3 in its 
primary market on the previous trading day, and which have national 
average daily volume that equals or exceeds 1000 contracts per day as 
determined by The Options Clearing Corporation during the preceding 
three calendar months. The listing of $0.50 strike prices would be 
limited to options classes overlying no more than 5 individual stocks 
(the ``$0.50 Strike Program'') as specifically designated by the 
Exchange. The Exchange would also be able to list $0.50 strike prices 
on any other option classes if those classes were specifically 
designated by other securities exchanges that employed a similar $0.50 
Strike Program under their respective rules.
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    \5\ The Exchange recently amended NYSE Arca Rule 5.4, Withdrawal 
of Approval of Underlying Securities or Options, to eliminate the $3 
market price per share requirement for continued approval for an 
underlying security. The amendment eliminated the prohibition 
against listing additional series or options on an underlying 
security at any time when the price per share of such underlying 
security is less than $3. The Exchange explained in that proposed 
rule change that the market price for a large number of securities 
has fallen below $3 in the current volatile market environment. See 
Securities Exchange Act Release No. 59349, SR-NYSEArca-2009-07 
(February 3, 2009), 74 FR 6939 (February 11, 2009).
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    Currently, the Exchange may list options on stocks trading at $3 at 
strike prices of $1, $2, $3, $4, $5, $6, $7, and $8 if they are 
designated to participate in the $1 Strike Program.\6\ If these stocks 
have not been selected for the Exchange's $1 Strike Program, the 
Exchange may list strike prices of $2.50, $5, $7.50, and so forth, but 
not strike prices of $1, $2, $3, $4, $6, $7, and $8.\7\ The Exchange is 
now proposing to amend Commentary .04 to Rule 6.4 by adding new sub-
paragraph (b) to list strike prices on options on a number of 
qualifying stocks that trade at or under $3.00, not simply those stocks 
also participating in the $1 Strike Program, in finer intervals of 
$0.50, beginning at $1 up to $3.50. Thus, a qualifying stock trading at 
$3 would have option strike prices established not just at $2.50, 
$5.00, $7.50, and so forth (for stocks not in the Exchange's $1 Strike 
Program) or just at $1, $2, $3, $4, $5, $6, $7, and $8 (for stocks 
designated to participate in the $1 Strike Program), but rather at 
strike prices established at $1, $1.50, $2, $2.50, $3, and $3.50.\8\
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    \6\ Additionally, market participants may be able to trade $2.50 
strikes on the same option at another exchange, if that exchange has 
elected not to select the stock for participation in its own similar 
$1 Strike Program.
    \7\ Again, market participants may also be able to trade the 
option at $1 strike price intervals on other exchanges, if those 
exchanges have selected the stock for participation in their own 
similar $1 Strike Program.
    \8\ The option on the qualifying stock could also have strike 
prices set at $5, $7.50, and so forth at $2.50 intervals or, if it 
has been selected for the $1 Strike Program, at $4, $5, $6, $7, and 
$8.
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    The Exchange believes that current market conditions demonstrate 
the appropriateness of the new strike prices. Recently the number of 
securities trading below $3.00 has increased dramatically.\9\ Unless 
the underlying stock has been selected for the $1 Strike Program, there 
is only one possible in-the-money call (at $2.50) to be traded if an 
underlying stock trades at $3.00. Similarly, unless the underlying 
stock has been selected for the $1 Strike Program, only one out-of-the-
money strike price choice within 100% of a stock price of $3 is 
available if an investor wants to purchase out-of-the-money calls. 
Stated otherwise, a purchaser would need over a 100% move in the 
underlying stock price in order to have a call option at any strike 
price other than the $5 strike price become in-the-money. If the stock 
is selected for the $1 Strike Program, the available strike price 
choices are somewhat broader, but are still greatly limited by the 
proximity of the $3 stock

[[Page 50860]]

price to zero, and the very large percent gain or loss in the 
underlying stock price, relative to a higher priced stock, that would 
be required in order for strikes set at $1 or away from the stock price 
to become in-the-money and serve their intended hedging purpose.
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    \9\ As of July 31, 2009, stocks trading at or below $3 include 
E*Trade Financial Corporation, Ambac Financial Group, Inc., Alcatel-
Lucent, Federal Home Loan Mortgage Corporation (Freddie Mac) and 
Federal National Mortgage Association (Fannie Mae). A number of 
these stocks are widely held and actively traded equities, and the 
options overlying these stocks also trade actively on NYSE Arca.
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    As a practical matter, a low-priced stock by its very nature 
requires narrow strike price intervals in order for investors to have 
any real ability to hedge the risks associated with such a security or 
execute other related options trading strategies. The current 
restriction on strike price intervals, which prohibits intervals of 
less than $2.50 (or $1 for stocks in the $1 Strike Program) for options 
on stocks trading at or below $3, could have a negative affect on 
investors. The Exchange believes that the proposed $0.50 strike price 
intervals would provide investors with greater flexibility in the 
trading of equity options that overlie lower priced stocks by allowing 
investors to establish equity option positions that are better tailored 
to meet their investment objectives. The proposed new strike prices 
would enable investors to more closely tailor their investment 
strategies and decisions to the movement of the underlying security. As 
the price of stocks decline below $3 or even $2, the availability of 
options with strike prices at intervals of $0.50 could provide 
investors with opportunities and strategies to minimize losses 
associated with owning a stock declining in price.
    With regard to the impact on system capacity, NYSE Arca has 
analyzed its capacity and represents that it and the Options Price 
Reporting Authority have the necessary systems capacity to handle the 
additional traffic associated with the listing and trading of an 
expanded number of series as proposed by this filing.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \10\ of the Securities Exchange Act of 1934 (the ``Act''), 
in general, and furthers the objectives of Section 6(b)(5) \11\ in 
particular in that it is designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, to 
remove impediments to and to perfect the mechanism for a free and open 
market and a national market system and, in general, to protect 
investors and the public interest, by expanding the ability of 
investors to hedge risks associated with stocks trading at or below $3. 
The proposal should create greater trading and hedging opportunities 
and flexibility, and provide customers with the ability to more closely 
tailor investment strategies to the price movement of the underlying 
stocks, trading in many of which is highly liquid.
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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 Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in 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 with respect to the 
proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, if consistent with the 
protection of investors and the public interest, it has become 
effective pursuant to 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) 
thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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 Exchange is deemed to have satisfied this requirement.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay to permit the Exchange to compete effectively with Phlx 
by being able to list the same strike prices as Phlx. The Commission 
recently approved SR-Phlx-2009-65,\14\ and therefore finds that waiver 
of the operative delay is consistent with the protection of investors 
and the public interest because such waiver will encourage fair 
competition among the exchanges. Therefore, the Commission designates 
the proposal operative upon filing.\15\
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    \14\ See Securities Exchange Act Release No. 60694 (September 
18, 2009) (SR-Phlx-2009-65) (order approving a $0.50 strike program 
substantially the same as the $0.50 Strike Program proposed by 
NYSEArca).
    \15\ 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. See 15 U.S.C. 
78c(f).
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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 Number SR-NYSEArca-2009-85 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 SR-NYSEArca-2009-85. 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 also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying

[[Page 50861]]

information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NYSEArca-2009-85 and should be submitted on or before 
October 22, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23698 Filed 9-30-09; 8:45 am]
BILLING CODE 8011-01-P