[Federal Register Volume 74, Number 200 (Monday, October 19, 2009)]
[Notices]
[Pages 53535-53537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-25114]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60814; File No. SR-BX-2009-063]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Strike Price Intervals of $0.50 for Options on Stocks Trading at or 
Below $3.00 on the Boston Options Exchange Facility

October 13, 2009.
    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, October 6, 2009, NASDAQ OMX BX, Inc. (the ``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 self-regulatory organization. The Exchange filed the 
proposed rule change 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 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).
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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 the Supplementary Material to 
Chapter IV, Section 6 (Series of Options Contracts Open for Trading) of 
the Rules of the Boston Options Exchange Group, LLC (``BOX'') in order 
to establish strike price intervals of $0.50, beginning at $1, for 
certain option 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 available from the principal office of the 
Exchange, at the Commission's Public Reference Room and also on the 
Exchange's Internet Web site at http://nasdaqomxbx.cchwallstreet.com/NASDAQOMXBX/Filings/.

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 these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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 expand the ability of

[[Page 53536]]

investors to hedge risks associated with stocks trading at or under $3. 
Currently, Supplementary Material .01 to Chapter IV, Section 6 of the 
BOX Rules provides that the interval of strike prices of series of 
options on individual stocks may be $2.50 or greater where the strike 
price is $25 or less. Additionally, Supplementary Material .02 to 
Chapter IV, Section 6 of the BOX Rules allows BOX to establish $1 
strike price intervals (the ``$1 Strike Price Program'') on options 
classes overlying no more than fifty-five individual stocks designated 
by BOX. In order to be eligible for selection into the $1 Strike Price 
Program, the underlying stock must close below $50 in its primary 
market on the previous trading day. If selected for the $1 Strike Price 
Program, BOX 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. BOX may also list $1 strikes on any other option class designated 
by another securities exchange that employs a similar $1 Strike Price 
Program its own rules.\5\ BOX is restricted from listing any series 
that would result in strike prices being within $0.50 of a strike price 
set pursuant to Supplementary Material .01 to Chapter IV, Section 6 at 
intervals of $2.50.
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    \5\ The Exchange may not list long-term option series 
(``LEAPS'') at $1 strike price intervals for any class selected for 
the $1 Strike Price 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.\6\ 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 1,000 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 Price Program'') as specifically designated by BOX. 
BOX 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 Price Program 
under their respective rules.
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    \6\ The Exchange recently amended Chapter IV, Section 4 of the 
BOX Rules. 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. 59419 (February 19, 2009), 74 FR 8596 (February 25, 
2009) (SR-BX-2009-011) (Notice of Filing and Immediate Effectiveness 
of Proposed Rule Change to Eliminate the $3 Underlying Price 
Requirement for Continued Listing and Listing of Additional Series 
on the Boston Options Exchange Facility).
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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 Price Program.\7\ If these 
stocks have not been selected for the Exchange's $1 Strike Price 
Program, the Exchange may list strike prices of $2.50, $5, $7.50 and so 
forth as provided in Supplementary Material .01 to Chapter IV, Section 
6 of the BOX Rules, but not strike prices of $1, $2, $3, $4, $6, $7 and 
$8.\8\
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    \7\ 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 Price Program.
    \8\ 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 Price Program.
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    The Exchange is now proposing to add Supplementary Material .06 to 
Chapter IV, Section 6 of the BOX Rules 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 Price 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 $1 Strike Price Program) or just at $1, $2, $3, $4, $5, $6, 
$7 and $8 (for stocks designated to participate in the $1 Strike Price 
Program), but rather at strike prices established at $1, $1.50, $2, 
$2.50, $3 and $3.50.\9\
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    \9\ The option on the qualifying stock could also have strike 
prices set at $5, $7.50 and so forth at $2.50 intervals (pursuant to 
Supplementary Material .01 to Chapter IV, Section 6 of the BOX 
Rules) or, if it has been selected for the $1 Strike Price 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.\10\ Unless 
the underlying stock has been selected for the $1 Strike Price 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 Price 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 Price Program, the available strike price 
choices are somewhat broader, but are still greatly limited by the 
proximity of the $3 stock 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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    \10\ 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 BOX.
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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 Price 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, BOX 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.

[[Page 53537]]

2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\11\ in general, and Section 
6(b)(5) of the Act,\12\ 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 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 under $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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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 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

    The Exchange 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

    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 \13\ and Rule 19b-4(f)(6) 
thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 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 has 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 
other options exchanges offering a similar $.50 Strike Program. The 
Commission recently approved SR-Phlx-2009-65,\15\ 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.\16\
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    \15\ See Securities Exchange Act Release No. 60694 (September 
18, 2009), 74 FR 49048 (September 25, 2009) (SR-Phlx-2009-65) (order 
approving a $0.50 strike program substantially the same as the $0.50 
Strike Program proposed by the Exchange).
    \16\ 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-BX-2009-063 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-BX-2009-063. 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 information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BX-2009-063 and should be 
submitted on or before November 9, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-25114 Filed 10-16-09; 8:45 am]
BILLING CODE 8011-01-P