[Federal Register Volume 74, Number 208 (Thursday, October 29, 2009)]
[Notices]
[Pages 55880-55883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-26061]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60865; File No. SR-ISE-2009-82]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Expand the Penny Pilot Program

October 22, 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 October 19, 2009, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the self-regulatory organization. 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 ISE is proposing to amend its rules relating to a pilot program 
to quote and to trade certain options in pennies. The text of the 
proposed rule change is as follows, with deletions in [brackets] and 
additions in italics:

Rule 710. Minimum Trading Increments

    (a) The Board may establish minimum trading increments for options 
traded on the Exchange. Such changes by the Board will be designated as 
a stated policy, practice, or interpretation with respect to the 
administration of this Rule 710 within the meaning of subparagraph 
(3)(A) of Section 19(b) of the Exchange Act and will be filed with the 
SEC as a rule change for effectiveness upon filing. Until such time as 
the Board makes a change in the increments, the following principles 
shall apply:

[[Page 55881]]

    (1) If the options contract is trading at less than $3.00 per 
option, $.05; and
    (2) If the options contract is trading at $3.00 per option or 
higher, $.10.
    (b) Minimum trading increments for dealings in options contracts 
other than those specified in paragraph (a) may be fixed by the 
Exchange from time to time for options contracts of a particular 
series.
    (c) Notwithstanding the above, the Exchange may trade in the 
minimum variation of the primary market in the underlying security.

Supplementary Material to Rule 710

    .01 Notwithstanding any other provision of this Rule 710, the 
Exchange will operate a pilot program to permit options classes to be 
quoted and traded in increments as low as $.01. The Exchange will 
specify which options trade in such pilot, and in what increments, in 
Regulatory Information Circulars filed with the Commission pursuant to 
Rule 19b-4 under the Exchange Act and distributed to Members.
    The Exchange may replace, on a semi-annual basis, any penny pilot 
issues that have been delisted with the next most actively traded 
multiply listed options classes that are not yet included in the penny 
pilot, based on trading activity in the previous six months. The 
replacement issues may be added to the penny pilot on the second 
trading day following January 1, 2010 and July 1, 2010.
    .02 No Change.
* * * * *

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
    On January 24, 2007, the SEC approved ISE's rule filing, SR-ISE-
2006-62, which initiated a pilot program to quote and to trade certain 
options in penny increments (the ``Penny Pilot Program'').\3\ Under the 
Penny Pilot Program, the minimum price variation for all participating 
options classes, except for the Nasdaq-100 Index Tracking Stock 
(``QQQQ''), is $0.01 for all quotations in options series that are 
quoted at less than $3 per contract and $0.05 for all quotations in 
options series that are quoted at $3 per contract or greater. The QQQQs 
are quoted in $0.01 increments for all options series. Through 
subsequent expansions, the Penny Pilot now consists of 63 underlying 
securities,\4\ and is scheduled to expire on October 31, 2009.\5\ ISE 
now proposes to extend the Penny Pilot Program through December 31, 
2010.
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    \3\ See Securities Exchange Act Release No. 55161 (January 24, 
2007), 72 FR 4754 (February 1, 2007) (the ``Initial Filing''). The 
Penny Pilot Program was subsequently extended for an additional two 
month period, until September 27, 2007. See Securities Exchange Act 
Release No. 56151 (July 26, 2007), 72 FR 42452 (August 2, 2007).
    \4\ See Securities Exchange Act Release Nos. 56564 (September 
27, 2007), 72 FR 56412 (October 3, 2007) and 57508 (March 17, 2008), 
73 FR 15243 (March 21, 2008).
    \5\ See Securities Exchange Act Release No. 34-60222 (July 1, 
2009), 74 FR 32994 (July 9, 2009).
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    The Exchange also proposes to expand the number of issues included 
in the Penny Pilot Program. Specifically, ISE proposes to add the top 
300 most actively traded multiply listed options classes that are not 
yet included in the Penny Pilot Program (``Top 300''). The Exchange 
proposes to determine the identity of the Top 300 based on national 
average daily volume in the prior six calendar months preceding their 
addition to the Penny Pilot Program except that the one month preceding 
their addition to the Penny Pilot Program would not be used for the 
purpose of the six month analysis.\6\ In determining the identity of 
the Top 300, the Exchange will exclude options classes with high 
premiums. The Exchange notes that it will submit proposed rule changes 
pursuant to Rule 19b-4 under the Exchange Act announcing the names of 
the options classes selected to participate in the Penny Pilot 
Program.\7\ The Exchange represents that after the addition of the 300 
options classes, as proposed under this rule change, it has the 
necessary system capacity to support the listing of additional series 
under the Penny Pilot Program.
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    \6\ The Exchange will not include options classes in which the 
issuer of the underlying security is subject to an announced merger 
or is in the process of being acquired by another company, or if the 
issuer is in bankruptcy. For purposes of assessing national average 
daily volume, the Exchange will use data compiled and disseminated 
by the Options Clearing Corporation.
    \7\ ISE will also issue a Regulatory Information Circular, which 
will be published on its Web site, identifying the options classes 
added to the Penny Pilot Program.
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    ISE believes that it is appropriate to exclude high priced 
underlying securities, as the benefit to the public from including such 
issues is minimal because of the high price of at-the-money options.\8\ 
The Exchange believes an appropriate threshold for designation as 
``high priced'' at the time of selection of new issues to be included 
in the Penny Pilot Program is $200 per share or a calculated index 
value of 200. At $200 per share or a calculated index value of 200, 
strike prices are in $10 increments, so the ``at the money'' strike is 
more likely to carry an intrinsic value of $3 or more, and thus not 
trade in a penny increment. With a greater distance between strikes, 
there are fewer series that are actively traded. The determination of 
whether a security is trading above $200 or above a calculated index 
value of 200 shall be based on the price at the close of trading on the 
Expiration Friday prior to being added to the Penny Pilot Program.
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    \8\ For instance, as of August 12, 2009, the near term at the 
money call in GOOG (August 460 Calls) was trading at $6.50 with the 
underlying at $459.84. The lowest strike price September call 
trading below $3 (with the underlying at the same price) was the 
September 500 Call.
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    The Exchange proposes to phase-in the additional classes to the 
Penny Pilot Program over four successive quarters. Specifically, the 
Exchange proposes to add 75 classes on November 2, 2009; February 1, 
2010; May 3, 2010; and August 2, 2010. The classes to be added on 
November 2, 2009 will be based on the most actively traded multiply 
listed classes for the six month period from April 1, 2009 through 
September 30, 2009. The classes to be added on February 1, 2010 will be 
based on the most actively traded multiply listed classes for the six 
month period from July 1, 2009 through December 31, 2009. The classes 
to be added on May 3, 2010 will be based on the most actively traded 
multiply listed classes for the six month period from October 1, 2009 
through March 31, 2010. The classes to be added on August 2, 2010 will 
be based on the most actively traded classes for the six month period 
from January 1, 2010 through June 30, 2010.
    Additionally, the Exchange proposes that any Penny Pilot Program 
issues that have been delisted may be replaced on a semi-annual basis 
by the next most actively traded multiply listed options classes that 
are not yet included in the Penny Pilot Program, based on trading 
activity in the previous six months. The replacement issues would be 
added to the Penny Pilot Program on the second

[[Page 55882]]

trading day following January 1, 2010 and July 1, 2010.\9\ The Exchange 
will employ the same parameters to prospective replacement issues as 
approved and applicable under the Penny Pilot Program, including 
excluding high-priced underlying securities.
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    \9\ The replacement issues will be announced to the Exchange's 
membership via Regulatory Information Circulars and published by the 
Exchange on its Web site.
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    The Exchange agrees to submit semi-annual reports to the Commission 
that will include sample data and analysis of information collected 
from April 1 through September 30, and from October 1 through March 31, 
for each year, for the ten most active and twenty least active options 
classes added to the Pilot Program.\10\ As the Penny Pilot Program 
matures and expands, the Exchange believes that this proposed sampling 
approach provides an appropriate means by which to monitor and assess 
the Penny Pilot Program's impact. The Exchange will also identify, for 
comparison purposes, a control group consisting of the ten least active 
options classes from the existing 63 Penny Pilot Program classes. This 
report will include, but is not limited to: (1) Data and analysis on 
the number of quotations generated for options included in the report; 
(2) an assessment of the quotation spreads for the options included in 
the report; (3) an assessment of the impact of the Penny Pilot Program 
on the capacity of the ISE's automated systems; (4) data reflecting the 
size and depth of markets, and (5) any capacity problems or other 
problems that arose related to the operation of the Penny Pilot Program 
and how the Exchange addressed them.
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    \10\ The Exchange will continue to provide data concerning the 
existing 63 Penny Pilot Program classes.
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    The Exchange believes the benefits to public customers and other 
market participants who will be able to express their true prices to 
buy and sell options have been demonstrated to outweigh the increase in 
quote traffic.
2. Statutory Basis
    The basis under the Securities Exchange Act of 1934 (the ``Exchange 
Act'') for this proposed rule change is found in Section 6(b)(5), in 
that the proposed rule change is designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanisms 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest. In particular, the 
proposed rule change allows for a measured expansion of the Penny Pilot 
Program for the benefit of market participants.

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

    The proposed rule change does not 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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any written comments from members or other interested parties.

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

    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) \11\ of the Act and subparagraph (f)(6) of Rule 
19b-4 thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). 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 Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \13\ normally 
does not become operative for 30 days after the date of filing. 
However, Rule 19b 4(f)(6)(iii) \14\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange requests that the 
Commission waive the 30-day operative delay so that the proposal may 
become operative immediately upon filing. The Exchange states that 
waiver of the 30-day operative delay will allow the Penny Pilot Program 
to continue uninterrupted. Further, the exchange represents that this 
proposed rule change is based on proposals submitted by another 
exchange regarding the expansion and extension of the Penny Pilot 
Program \15\ and the phase-in dates for the additional classes that 
will be added to the Penny Pilot Program.\16\
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ See Securities Exchange Act Release No. 60711 (September 
23, 2009), 74 FR 49419 (September 28, 2009).
    \16\ See Securities Exchange Act Release No. 60833 (October 16, 
2009).
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    The Commission believes waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because such waiver will allow the Exchange to implement the 75 
additional classes on November 2, 2009 and permit the Penny Pilot 
Program to continue uninterrupted, consistent with other exchanges.\17\ 
Accordingly, the Commission designates the proposed rule change 
operative upon filing with the Commission.
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    \17\ For the 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. 
78(c)(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-ISE-2009-82 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-ISE-2009-82. 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

[[Page 55883]]

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 such 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 No. SR-ISE-2009-82 and should be submitted on or before November 
19, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-26061 Filed 10-28-09; 8:45 am]
BILLING CODE 8011-01-P