[Federal Register Volume 76, Number 66 (Wednesday, April 6, 2011)]
[Notices]
[Pages 19165-19167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8136]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64162; File No. SR-NYSEArca-2011-13]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by NYSE Arca, Inc. To Expand the 
$2.50 Strike Price Program

March 31, 2011.
    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 March 29, 2011, NYSE Arca, Inc. (``NYSE Arca'' or 
``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 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 .03 to NYSE Arca Rule 6.4 
to expand the $2.50 Strike Price Program. The text of the proposed rule 
change is available at the principal office of the Exchange, the 
Commission's Public Reference Room, the Commission's Web site at http://www.sec.gov and http://www.nyse.com.

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to expand the current 
$2.50 Strike Price Program (``Program'') \3\ to permit the listing of 
options with $2.50 strike price intervals for options with strike 
prices between $50 and $100, provided the $2.50 strike price intervals 
are no more than $10 from the closing price of the underlying stock in 
the primary market.\4\ Additionally, the Exchange proposes to increase 
the number of option classes on individual stocks for which the 
intervals of strike prices will be $2.50 to 60 options classes.
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    \3\ See Securities Exchange Act Release No. 35993 (July 19, 
1995), 60 FR 38073 (July 25, 1995) (approving File Nos. SR-Phlx-95-
08, SR-Amex-95-12, SR-PSE-95-07, SR-CBOE-95-19, and SR-NYSE-95-12). 
See also Exchange Act Release No. 52986 (December 20, 2005) 70 FR 
76897 (December 28, 2005) (a rule change to allow the listing of 
options with $2.50 strike price intervals for strike prices between 
$50 and $75).
    \4\ The term ``primary market'' is defined in NYSE Arca Rule 
6.1(27), in respect of an underlying stock, as the principal market 
in which the underlying stock is traded.
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    Currently, Exchange Rule 6.4 at Commentary .03 permits the listing 
of options with $2.50 strike price intervals for options with strike 
prices between $50 and $75. Specifically, the Exchange proposes to 
amend Commentary .03 to NYSE Arca Rule 6.4 to amend the current text.
    For example, consider a hypothetical where Caterpillar, Inc. 
(``CAT'') was trading at $81. With approximately one month remaining 
until expiration, and with a front month at-the-money put option (the 
80 strike) trading at approximately $1.30, the investor would be able 
to purchase a $77.50 strike put at an estimated $.60 per contract. 
Today, the next available strike of a one month put option is the 75 
strike. While the 75 strike put would certainly trade at a lesser price 
than the 80 strike put,\5\ the protection offered would only take 
effect with a 7.40% decline in the market as opposed to a 4.30% decline 
in the market. The additional choice would provide the investor an 
additional opportunity to hedge exposure (the opportunity to hedge with 
a reduced outlay) and thereby minimize risk if there were a decline in 
the stock price of CAT.
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    \5\ The 75 strike put would trade at $.30 in this example.
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    Another example would be if an investor desired to sell call 
options to hedge the exposure of an underlying stock position and 
enhance yield. Consider a hypothetical where CAT was trading at $81 and 
the second month (two months remaining) of a recently out-of-the-money 
call option (the 85 strike) was trading at approximately $2.35. If the 
investor were to sell the 85 call against an existing stock position, 
the investor could yield a return of approximately 2.90% over a two-
month period or an annualized return of 17.4%. By providing an 
additional $2.50 strike interval above $75, the investor would have the 
opportunity to sell the 82.50 strike instead of the 85 strike. If the 
85 strike call were trading at $2.35, the 82.50 strike call would trade 
at approximately 3.30. By selling the 82.50 strike call at 3.30 against 
an existing stock position, the investor could yield a 4.07% return 
over a two-month period or an annualized 24.40% return. Therefore, an 
additional choice of a $2.50 strike interval could afford varying 
yields to the investor.
    The Exchange believes that the Program has to date created 
additional trading opportunities for investors, thereby benefiting the 
marketplace. The existence of $2.50 strike prices with strike intervals 
above $75 affords investors the ability to more closely tailor 
investment strategies to the precise movement of the underlying 
security and meet their investment, trading and risk management 
requirements.

[[Page 19166]]

    The Exchange is also making a small revision to the rule text to 
remove a reference to Exchange-Traded Fund Shares (``ETF''), as the 
strike interval for ETFs has been superseded by Rule 6.4 Commentary 
.05, which permits strike price intervals for ETFs in $1 increments 
under $200.
    The Exchange is also proposing to increase the number of option 
classes on individual stocks for which the intervals of strike prices 
will be $2.50 to 60 options classes. Currently, the Exchange may select 
up to 43 options classes on individual stocks for which the intervals 
of strike prices will be $2.50. Initially adopted in 1995 as a pilot 
program, the options exchanges at that time were permitted to list 
options with $2.50 strike price intervals up to $50 on a total of up to 
100 option classes. In 1998, the pilot program was expanded and 
permanently approved to allow the options exchanges collectively to 
select up to 200 option classes on which to list options with $2.50 
strike price intervals up to $50. Of these 200 options classes eligible 
for the Program, 43 classes were allocated to the Exchange pursuant to 
a formula approved by the Commission as part of the permanent approval 
of the Program.\6\ In addition, each options exchange is permitted to 
list options with $2.50 strike price intervals on any option class that 
another options exchange selects under its program.
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    \6\ See Securities Exchange Act Release No. 40662 (November 12, 
1998), 63 FR 64297 (November 19, 1998) (approving File Nos. SR-Amex-
98-21, SR-CBOE-98-29, SR-PCX-98-31, and SR Phlx-98-26).
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    Since 1998, the 200 options classes have not been expanded, 
although increasingly more companies have completed initial public 
offerings from 1998 through 2010. Additionally, significantly more 
options classes are trading in 2010 as compared to 1998. The Exchange 
proposes to increase its allocation from 43 to 60 \7\ options classes 
to accommodate investor requests for $2.50 strikes in certain options 
classes. The Exchange believes that offering additional options classes 
would benefit investors.
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    \7\ Currently, the Chicago Board Options Exchange (``CBOE'') has 
an allocation of 60 options.
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    Furthermore, the Exchange does not believe that this proposal would 
have a negative impact on the marketplace. The Exchange would compare 
this proposal with the $1 Strike Price expansion, wherein the Exchange 
expanded its $1 Strike Price Program from 55 individual stocks to 150 
individual stocks on which an option series may be listed at $1 strike 
price intervals.\8\ The Exchange believes that this proposal, wherein 
the Exchange is proposing to increase its allocation from 43 to 60 
options classes is substantially less than the $1 Strike Price Program 
increase and therefore would have less impact than that program, which 
has not had any negative impact on the market in terms of proliferation 
of quote volume or fragmentation.
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    \8\ See Securities Exchange Act Release No. 62450 (July 2, 2010) 
75 FR 39712 (July 12, 2010).
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    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it and the 
Options Price Reporting Authority have the necessary system capacity to 
handle the potential additional traffic associated with the listing and 
trading of classes on individual stocks in the $2.50 Strike Price 
Program.
2. Statutory Basis
    The Exchange believes that this proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (``Act'') \9\, 
in general, and furthers the objectives of Section 6(b)(5) of the Act 
\10\ in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and, in general, to protect 
investors and the public interest. The Exchange believes that the 
effect of the proposed expansion on the marketplace would not result in 
a material proliferation of quote volume or concerns with 
fragmentation. In addition, the Exchange believes that it has the 
necessary system capacity to handle the potential additional traffic 
associated with the listing and trading of additional series.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    Rather, the Exchange believes the $2.50 Strike Price Program 
proposal would provide the investing public and other market 
participants increased opportunities to better manage their risk 
exposure. Accordingly, the Exchange believes that the proposal to 
expand the number of classes in the Program and to allow the listing of 
options with $2.50 strike price intervals for options with strike 
prices between $50 and $100 should further benefit investors and the 
market by providing greater trading opportunities for those underlying 
stocks that have low volatility and thus trade in a narrow range.

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 significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6) 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 the Exchange to give the Commission written notice of the 
Exchange's 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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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission believes that waiver of the operative 
delay is consistent with the protection of investors and the public 
interest because the proposal is substantially similar to that of 
another exchange that has been approved by the Commission.\13\ 
Therefore, the Commission designates the proposal operative upon 
filing.\14\
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    \13\ See Securities Exchange Act Release No. 64157 (March 31, 
2011) (SR-Phlx-2011-15) (order approving expansion of $2.50 Strike 
Price Program).
    \14\ 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 summarily may temporarily suspend 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

[[Page 19167]]

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-2011-13 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-2011-13. 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 Web site 
viewing and printing 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-
NYSEArca-2011-13 and should be submitted on or before April 27, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8136 Filed 4-5-11; 8:45 am]
BILLING CODE 8011-01-P