[Federal Register Volume 77, Number 109 (Wednesday, June 6, 2012)]
[Notices]
[Pages 33543-33546]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-13640]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67083; File No. SR-ISE-2012-33]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of Proposed Rule Change Regarding Strike Price
Intervals for Certain Option Classes
May 31, 2012.
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 May 21, 2012, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') filed with the Securities and Exchange
Commission (``Commission'')
[[Page 33544]]
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 Exchange proposes to amend its rules to modify the Short Term
Option Series Program (``STOS Program'') to permit, during the
expiration week of an option class that is selected for the STOS
Program, the strike price intervals for the related non-STOS options to
be the same as the strike price interval for the STOS options. The
Exchange also proposes to adopt a rule to open for trading Short Term
Option Series at $0.50 strike price intervals for option classes that
trade in one dollar increments and are in the STOS Program.
The text of the proposed rule change is available on the Exchange's
Internet Web site at http://www.ise.com, at the principal office of the
Exchange, 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 Exchange 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 this proposed rule change is to amend ISE Rules 504
and 2009 regarding the STOS Program.\3\ Specifically, the Exchange
proposes to amend its rules to indicate that during the expiration week
of an option class that is selected for the STOS Program, the strike
price intervals for the related non-STOS option \4\ shall be the same
as the strike price interval for the STOS option. The purpose of this
proposed rule change is also to adopt a rule to permit the Exchange to
list Short Term Option Series at $0.50 strike price intervals for
option classes that trade in one dollar increments and are in the STOS
Program (``Eligible Option Classes''). As of April 13, 2012, there are
95 Eligible Option Classes.\5\
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\3\ The Exchange adopted the STOS Program on a pilot basis in
2005. See Securities Exchange Act Release No. 52012 (July 12, 2005),
70 FR 41246 (July 18, 2005) (SR-ISE-2005-17). The STOS Program was
approved on a permanent basis in 2010. See Securities Exchange Act
Release No. 62444 (July 2, 2010), 75 FR 39595 (July 9, 2010) (SR-
ISE-2010-72).
\4\ The related non-STOS option will be the same option class as
the STOS option but will have a longer expiration cycle (e.g., a SPY
monthly option as compared to a SPY weekly option.)
\5\ As of April 13, 2012, there are 141 option classes across
all options exchanges that have STOS options expiring on April 13,
2012. Of these 141 option classes, only 95 would qualify to have
series listed at $0.50 strikes because these 95 classes currently
trade in one dollar increments and are selected to participate in
the STOS Program.
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The STOS Program is codified in ISE Rules 504 and 2009. These rules
state that after an option class has been approved for listing and
trading on the Exchange, the Exchange may open for trading on any
Thursday or Friday that is a business day series of options on no more
than thirty option classes that expire on the Friday of the following
business week that is a business day. In addition to the thirty-option
class limitation, there is also a limitation that no more than twenty
series for each expiration date in those classes that may be opened for
trading.\6\ Furthermore, the strike price of each short term option has
to be fixed with approximately the same number of strike prices being
opened above and below the value of the underlying security at about
the time that the short term options are initially opened for trading
on the Exchange, and with strike prices being within thirty percent
(30%) above or below the closing price of the underlying security from
the preceding day. The Exchange does not propose any changes to the
current program limitations. The Exchange only proposes to specify that
Eligible Option Classes can have interval prices of $0.50, as proposed
under Supplementary Material .12 to Rule 504 and Supplementary Material
.05 to Rule 2009.
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\6\ The Exchange may open up to 10 additional series for each
option class that participates in the Short Term Option Series
Program when the Exchange deems it necessary to maintain an orderly
market, to meet customer demand or when the market price of the
underlying security moves substantially from the exercise price or
prices of the series already opened. Any additional strike prices
listed by the Exchange shall be within thirty percent (30%) above or
below the current price of the underlying security. The Exchange may
also open additional strike prices on Short Term Option Series that
are more than 30% above or below the current price of the underlying
security provided that demonstrated customer interest exists for
such series, as expressed by institutional, corporate or individual
customers or their brokers. Market makers trading for their own
account shall not be considered when determining customer interest
under this provision. Supplementary Material .02(d) to Rule 504 and
Supplementary Material .01(d) to Rule 2009.
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The principal reason for the proposed interval pricing structure is
market and customer demand. The Exchange has received numerous requests
to list actively traded products, such as the Eligible Option Classes,
in more granular strike price intervals, especially as they approach
expiration to provide Members and their customers more trading
opportunities for short term options.
In the almost two years since the inception of the STOS Program, it
has steadily expanded to the point that in the 1st quarter of 2012,
STOS options represented 9.0% of the total options volume on the
Exchange and 9.2% of the total options volume in the United States. The
STOS options volume becomes even more significant when the volume of an
STOS option class is compared to the volume of the related non-STOS
option class. As an example, in the first three months of 2012, on the
Exchange there were 10,399,842 contracts of SPY STOS options traded and
18,354,779 contracts of SPY monthly options traded; and 1,319,580
contracts of AAPL STOS options traded and 3,975,896 contracts of AAPL
monthly options traded. From the 4th quarter of 2010 to the 4th quarter
of 2011, STOS options volume increased by more than 40%,\7\ and the
Exchange believes that STOS options volume will continue to rise as a
percentage of overall activity in 2012.
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\7\ During the same time period, monthly options volume
decreased by 8%.
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Moreover, the Commission has previously approved the use of $0.50
strike price intervals. Numerous options products are listed (trade) on
the Exchange at $0.50 strike price intervals. For example, pursuant to
ISE Rule 504(h), there are six individual ETF options listed on the
Exchange at $0.50 strike price intervals. There are approximately 53
options listed on the Exchange at $0.50 strike price intervals pursuant
to the $0.50 Strike Program. The Exchange further notes that while
there are more than 1,000 options listed on the Exchange with one
dollar strike price intervals, under this proposed rule change, the
Exchange would currently offer only 95 option classes in more granular
strike intervals.\8\
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\8\ The Exchange notes that Supplementary Material .02(a) to ISE
Rule 504 limits the Exchange's ability to list series unless another
exchange lists a similar series at $0.50 strike interval. In other
words, if another exchange opens a $40 strike in an Eligible Option
Class, and ISE lists that $40 strike pursuant to Supplementary
Material .02(a), ISE would not therefore be permitted to open
strikes of $39.50 or $40.50 in that class of option.
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[[Page 33545]]
The Exchange believes that there are substantial benefits to market
participants in the ability to trade the Eligible Option Classes at
more granular strike price intervals. The proposed interval for the
Eligible Option Classes would allow traders and investors, and in
particular public (retail) investors to more effectively and with
greater precision consummate trading and hedging strategies on the
Exchange. The Exchange believes that this precision is increasingly
necessary, and in fact crucial, as traders and investors engage in
trading and hedging strategies across various investment platforms
(e.g., equity and ETF, index, derivatives, futures, foreign currency,
and even commodities products); particularly when many of these
platforms enjoy substantially smaller strike price differentiations
(e.g., as low as $.05).\9\
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\9\ As an example, per the CME Group Web site, http://www.cmegroup.com/trading/metals/precious/ProductOverride/SO-silver-options.html, strike prices for options on futures may be at an
interval of $.05 and $.25 per specified parameters.
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The Exchange notes that this proposed rule change has the support
of several ISE market makers. This proposal was developed in
consultations with one such market-making firm. The ISE Board of
Directors, which includes several major market makers, also voted in
favor of this proposal.
Following is an example of how existing strike intervals in the
Eligible Option Classes negatively impact trading and hedging
opportunities. If an investor needs to purchase a call option in CSCO
(03/26/12 closing price $20.84), the current one dollar strike interval
would offer less opportunity and choice for an investor seeking to keep
cash expenditures low. For example, an investor wishing to buy an in-
the-money call option for less than a $2.50 investment per call
purchase has only two strike prices that meet his criteria from which
to choose: the 19 strike and the 20 strike. Such call options with five
days until expiration might offer ``ask prices'' (option premiums) of
$1.75 and $.75. However, if CSCO had $0.50 strike prices as proposed,
the same investor would have a selection of March 18.50, 19.00, 19.50,
20.00, and the 20.50 strike call options that may have options premiums
from approximately $2.25 down to approximately $.25. This expanded
range of strikes, and commensurate option premiums, offers far more
choice and a considerably lower cost of entry to the investor, thereby
garnering the investor more than a 66% options premium savings. Lower
intervals offer more trading and hedging opportunity at lower cost.
Clearly, more efficient pricing is advantageous to all market
participants, from retail to institutional investors. The changes
proposed by the Exchange should allow execution of more trading and
hedging strategies on the Exchange. The Exchange notes that in
conformance with ISE Rules, the Exchange shall not list $0.50 strike
price intervals on non-STOS options within five (5) days of expiration.
For example, if a non-STO in an options class is set to expire on
Friday, March 16, the Exchange could begin to trade $0.50 strike price
intervals surrounding that non-STO on Monday, March 12, but no later.
The Exchange notes that liquidity levels at each individual option
series could decrease as a result of listing short term options series
at more granular strike increments. ISE, however, does not expect a
significant change in liquidity, nor does the Exchange expect overall
liquidity in these products to decline. Moreover, this proposal will
result in more targeted liquidity being available for industry
participants, allowing liquidity providers to better concentrate their
efforts in parts of the markets where liquidity is most needed.
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 systems capacity
to handle the potential additional traffic associated with trading
Eligible Option Classes in narrower strike price intervals. Further,
the Exchange notes that this proposal, if approved, would not increase
the number of listed short-term series.
The Exchange also proposes that during the expiration week of an
option class that is selected for the STOS Program, the strike price
intervals for the related non-STOS option shall be the same as the
strike price intervals for the STOS option. The Exchange proposes to
make this change to ensure conformity between STOS options and non-STOS
options that are in the same options class (e.g., weekly and monthly
SPY options). The Exchange believes that not having such a conforming
change would be counter-productive and not beneficial for trading and
hedging purposes.\10\
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\10\ Moreover, the Exchange notes that STOS options are not
listed and traded during the expiration week of the related non-STOS
options. During this week, the non-STOS options are materially and
financially equivalent to the STOS options. The proposed change
would allow traders and hedgers to have the noted benefits of the
STOS Program during each week in a month.
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The Exchange believes that listing $0.50 strike prices in a handful
of option classes has provided investors with greater trading
opportunities and the ability to more closely tailor their investment
and risk management strategies and decisions. However, due to
limitations imposed by ISE's rules, the Exchange has had to reject
trading requests to list more option classes in narrower strike prices.
The Exchange believes a gradual expansion of strike price intervals, as
proposed herein, and limiting it to the Eligible Option Classes will
provide investors with better and more choices for investment, trading
and risk management purposes.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Securities Exchange Act of 1934 \11\ (the
``Act'') in general, and furthers the objectives of Section 6(b)(5) of
the Act \12\ in particular, in that it is designed to promote just and
equitable principles of trade, to 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 providing strike prices of $0.50 in the Eligible Option
Classes is reasonable because doing so will result in a continuing
benefit to investors by giving them more flexibility to closely tailor
their investment and hedging decisions in a greater number of
securities. The Exchange also believes it is reasonable to provide the
same strike price intervals for option classes that are in the STOS
Program and for the related non-STOS option during expiration week
because doing so will ensure conformity between STOS options and non-
STOS options that are in the same options class. While the proposed
rule change will generate additional quote traffic, the Exchange does
not believe that this increased traffic will become unmanageable since
the proposal remains limited to a fixed number of classes.
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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 proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
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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 unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the publication date of this notice or within
such longer period (1) as the Commission may designate up to 45 days of
such date if it finds such longer period to be appropriate and
publishes its reasons for so finding or (2) as to which the self-
regulatory organization consents, the Commission will:
(A) by order approve or disapprove such Proposed Rule Change; or
(B) institute proceedings to determine whether the Proposed Rule
Change should be disapproved.
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 email to [email protected]. Please include
File Number SR-ISE-2012-33 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-2012-33. This file
number should be included on the subject line if email 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
10:00 a.m. and 3:00 p.m. The text of the proposed rule change is
available on the Commission's Web site at http://www.sec.gov. 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 Number SR-ISE-2012-33 and should be submitted on or before June
27, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13640 Filed 6-5-12; 8:45 am]
BILLING CODE 8011-01-P