

[Federal Register: May 3, 2007 (Volume 72, Number 85)]
[Notices]               
[Page 24646-24648]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my07-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55673; File No. SR-CBOE-2007-38]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to the Extension of a Pilot Program That Allows 
for the Listing of Option Series at $1 Strike Price Intervals

April 26, 2007.
    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 April 24, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by CBOE. The Exchange has filed the proposal as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders it effective upon 
filing with the Commission. 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.
    \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 extend the pilot period for the $1 strike 
price pilot program (``Pilot Program'') for an additional year until 
June 5, 2008. The text of the proposed rule change is available at 
CBOE, the Commission's Public Reference Room, and http://www.cboe.org/legal
.


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

    In its filing with the Commission, CBOE 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. CBOE has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

[[Page 24647]]

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 extend the Pilot 
Program for an additional year (``Fourth Pilot Extension Notice'').\5\ 
The Pilot Program allows CBOE to select a total of five individual 
stocks on which option series may be listed at $1 strike price 
intervals.\6\ In order to be eligible for selection into the Pilot 
Program, the underlying stock must close below $20 on its primary 
market on the previous trading day. If selected for the Pilot Program, 
the Exchange may list strike prices at $1 intervals from $3 to $20, 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 also may list $1 strikes on any other options class 
designated by another securities exchange that employs a similar pilot 
program under its rules. Under the terms of the Pilot Program, the 
Exchange may not list long-term option series (``LEAPS''[reg]) at $1 
strike price intervals for any class selected for the Pilot Program. 
The Exchange also is restricted from listing any series that would 
result in strike prices being $0.50 apart.
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    \5\ The Commission approved the Pilot Program on June 5, 2003. 
See Securities Exchange Act Release No. 47991 (June 5, 2003), 68 FR 
35243 (June 12, 2003) (SR-CBOE-2001-60) (``Pilot Approval Order''). 
The Pilot Program been subsequently extended through June 5, 2007. 
See Securities Exchange Act Release Nos. 49799 (June 3, 2004), 69 FR 
32642 (June 10, 2004) (SR-CBOE-2004-34) (``First Pilot Extension 
Notice''); 51771 (May 31, 2005), 70 FR 33228 (June 7, 2005) (SR-
CBOE-2005-37) (``Second Pilot Extension Notice''); and 53805 (May 
15, 2007), 71 FR 29690 (May 23, 2006) (SR-CBOE-2006-31) (``Third 
Pilot Extension Notice'') (collectively, ``Pilot Extension 
Notices'').
    \6\ The Pilot Program generally allows CBOE to select a total of 
five individual stocks on which option series may be listed at $1 
strike price intervals. However, the Pilot Program was amended to 
provide that CBOE can designate no more than four individual stocks 
for inclusion in the Pilot Program at the same time there are strike 
prices listed for $1 intervals on Mini-SPX options in accordance 
with Interpretation and Policy .14 to CBOE Rule 24.9. If CBOE were 
to determine to discontinue listing Mini-SPX option series at $1 
strike price intervals, CBOE would again be free to select up to 
five option classes for inclusion in the Pilot Program. See 
Securities Exchange Act Release No. 52625 (October 18, 2005), 70 FR 
61479 (October 24, 2005) (SR-CBOE-2005-81) (notice of filing and 
order granting accelerated approval of proposed rule change relating 
to options on a reduced-value version of the Standard and Poor's 500 
Stock Index).
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    As stated in its previous filings establishing and extending the 
Pilot Program,\7\ CBOE believes that $1 strike price intervals provide 
investors with greater flexibility in the trading of equity options 
that overlie lower-priced stocks \8\ by allowing investors to establish 
equity options positions that are better tailored to meet their 
investment objectives.\9\ As reflected in the First Pilot Extension 
Notice, the trading volume in a wide majority of the classes selected 
for the Pilot Program increased significantly within the first year 
after being selected for the Pilot Program and in ten of the 22 classes 
originally selected, average daily trading volume (``ADV'') increased 
over 100%, and in some classes ADV more than tripled.\10\ Now, almost 
four years since the inception of the Pilot Program, CBOE notes that 
ADV in several options classes continues to remain significantly higher 
than immediately prior to their respective selection in the Pilot 
Program.\11\ It should be noted that, as reflected in the Pilot Program 
Report for this Fourth Pilot Extension Notice, ADV has also dropped in 
several options classes since their selection for the Pilot Program, 
although it is difficult to identify the specific market factors that 
may contribute to the increase or decrease in options trading volume 
from one particular class to another, especially considering the time 
removed since the inception of the Pilot Program. However, the Exchange 
still believes that the practice of offering customers strike prices 
for lower-priced stocks at $1 intervals contributes to the overall 
volume of the participating options classes.
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    \7\ See Pilot Approval Order and Pilot Extension Notices, supra 
note 5.
    \8\ In order to be eligible for inclusion in the Pilot Program, 
the underlying stock must close below $20 per share on its primary 
market on the previous trading day.
    \9\ See Pilot Approval Order and Pilot Extension Notices, supra 
note 5.
    \10\ See First Pilot Extension Notice, supra note 5.
    \11\ Pursuant to the Pilot Extension Notices, CBOE is submitting 
a report (``Pilot Program Report''), as Exhibit 3 to the proposal. 
Among other things, the Pilot Program Report contains analyses of 
the ADV and open interest for the options classes that have been 
selected for the Pilot Program since its inception.
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    With regard to the impact on system capacity, CBOE's analysis of 
the Pilot Program also suggests that the impact on CBOE's, the Options 
Price Reporting Authority's (``OPRA''), and market data vendors' 
respective automated systems has been minimal. Specifically, CBOE notes 
that in March 2007, 21 classes participating in the Pilot Program 
accounted for 12,950,404 average quotes per day or 1.20% of the 
industry's 337,744,725 average quotes per day. The 21 classes averaged 
412,007 contracts per day or 3.96% of the industry's 10,412,091 average 
contracts per day. The 21 classes involved totaled 2754 series or 1.80% 
of all series listed.\12\ It should be noted that these quoting 
statistics may overstate the contribution of $1 strike prices because 
these figures also include quotes for series listed in intervals higher 
than $1 (i.e., $2.50 strikes) in the same options classes. Even with 
the non-$1 strike series quoting being included in these figures, CBOE 
believes that the overall impact on capacity is still minimal.
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    \12\ See Pilot Program Report attached as Exhibit 3 to CBOE's 
proposed rule change.
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2. Statutory Basis
    The Exchange believes that an extension of the Pilot Program is 
warranted because the data indicates that there is strong investor 
demand for $1 strikes and because the Pilot Program has not adversely 
impacted systems capacity. For these reasons, the Exchange believes the 
proposed rule change is consistent with the Act and the rules and 
regulations under the Act applicable to a national securities exchange 
and, in particular, the requirements of Section 6(b) of the Act.\13\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) \14\ that the rules 
of a national securities exchange be designed to promote just and 
equitable principles of trade, to prevent fraudulent and manipulative 
acts and, in general, to protect investors and the public interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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 neither solicited nor received comments on the 
proposal.

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

    Because the foregoing rule change does not: (1) Significantly 
affect the protection of investors or the public interest; (2) impose 
any significant burden on competition; and (3) become operative for 30 
days from the date of this filing, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section

[[Page 24648]]

19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). Rule 19b-4(f)(6) also requires the 
self-regulatory organization to give the Commission 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. CBOE 
has satisfied the five-day pre-filing requirement. As set forth in 
the Commission's initial approval of the Pilot Program, if CBOE 
proposes to: (1) Extend the Pilot Program; (2) expand the number of 
options eligible for inclusion in the Pilot Program; or (3) seek 
permanent approval of the Pilot Program, it must submit a Pilot 
Program report to the Commission along with the filing of its 
proposal to extend, expand, or seek permanent approval of the Pilot 
Program. CBOE must file any proposal to expand or seek permanent 
approval of the Pilot Program and the Pilot Program report with the 
Commission at least 60 days prior to the expiration of the Pilot 
Program. The Pilot Program report must cover the entire time the 
Pilot Program was in effect and must include: (1) Data and written 
analysis on the open interest and trading volume for options (at all 
strike price intervals) selected for the Pilot Program; (2) delisted 
options series (for all strike price intervals) for all options 
selected for the Pilot Program; (3) an assessment of the 
appropriateness of $1 strike price intervals for the options CBOE 
selected for the Pilot Program; (4) an assessment of the impact of 
the Pilot Program on the capacity of CBOE's, OPRA's, and vendors' 
automated systems; (5) any capacity problems or other problems that 
arose during the operation of the Pilot Program and how CBOE 
addressed them; (6) any complaints that CBOE received during the 
operation of the Pilot Program and how CBOE addressed them; and (7) 
any additional information that would help to assess the operation 
of the Pilot Program. See Pilot Approval Order, supra note 5.
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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 rule-comments@sec.gov. Please include 

File No. SR-CBOE-2007-38 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-CBOE-2007-38. 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. Copies of such 
filing will also be available for inspection and copying at the 
principal office of CBOE. 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-
CBOE-2007-38 and should be submitted on or before May 24, 2007.

    For the Commission, by the Division of Market Regulation, 
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. E7-8396 Filed 5-2-07; 8:45 am]

BILLING CODE 8010-01-P
