

[Federal Register: November 23, 2007 (Volume 72, Number 225)]
[Notices]               
[Page 65784-65786]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23no07-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56801; File No. SR-CBOE-2007-125]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change and Amendment 
No. 2 Thereto Relating to the $1 Strike Pilot Program

November 16, 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 October 31, 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 the Exchange. On November 14, 2007, the 
Exchange filed Amendment No. 1 to the proposed rule change. The 
Exchange subsequently withdrew Amendment No. 1 and filed Amendment No. 
2 to the proposed rule change on November 15, 2007. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, 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

    CBOE proposes to amend its rules relating to the $1 Strike Pilot 
Program (``Pilot Program''). \3\ The text of the

[[Page 65785]]

proposed rule change is available at the Exchange, the Commission's 
Public Reference Room, and http://www.cboe.com.

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    \3\ 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). The Pilot Program has been 
subsequently extended through June 5, 2008. See Securities Exchange 
Act Release Nos. 49799 (June 3, 2004), 69 FR 32642 (June 10, 2004) 
(SR-CBOE-2004-34) (extending the Pilot Program through June 5, 
2005); 51771 (May 31, 2005), 70 FR 33228 (June 7, 2005) (SR-CBOE-
2005-37) (extending the Pilot Program through June 5, 2006); 53805 
(May 15, 2006), 71 FR 29690 (May 23, 2006) (SR-CBOE-2006-31) 
(extending the Pilot Program through June 5, 2007); and 55673 (April 
26, 2007), 72 FR 24646 (May 3, 2007) (SR-CBOE-2007-38) (extending 
the Pilot Program through June 5, 2008).
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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 Exchange 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 Pilot 
Program and to request permanent approval of the Pilot Program. The 
Pilot Program currently allows CBOE to select a total of 5 individual 
stocks on which option series may be listed at $1 strike price 
intervals. \4\ In order to be eligible for selection into the Pilot 
Program, the underlying stock must close below $20 in 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 option class 
designated by another securities exchange that employs a similar Pilot 
Program under their respective rules. The Exchange may not list long-
term option series (``LEAPS'') 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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    \4\ Although the Pilot Program generally allows CBOE to select a 
total of 5 individual stocks on which option series may be listed at 
$1 strike price interval, the Pilot Program was amended to provide 
that CBOE can designate no more than 4 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 .11 to CBOE Rule 24.9. If CBOE 
decides to discontinue listing Mini-SPX option series at $1 strike 
price intervals, CBOE would again be free to select up to 5 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) (providing that as long as there are open 
Mini-SPX option series listed at $1 strike price intervals, the 
Exchange would be required to surrender one of its five selections 
under the Pilot Program).
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    The Exchange proposes to amend Interpretation and Policy .01 to 
CBOE Rule 5.5 to expand the Pilot Program and allow it to select a 
total of 10 individual stocks on which option series may be listed at 
$1 strike price intervals. Additionally, CBOE proposes to expand the 
price range on which it may list $1 strikes from $3 to $50. The 
existing restrictions on listing $1 strikes would continue, i.e., 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, and 
CBOE is restricted from listing any series that would result in strike 
prices being $0.50 apart. In addition, because the Pilot Program has 
been very successful by allowing investors to establish equity options 
positions that are better tailored to meet their investment objectives, 
CBOE requests that the Pilot Program be approved on a permanent basis.
    As stated in the Commission order approving CBOE's Pilot Program 
and in the subsequent extensions of the Pilot Program, \5\ CBOE 
believes that $1 strike price intervals provide investors with greater 
flexibility in the trading of equity options that overlie lower priced 
stocks by allowing investors to establish equity options positions that 
are better tailored to meet their investment objectives. Indeed, member 
firms representing customers have repeatedly requested that CBOE seek 
to expand the Pilot Program, both in terms of the number of classes 
which can be selected and the range in which $1 strikes may be listed.
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    \5\ See supra note 3.
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    With regard to the impact on systems capacities, CBOE's analysis of 
the Pilot Program shows that the impact on CBOE's, OPRA's, and market 
data vendors' respective automated systems has been minimal. 
Specifically, in March 2007, CBOE states that the 21 classes 
participating in the Pilot Program industry-wide 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 2,754 series or 
1.80% of all series listed. \6\ CBOE notes 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 option classes. Even with the 
non-$1 strike series quotes included in these figures, CBOE believes 
that the overall impact on capacity is still minimal. CBOE represents 
that it has sufficient capacity to handle an expansion of the Pilot 
Program, as proposed.
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    \6\ See Securities Exchange Act Release No. 55673 (April 26, 
2007), 72 FR 24646 (May 3, 2007) (SR-CBOE-2007-38) (Pilot Program 
report).
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    Finally, the Exchange proposes to make a corresponding change to 
Interpretation and Policy .11(e) to CBOE Rule 24.9, which pertains to 
the expansion of the Pilot Program. In addition, CBOE proposes to make 
a technical correction to paragraph (a) of Interpretation and Policy 
.01 to CBOE Rule 5.5 where it references ``Interpretation and Policy 
.14 to Rule 24.9.'' Paragraph (a) of Interpretation .01 should 
reference Interpretation .11 to Rule 24.9.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act, \7\ in general, and furthers the objectives of 
section 6(b)(5) of the Act, \8\ in particular, in that it is designed 
to promote just and equitable principles of trade, serve to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 neither solicited nor received comments on the 
proposal.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i)

[[Page 65786]]

as the Commission may designate up to 90 days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which CBOE consents, the Commission will:
    A. By order approve 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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-CBOE-2007-125 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 Number SR-CBOE-2007-125. 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-CBOE-2007-125 and should be 
submitted on or before December 14, 2007.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority. \9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-22841 Filed 11-21-07; 8:45 am]

BILLING CODE 8011-01-P
