

[Federal Register: January 3, 2008 (Volume 73, Number 2)]
[Notices]               
[Page 528-529]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03ja08-61]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57049; File No. SR-CBOE-2007-125]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change, as 
Modified by Amendment No. 2 Thereto, Relating to the $1 Strike Pilot 
Program

December 27, 2007.

I. Introduction

    On October 31, 2007, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend its rules relating to the $1 Strike 
Pilot Program (``$1 Strike Program''). 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 proposed rule 
change, as amended, was published for comment in the Federal Register 
on November 23, 2007.\3\ The Commission received no comments on the 
proposal. This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56801 (November 16, 
2007), 72 FR 65784 (``Notice'').
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II. Description of the Proposal

    The purpose of the proposed rule change is to expand the $1 Strike 
Program and to request permanent approval of the $1 Strike Program. The 
$1 Strike Program currently allows CBOE to select a total of 5 
individual stocks on which option series may be listed at $1 strike 
price intervals. To be eligible for selection into the $1 Strike 
Program, the underlying stock must close below $20 in its primary 
market on the previous trading day. If selected for the $1 Strike 
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 
$1 Strike 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 $1 Strike Program. The Exchange also is 
restricted from listing any series that would result in strike prices 
being $0.50 apart.
    The Exchange proposes to amend Interpretation and Policy .01 to 
CBOE Rule 5.5 to expand the $1 Strike Program to 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 raise the 
upper limit of the price range on which it may list $1 strikes from $20 
to $50. The existing restrictions on listing $1 strikes would continue, 
e.g., 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 would be restricted from listing any series that would 
result in strike prices being $0.50 apart. In addition, because it 
believes that the $1 Strike 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 $1 Strike Program be approved on a permanent basis.
    In its filing with the Commission, CBOE stated its belief 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. According to CBOE, 
member firms representing customers have repeatedly requested that CBOE 
seek to expand the $1 Strike Program, both in terms of the number of 
classes that can be selected and the range in which $1 strikes may be 
listed. CBOE concluded from its analysis of the $1 Strike Program that 
the impact on CBOE's, OPRA's, and market data vendors' respective 
automated systems has been minimal.\4\ CBOE has represented that is has 
sufficient capacity to handle an expansion of the $1 Strike Program, as 
proposed.
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    \4\ See Notice, supra note 3, at 65785 (providing CBOE's $1 
Strike Program analysis on systems capacity).
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    Finally, the Exchange proposes to make a corresponding change to

[[Page 529]]

Interpretation and Policy .11(e) to CBOE Rule 24.9 to (i) note that the 
Exchange shall designate no more than 9 individual stocks for inclusion 
in the $1 Strike Program at the same time there are strike prices 
listed at $1 intervals on Mini-SPX options,\5\ and (ii) make a 
technical correction to a cross-reference to Interpretation and Policy 
.01(a) to CBOE Rule 5.5.
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    \5\ Although the $1 Strike Program generally allowed CBOE to 
select a total of 5 individual stocks on which option series may be 
listed at $1 strike price intervals, the $1 Strike Program provided 
that CBOE could designate no more than 4 individual stocks for 
inclusion in the $1 Strike Program at the same time there are strike 
prices listed at $1 intervals on Mini-SPX options in accordance with 
Interpretation and Policy .11 to CBOE Rule 24.9. 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 $1 Strike Program). If CBOE decides to 
discontinue listing Mini-SPX option series at $1 strike price 
intervals, CBOE would again be free to select up to 10 option 
classes for inclusion in the $1 Strike Program, as proposed.
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III. Commission's Findings and Order Granting Approval of the Proposed 
Rule Change

    After careful review and based on the Exchange's representations, 
the Commission finds that the proposed rule change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\6\ In particular, the 
Commission finds that the proposed rule change is consistent with 
section 6(b)(5) of the Act \7\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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.
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    \6\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission believes that the proposed expansion 
to permit the Exchange to select a total of 10 individual underlying 
stocks trading at less than $50 on which option series may be listed at 
$1 strike price intervals, and the request to make the $1 Strike 
Program permanent, should provide investors with added flexibility in 
the trading of equity options and further the public interest by 
allowing investors to establish equity options positions that are 
better tailored to meet their investment objectives. The Commission 
also believes that the proposal strikes a reasonable balance between 
the Exchange's desire to accommodate market participants by offering a 
wider array of investment opportunities and the need to avoid 
unnecessary proliferation of options series and the corresponding 
increase in quotes. The Commission notes that the existing restrictions 
on listing $1 strike price intervals will continue to apply, e.g., no 
$1 strike price may be listed (a) that is greater than $5 from the 
underlying stock's closing price in its primary market on the previous 
day, or (b) that would result in strike prices being $0.50 apart.
    The Commission expects the Exchange to continue to monitor for 
options with little or no open interest and trading activity and to act 
promptly to delist such options. In addition, the Commission expects 
that CBOE will continue to monitor the trading volume associated with 
the additional options series listed as a result of this proposal and 
the effect of these additional series on market fragmentation and on 
the capacity of the Exchange's, OPRA's, and vendors' automated systems.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-2007-125), as modified 
by Amendment No. 2 thereto, be, and it hereby is, approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
Nancy M. Morris,
Secretary.
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    \9\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E7-25570 Filed 1-2-08; 8:45 am]

BILLING CODE 8011-01-P
