
[Federal Register: April 7, 2008 (Volume 73, Number 67)]
[Notices]               
[Page 18828-18831]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ap08-104]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57594; File No. SR-BSE-2008-17]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Quarterly Options Series Pilot Program To Permit the Listing 
of Additional Series

April 1, 2008.
    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 28, 2008, the Boston Stock Exchange, Inc. (``Exchange'' or 
``BSE'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
The Exchange has designated this proposal as non-controversial under 
Section 19(b)(3)(A)(iii) of the Act \3\ and

[[Page 18829]]

Rule 19b-4(f)(6) thereunder,\4\ which renders the proposed rule change 
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)(iii).
    \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 amend Supplementary Material .04 to 
Section 6 of Chapter IV of the Rules of the Boston Options Exchange 
(``BOX'') to permit the Exchange to list strike prices for Quarterly 
Options Series (``QOS'') in exchange traded fund (``Fund Share'') 
options that fall within a percentage range (30%) above and below the 
price of the underlying Fund Share. Additionally, upon demonstrated 
customer interest, the Exchange also will be permitted to open 
additional strike prices of QOS in Fund Share options that are more 
than 30% above or below the current price of the Fund Share. Market 
makers trading for their own account will not be considered when 
determining customer interest under this provision. In addition to the 
initial listed series, the Exchange may list up to sixty (60) 
additional series per expiration month for each QOS in Fund Share 
options. Further, the proposal includes a delisting program to be 
undertaken by the Exchange in connection with QOS in Fund Share 
options.
    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.bostonstock.com), at the Exchange's principal 
office, 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 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 Exchange proposes to amend Supplemental Material .04 to Section 
6 of Chapter IV of the BOX Rules to permit the Exchange to open 
additional series for QOS in Fund Share options that fall within thirty 
percent (30%) above and below the price of the underlying Fund Share. 
Additionally, upon demonstrated customer interest, the Exchange also 
will be permitted to open additional strike prices of QOS in Fund Share 
options that are more than 30% above or below the current price of the 
underlying Fund Share. Market makers trading for their own account will 
not be considered when determining customer interest under this 
provision. The Exchange will be permitted to list up to sixty (60) 
additional series per expiration month for each QOS in Fund Share 
options.
    On July 17, 2007, the Exchange filed with the Commission a pilot 
program proposal to permit the listing and trading of QOS in options on 
indexes or options on Fund Shares that satisfy the applicable listing 
criteria under BOX rules.\5\ QOS trade based on calendar quarters that 
end in March, June, September, and December. The Exchange lists QOS 
that expire at the end of the next consecutive four calendar quarters, 
as well as the fourth quarter of the next calendar year. For example, 
if BOX were trading QOS in the iShares Russell 2000 Index Fund 
(``IWM'') in the month of April 2008, the Exchange would list series 
that expire at the end of the second quarter of 2008 (June), third 
quarter of 2008 (September), fourth quarter of 2008 (December), first 
quarter of 2009 (March), and fourth quarter of 2009 (December).
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    \5\ See Securities Exchange Act Release No. 56086 (July 17, 
2007), 72 FR 40182 (July 23, 2007) (SR-BSE-2007-36) (``Pilot Program 
Release''). Under the pilot program, the Exchange may list QOS in up 
to five currently listed option classes that are either options on 
Fund Shares or indexes. The Exchange also is permitted to list QOS 
in any options class that is selected by other securities exchanges 
that employ a similar pilot program under their respective rules.
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    Currently, the Exchange list QOS in five Fund Share options: (1) 
Nasdaq-100 Index Tracking Stock (``QQQQ''); (2) IWM; (3) DIAMONDS 
Trust, Series 1 (``DIA''); (4) Standard and Poor's Depositary Receipts/
SPDRs (``SPY''); and (5) Energy Select SPDR (``XLE''). The average 
daily trading volume and total volume for QOS in IWM options 
significantly exceeds the volumes for QOS of some other Fund Share 
options that are listed and traded on the Exchange. The chart below 
provides trading volume figures for the fourth quarter in 2007, 
demonstrating that QOS in IWM options are one of the most popular and 
heavily traded QOS on the Exchange.

----------------------------------------------------------------------------------------------------------------
                                          October 2007              November 2007             December 2007
                QOS                -----------------------------------------------------------------------------
                                        ADV       Total vol       ADV       Total vol       ADV       Total vol
----------------------------------------------------------------------------------------------------------------
IWM...............................        1,690       38,891        1,597       33,540        3,230       64,612
QQQQ..............................        1,883       43,329        2,353       49,414        3,432       68,642
SPY...............................          699       16,086        1,349       28,335        2,087       41,756
DIA...............................          180        4,150          325        6,830          502       10,049
XLE...............................          188        4,329          927       19,483          261        5,237
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    Recently, certain options exchanges (``Options Exchanges'') have 
received requests from their members and participants to add additional 
strike prices for QOS in IWM options that would be outside of the price 
range for setting strikes as provided for under Supplemental Material 
.04 to Section 6 of Chapter IV of the BOX Rules (hereinafter ``+/-$5 
range'').\6\ These members and participants have advised the Options 
Exchanges that they are buying and selling QOS in IWM options to trade 
volatility. In order to adequately replicate the desired volatility 
exposure, these members and participants need to trade several IWM 
option series, many having strike prices that fall outside of the +/-$5 
range currently allowed under the QOS rules.
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    \6\ See Securities Exchange Act Release No. 57410 (March 3, 
2008), 73 FR 12483 (March 7, 2008) (SR-CBOE-2007-96). See also 
Securities Exchange Act Release No. 57425 (March 4, 2008) 73 FR 
12783 (March 10, 2008) (SR-ISE-2008-19). Supplemental Material .04 
to Section 6 of Chapter IV provides that the Exchange shall list 
strike prices for a QOS that are within $5 from the closing price of 
the underlying on the preceding day.

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[[Page 18830]]

    In addition, other members and participants have advised the 
Options Exchanges that their investment strategies involve trading 
options tied to a particular option ``delta,'' \7\ rather than a 
particular level of the underlying security or index. At issue is the 
fact that delta depends on both the relative difference between the 
level of the underlying security or index and the option strike price, 
and time to expiration. For example, with IWM trading at $85 per share, 
the strike price corresponding to a ``25-delta'' IWM call (i.e., a call 
option with a delta of 25) with one month to expiration would be 89. 
However, the strike price corresponding to a ``25-delta'' IWM call with 
3 months to expiration would be 93, and the strike price of a ``25-
delta'' call with 1 year to expiration would be 106. In short, the 
Exchange has been advised that the +/-$5 range for QOS in IWM options 
is insufficient to satisfy customer demand.
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    \7\ ``Delta'' is a measure of how an option price will change in 
response to a $1 price change in the underlying security or index. 
For example, an ABC option with a delta of ``50'' can be expected to 
change by $0.50 in response to a $1 change in the price of ABC.
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    In order to meet customer demand, the Exchange proposes to amend 
Supplemental Material .04 to Section 6 of Chapter IV of the BOX Rules, 
which governs the Quarterly Option Series Pilot Program. Specifically, 
the Exchange proposes to allow the Exchange to open additional strike 
prices of QOS in Fund Share options that are within thirty percent 
(30%) above or below the closing price of the underlying Fund Share on 
the preceding business day. The Exchange also will be permitted to open 
additional strike prices of QOS in Fund Share options that are more 
than 30% above or below the current price of the underlying Fund Share, 
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 will not be 
considered when determining customer interest under this proposed 
provision. The Exchange will be permitted to list up to sixty (60) 
additional series per expiration month for each QOS in Fund Share 
options.
    The Exchange is also proposing to add new paragraph (g) to 
Supplemental Material .04 to Section 6 of Chapter IV of the BOX Rules, 
which sets forth a delisting policy. Specifically, with respect to QOS 
in Fund Share options, the Exchange will, on a monthly basis, review 
series that are outside a range of five strikes above and five strikes 
below the current price of the underlying Fund Share, and delist series 
with no open interest in both the put and the call series having a 
strike price: (i) Higher than the highest strike price with open 
interest in the put and/or call series for a given expiration month; or 
(ii) lower than the lowest strike price with open interest in the put 
and/or call series for a given expiration month.
    To illustrate how the proposed delisting program would work, assume 
IWM closed at $70 on the day the Exchange conducts the monthly review 
of QOS in Fund Share options. Series having strike prices above $75 and 
below $65 would be reviewed by the Exchange for possible delisting. 
Assume that the Exchange lists the following QOS in IWM options that 
expire in June 2008:

------------------------------------------------------------------------
         Calls--June 08 Exp                    Puts--June 08 Exp
------------------------------------------------------------------------
     Strike         Open Interest?         Strike        Open Interest?
------------------------------------------------------------------------
       62                 No                 62                No
       63                 No                 63               Yes
       64                 Yes                64               Yes
        *                  *                 *                 *
       76                 Yes                76               Yes
       77                 Yes                77               Yes
       78                 Yes                78               Yes
       79                 Yes                79               Yes
       80                 Yes                80               Yes
       81                 Yes                81               Yes
       82                 Yes                82               Yes
       83                 No                 83                No
       84                 No                 84                No
       85                 No                 85               Yes
       86                 Yes                86                No
       87                 Yes                87               Yes
       88                 Yes                88               Yes
       89                 Yes                89                No
       90                 Yes                90                No
       91                 No                 91                No
       92                 No                 92                No
       93                 No                 93                No
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    The Exchange would de-list the first series listed above, as well 
as the last three: $62, $91, $92, and $93. The Exchange would not 
delist the $83 and $84 series because there are series having open 
interest with strike prices higher than these two series. In addition, 
the Exchange would not delist the $63 call series because there is open 
interest in the $63 put series.
    Notwithstanding the proposed delisting policy, customer requests to 
add strikes and/or maintain strikes in QOS in Fund Share options in 
series eligible for delisting shall be granted. Further, in connection 
with the proposed delisting policy, if the Exchange identifies series 
for delisting, the Exchange shall notify other options exchanges with 
similar delisting policies regarding eligible series for listing, and 
shall work with such other exchanges to develop a uniform list of 
series to be delisted, so as to ensure uniform series delisting of 
multiple listed QOS in Fund Share options. It is expected that the 
proposed delisting policy for QOS in Fund Share options would be 
adopted by other options exchanges that have adopted the QOS Pilot 
Program.
    BOX represents that it has the necessary systems capacity to 
support new options series that will result from this proposal. 
Further, as proposed, the Exchange notes that this rule change would 
become part of the pilot program and, going forward, would be 
considered by the Commission when the Exchange seeks to renew or make 
permanent the pilot program in the future.
2. Statutory Basis
    The Exchange believes the rule proposal is consistent with the Act 
and the rules and regulations there under applicable to a national 
securities exchange and, in particular, the requirements of Section 
6(b) of the Act.\8\ Specifically, the Exchange believes that the 
proposed rule change is consistent with the requirements under Section 
6(b)(5) of the Act \9\ that the rules of an 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. In order to meet customer demand, the Exchange 
proposes to amend Supplemental Material .04 to Section 6 of Chapter IV 
of the BOX Rules, which governs the Quarterly Option Series Pilot 
Program. The additional new series can be added without presenting 
capacity problems, and the Exchange has proposed a delisting policy 
with respect to QOS in Fund Share options.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

[[Page 18831]]

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

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public interest; (2) does not impose any significant burden on 
competition; and (3) does not become operative for 30 days from the 
date of filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Therefore, the foregoing rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\11\ The Exchange has asked the Commission to waive 
the 30-day operative delay to permit the Exchange to immediately 
compete with the other options exchanges that have similarly amended 
their quarterly options series pilot programs.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written 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. The Exchange has fulfilled this requirement.
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    The Commission notes that this proposal is substantially similar to 
a proposed rule change submitted by the Chicago Board Options Exchange, 
which was approved by the Commission following publication for notice 
and comment, and does not raise any new regulatory issues.\12\ Waiving 
the 30-day operative delay will promote, without undue delay, further 
competition in the options market.\13\ For these reasons, the 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest and 
designates the proposal operative upon filing.
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    \12\ See Securities Exchange Act Release No. 57410, supra note 
6. See also Securities Exchange Act Release No. 57425, supra note 6.
    \13\ 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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    The Commission notes that this rule change will become part of the 
pilot program and, going forward, its effects will be considered by the 
Commission in the event that the Exchange seeks to renew or make 
permanent the pilot program.\14\ Thus, in the Exchange's future reports 
on the Pilot Program, the Exchange should include analysis of (1) the 
impact of the additional series on the Exchange's market and quote 
capacity, and (2) the implementation and effects of the delisting 
policy, including the number of series eligible for delisting during 
the period covered by the report, the number of series actually 
delisted during that period (pursuant to the delisting policy or 
otherwise), and documentation of any customer requests to maintain QOS 
strikes that were otherwise eligible for delisting.
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    \14\ As set forth in the Pilot Program Release, if the Exchange 
were to propose an extension, expansion, or permanent approval of 
the Pilot Program, the Exchange must submit, along with any filing 
proposing such amendments to the program, a report that provides an 
analysis of the Pilot Program covering the entire period during 
which the Pilot Program was in effect. See Pilot Program Release, 
supra note 5. The Pilot Program Release requires the Exchange to 
include in its report, at a minimum: (1) data and written analysis 
on the open interest and trading volume in the classes for which QOS 
were opened; (2) an assessment of the appropriateness of the option 
classes selected for the Pilot Program; (3) an assessment of the 
impact of the Pilot Program on the capacity of the Exchange, OPRA, 
and market data vendors (to the extent data from market data vendors 
is available); (4) any capacity problems or other problems that 
arose during the operation of the Pilot Program and how the Exchange 
addressed such problems; (5) any complaints that the Exchange 
received during the operation of the Pilot Program and how the 
Exchange addressed them; and (6) any additional information that 
would assist in assessing the operation of the Pilot Program.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the 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-BSE-2008-17 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-BSE-2008-17. 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 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-BSE-2008-17 and should be 
submitted on or before April 28, 2008.

    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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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-7116 Filed 4-4-08; 8:45 am]

BILLING CODE 8011-01-P
