
[Federal Register Volume 76, Number 25 (Monday, February 7, 2011)]
[Notices]
[Pages 6641-6642]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2567]



[[Page 6641]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63803; File No. SR-BATS-2011-003]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Establish 
a $5 Strike Price Program

January 31, 2011.
    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 January 28, 2011, BATS Exchange, Inc. (``BATS'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. 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 is filing with the Commission a proposal for the BATS 
Exchange Options Market (``BATS Options'') to amend Rule 19.6 (Series 
of Options Contracts Open for Trading) to allow the Exchange to list 
and trade series in intervals of $5 or greater where the strike price 
is more than $200 in up to five (5) option classes on individual stocks 
(``$5 Strike Price Program'') to provide investors and traders with 
additional opportunities and strategies to hedge high priced 
securities.
    The text of the proposed rule change is available at the Exchange's 
Web site at http://www.batstrading.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 Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts 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 modify Rule 19.6 to 
allow the Exchange to list and trade series in intervals of $5 or 
greater where the strike price is more than $200 in up to five (5) 
option classes on individual stocks (``$5 Strike Price Program'') to 
provide investors and traders with additional opportunities and 
strategies to hedge high priced securities.
    Currently, Rule 19.6 permits strike price intervals of $10 or 
greater where the strike price is greater than $200. The Exchange is 
proposing to add the proposed $5 Strike Price Program as an exception 
to the $10 or greater program language in Rule 19.6(d)(3). The proposal 
would allow the Exchange to list series in intervals of $5 or greater 
where the strike price is more than $200 in up to five (5) option 
classes on individual stocks. The Exchange specifically proposes to 
create new subparagraph (5) to Rule 19.6(d) to provide that the 
Exchange may list series in intervals of $5 or greater where the strike 
price is more than $200 in up to five (5) option classes on individual 
stocks. In addition, the Exchange proposes to include language 
permitting it to list $5 strike prices on any other option classes 
designated by other securities exchanges that employ programs similar 
to the $5 Strike Price Program. This reciprocity provision is 
consistent with other strike price programs operated by the Exchange 
and will help to eliminate confusion, as investors will be able to 
access these series across all exchanges that employ programs similar 
to the $5 Strike Price Program. The Exchange believes that this is 
consistent with the goals of the National Market System and the 
concepts of price improvement and best execution. Also, because all of 
the existing strike price programs that have been adopted by the 
various exchanges include reciprocity provisions, the Exchange believes 
that current proposal will eliminate confusion and prevent listing 
errors amongst the exchanges.
    The Exchange believes the $5 Strike Price Program would offer 
investors a greater selection of strike prices at a lower cost. For 
example, if an investor wanted to purchase an option with an expiration 
of approximately one month, a $5 strike interval could offer a wider 
choice of strike prices which may result in reduced outlays in order to 
purchase the option. By way of illustration, using Google, Inc. 
(``GOOG'') as an example, if GOOG were trading at $610 \3\ with 
approximately one month remaining until expiration, the front month 
(one month remaining) at-the-money call option (the 610 strike) might 
trade at approximately $17.50 and the next highest available strike 
(the 620 strike) might trade at approximately $13.00. By offering a 615 
strike an investor would be able to trade a GOOG front month call 
option at approximately $15.25, thus providing an additional choice at 
a different price point.
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    \3\ The prices listed in this example are assumptions and not 
based on actual prices. The assumptions are made for illustrative 
purposes only using the stock price as a hypothetical.
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    Similarly, if an investor wanted to hedge exposure to an underlying 
stock position by selling call options, the investor may choose an 
option term with two months remaining until expiration. An additional 
$5 strike interval could offer additional and varying yields to the 
investor. For example if Apple, Inc. (``AAPL'') were trading at $310 
\4\ with approximately two months remaining until expiration, the 
second month (two months remaining) at-the-money call option (the 310 
strike) might trade at approximately $14.50 and the next highest 
available strike (the 320) strike might trade at $9.90. If at 
expiration the price of AAPL closed at $310, the 310 strike call would 
have yielded a return of 4.68% and the 320 strike call would have 
yielded a return of 3.19% over the holding period. If the 315 strike 
call were available, that series might be priced at approximately 
$12.10 (a yield of 3.90% over the holding period) and would have had a 
lower risk of having the underlying stock called away at expiration 
than that of the 310 strike call.
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    \4\ The prices listed in this example are assumptions and not 
based on actual prices. The assumptions are made for illustrative 
purposes only using the stock price as a hypothetical.
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    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 the listing 
and trading of classes on individual stocks $5 Strike Price Program. 
The proposed $5 Strike Price Program would provide investors increased 
opportunities to improve returns and manage risk in the trading of 
equity options that overlie high priced stocks. In addition, the 
proposed $5 Strike Price Program would allow investors to establish 
equity options positions that are better tailored to meet their 
investment, trading and risk management requirements.

[[Page 6642]]

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \5\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \6\ in particular in that it is designed to promote 
just and equitable principles of trade, to remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system, and, in general to protect investors and the public interest. 
The Exchange believes the $5 Strike Price Program proposal will provide 
the investing public and other market participants increased 
opportunities because a $5 series in high priced stocks will provide 
market participants additional opportunities to hedge high priced 
securities. This will allow investors to better manage their risk 
exposure, and the Exchange believes the proposed $5 Strike Price 
Program would benefit investors by giving them more flexibility to 
closely tailor their investment decisions in a greater number of 
securities. While the $5 Strike Price Program will generate additional 
quote traffic, the Exchange does not believe that this increased 
traffic will become unmanageable since the proposal is limited to a 
fixed number of classes. Further, the Exchange does not believe that 
the proposal will result in a material proliferation of additional 
series because it is limited to a fixed number of classes and the 
Exchange does not believe that the additional price points will result 
in fractured liquidity.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 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 imposes 
any burden on competition.

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 written comments on 
the proposed rule change.

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

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \7\ and Rule 19b-
4(f)(6) thereunder.\8\
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's 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 
Commission has waived the five-day prefiling requirement in this 
case.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission believes that waiver of the operative 
delay is consistent with the protection of investors and the public 
interest because the $5 Strike Price Program is substantially similar 
to that of another exchange that is already effective and operative.\9\ 
Therefore, the Commission designates the proposal operative upon 
filing.\10\
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    \9\ See Securities Exchange Act Release No. 63654 (January 6, 
2011), 76 FR 2182 (January 12, 2011) (SR-Phlx-2010-158) (order 
approving establishment of a $5 Strike Price Program). See also 
Securities Exchange Act Release No. 63658 (January 6, 2011), 76 FR 
2187 (January 12, 2011) (SR-Phlx-2011-02) (notice of filing and 
immediate effectiveness of reciprocity provision related to the $5 
Strike Price Program).
    \10\ 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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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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 Number SR-BATS-2011-003 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-BATS-2011-003. 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 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 
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-BATS-2011-003 and should be 
submitted on or before February 28, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2567 Filed 2-4-11; 8:45 am]
BILLING CODE 8011-01-P


