
[Federal Register Volume 76, Number 69 (Monday, April 11, 2011)]
[Notices]
[Pages 20066-20067]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8498]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64189; File No. SR-CBOE-2011-008]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change To Permit 
the Listing of Series With $0.50 and $1 Strike Price Increments on 
Certain Options Used To Calculate Volatility Indexes

April 5, 2011.

I. Introduction

    On February 4, 2011, 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 proposed rule change to expand the $2.50 Strike Price 
Program. The proposed rule change was published for comment in the 
Federal Register on February 24, 2011.\3\ The Commission received no 
comment letters on the proposal. This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 63927 (February 17, 
2011), 76 FR 10412 (``Notice'').
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II. Description of the Proposal

    CBOE has proposed to amend Rules 5.5 and 24.9 to permit the listing 
of strike prices in $0.50 intervals where the strike price is less than 
$75, and strike prices in $1.00 intervals where the strike price is 
between $75 and $150 for option classes used to calculate volatility 
indexes. The Exchange also proposed to amend Interpretation and Policy 
.08 to Rule 5.5 to permit $0.50 strike price intervals where the strike 
price is less than $75 for options on exchange-traded funds (``ETFs'') 
that are used to calculate a volatility index.
    In its proposal, CBOE seeks to apply its VIX methodology \4\ to 
options on certain ETFs and individual equity

[[Page 20067]]

securities, and believes that it is appropriate to designate strike 
price intervals and ranges for series in such options that are 
comparable to those strike price intervals and ranges in effect for the 
SPX option series. The Exchange hopes that this will permit calculation 
of volatility index values that are recognized to be as accurate and 
reliable as the VIX values. The Exchange stated that allowing smaller 
strike price intervals for options overlying single stocks, ETFs, and 
indexes with prices of $150 or less will allow the Exchange to 
calculate volatility indexes that are better estimates of the expected 
volatility of option classes with underlying prices that are low 
relative to the level of the S&P 500.
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    \4\ The VIX methodology is derived from a body of research 
showing that it is possible to create pure exposure to volatility by 
assembling a special portfolio of options. While the price of a 
single option depends on both the underlying price and volatility, 
this special portfolio is constructed, in the aggregate, to 
eliminate the stock price dependence. In theory, this option 
portfolio would be comprised of an infinite number of options with 
continuous strike prices. In practice, however, the options that are 
used to calculate VIX--as well as other volatility indexes--are 
finite in number and are subject to a minimum interval between 
strike prices. The narrower this minimum interval, the more accurate 
the expression of volatility should be.
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    The Exchange also stated its belief that the expansion of strike 
prices resulting from the proposal is limited because the proposal will 
apply only to options that are used to calculate a volatility index. 
CBOE further stated that it has analyzed its capacity and represented 
that it believes that the Exchange and the Options Price Reporting 
Authority have the necessary systems capacity to handle the additional 
traffic associated with the listing series with strike prices in $0.50 
intervals where the strike price is less than $75, and series with 
strike prices in $1.00 intervals where the strike price is between $75 
and $150 for option classes used to calculate volatility indexes that 
would result from the Exchange's proposal.

III. Discussion

    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.\5\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\6\ which requires, among other things, that 
the rules of a national securities exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts, 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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    \5\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The proposal appears to strike a reasonable balance between the 
Exchange's desire to offer a wider array of investment opportunities 
and the need to avoid unnecessary proliferation of options series and 
the corresponding increase in quotes and market fragmentation. The 
Commission expects the Exchange 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. The Commission notes that CBOE has 
represented that it believes the Exchange and the Options Price 
Reporting Authority have the necessary systems capacity to handle the 
additional traffic associated with the newly permitted listings.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-CBOE-2011-008) be, and it 
hereby is, approved.
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    \7\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8498 Filed 4-8-11; 8:45 am]
BILLING CODE 8011-01-P


