
[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20764-20767]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8856]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64258; File No. SR-ISE-2011-23]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Expand the $2.50 Strike Price Program

April 8, 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 April 6, 2011, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and

[[Page 20765]]

Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. The Exchange has filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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).
    \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 ISE Rule 504 to expand the $2.50 
Strike Price program. The text of the proposed rule change is available 
on the Exchange's Web site http://www.ise.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 self-regulatory organization 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 this proposed rule change is to expand the current 
$2.50 Strike Price Program (``Program'') \5\ to permit the listing of 
options with $2.50 strike price intervals for options with strike 
prices between $50 and $100, provided the $2.50 strike price intervals 
are no more than $10 from the closing price of the underlying stock in 
the primary market.\6\ Additionally, ISE proposes to specify that it 
may select up to sixty (60) option classes on individual stocks for 
which the intervals of strike prices will be $2.50. Currently, ISE Rule 
504(g) permits the listing of options with $2.50 strike price intervals 
with strike prices between $50 and $75. Specifically, ISE proposes to 
amend the current text of ISE Rule 504(g) to expand the Program.
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    \5\ The $2.50 Strike Price Program existed among the options 
exchanges when ISE began operations in 2000. Initially adopted in 
1995 as a pilot program, the pilot $2.50 Strike Price Program 
allowed options exchanges to list options with $2.50 strike price 
intervals for options trading at strike prices greater than $25 but 
less than $50 on a total of up to 100 option classes. See Securities 
Exchange Act Release No. 35993 (July 19, 1995), 60 FR 38073 (July 
25, 1995) (approving File Nos. SR-Phlx-95-08, SR-Amex-95-12, SR-PSE-
95-07, SR-CBOE-95-19, and SR-NYSE-95-12). In 1998, the pilot program 
was permanently approved and expanded to allow the options exchanges 
to select up to 200 option classes for the $2.50 Strike Price 
Program. See Securities Exchange Act Release No. 40662 (November 12, 
1998), 63 FR 64297 (November 19, 1998) (approving File Nos. SR-Amex-
98-21, SR-CBOE-98-29, SR-PCX-98-31, and SR-Phlx-98-26). The Exchange 
lists options with $2.50 strike price intervals on those classes 
selected by the other options exchanges and does not select any 
class for inclusion in the $2.50 Strike Price Program. See 
Securities Exchange Act Release No. 52960 (December 15, 2005), 70 FR 
76090 (December 22, 2005) (SR-ISE-2005-59).
    \6\ The term ``primary market'' is defined in ISE Rule 
100(a)(37) as the principal market in which an underlying security 
is traded.
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    For example, consider a hypothetical where Caterpillar, Inc. 
(``CAT'') was trading at $81. With approximately one month remaining 
until expiration, and with a front month at-the-money put option (the 
80 strike) trading at approximately $1.30, the investor would be able 
to purchase a $77.50 strike put at an estimated $0.60 per contract. 
Today, the next available strike of a one month put option is the 75 
strike. While the 75 strike put would certainly trade at a lesser price 
than the 80 strike put,\7\ the protection offered would only take 
effect with a 7.40% decline in the market as oppose to a 4.30% decline 
in the market. The $77.50 strike put would provide the investor an 
additional choice to hedge exposure (the opportunity to hedge with a 
reduced outlay) and thereby minimize risk if there were a decline in 
the stock price of CAT.
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    \7\ The 75 strike put would trade at $0.30 in this example.
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    Another example would be if an investor desired to sell call 
options to hedge the exposure of an underlying stock position and 
enhance yield. Consider a hypothetical where CAT was trading at $81 and 
the second month (two months remaining) of a recently out of-the-money 
call option (the 85 strike) was trading at approximately $2.35. If the 
investor were to sell the 85 strike call against an existing stock 
position, the investor could yield a return of approximately 2.90% over 
a two month period or an annualized return of 17.4%. By providing an 
additional $2.50 strike interval above $75, the investor would have the 
opportunity to sell the 82.50 strike instead of the 85 strike. If the 
85 strike call were trading at $2.35, the 82.50 strike call would trade 
at approximately $3.30. By selling the 82.50 strike call at $3.30 
against an existing stock position, the investor could yield a 4.07% 
return over a two month period or an annualized 24.40% return. 
Therefore, an additional choice of a $2.50 strike interval could afford 
varying yields to the investor.
    ISE believes that the Program has to date created additional 
trading opportunities for investors, thereby benefiting the 
marketplace. The existence of $2.50 strike prices with strike intervals 
above $75 affords investors the ability to more closely tailor 
investment strategies to the precise movement of the underlying 
security and meet their investment, trading and risk management 
requirements.
    ISE is also proposing to specify that it may select up to 60 option 
classes on individual stocks for which the intervals of strike prices 
will be $2.50. ISE has participated in the industry wide $2.50 Strike 
Price Program since ISE's inception in 2000. Currently, the options 
exchanges may collectively select up to 200 options classes on 
individual stocks for which the intervals of strike prices will be 
$2.50. In addition, each options exchange is permitted to list options 
with $2.50 strike price intervals on any option class that another 
options exchange selects under its program.
    The industry wide collection of 200 options classes has not been 
expanded since 1998, although increasingly more companies have 
completed initial public offerings from 1998 through 2010. 
Additionally, significantly more options classes are trading in 2011 as 
compared to 1998. The Exchange proposes to specify that ISE may select 
up to 60 options classes to remain competitive with other exchanges and 
to offer investors additional investment choices. ISE believes that 
offering additional options classes would benefit investors.
    Furthermore, ISE does not believe that this proposal would have a 
negative impact on the marketplace. ISE would compare this proposal 
with the $1 Strike Price expansion, wherein ISE, among several options 
exchanges, expanded its $1 Strike Price Program from 55 individual 
stocks to 150 individual stocks on which an option series may be listed 
at $1 strike price

[[Page 20766]]

intervals.\8\ ISE believes that this proposed rule change that would, 
in part, result in an increase to the 200 options classes in the 
industry wide Program, is less than the $1 Strike Price Program 
increase among several exchanges and therefore would have less impact 
than that program, which has not had any negative impact on the market 
in terms of proliferation of quote volume or fragmentation. ISE 
believes that the effect of the proposed expansion on the marketplace 
would not result in a material proliferation of quote volume or 
concerns with fragmentation.
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    \8\ See Exchange Act Release No. 62442 (July 2, 2010), 75 FR 
39597 (July 9, 2010) (SR-ISE-2010-64).
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    With regard to the impact of this proposal on system capacity, ISE 
has analyzed its capacity and represents that it and the Options Price 
Reporting Authority have the necessary system capacity to handle the 
potential additional traffic associated with the listing and trading of 
additional classes on individual stocks in the $2.50 Strike Price 
Program.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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. ISE believes that the effect of the proposed expansion on the 
marketplace would not result in a material proliferation of quote 
volume or concerns with fragmentation. In addition, ISE believes that 
it has the necessary system capacity to handle the potential additional 
traffic associated with listing and trading of the additional classes.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    Rather, ISE believes the $2.50 Strike Price Program proposal would 
provide the investing public and other market participants increased 
opportunities to better manage their risk exposure. Accordingly, ISE 
believes that the proposal to expand the Program to allow the listing 
of options with $2.50 strike price intervals for options with strike 
prices between $50 and $100 should further benefit investors and the 
market by providing greater trading opportunities for those underlying 
stocks that have low volatility and thus trade in a narrow range. While 
expansion of the $2.50 Strike Price Program will generate additional 
quote traffic, ISE does not believe that this increased traffic will 
become unmanageable since the proposal is limited to a fixed number of 
classes. Further, ISE 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 ISE does not believe that the additional 
price points will result in fractured liquidity.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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 not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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 \11\ and Rule 19b-
4 (f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 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 proposal is substantially similar to that of 
another exchange that has been approved by the Commission.\13\ 
Therefore, the Commission designates the proposal operative upon 
filing.\14\
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    \13\ See Securities Exchange Act Release No. 64157 (March 31, 
2011), 76 FR 18817 (April 5, 2011) (SR-Phlx-2011-15) (order 
approving expansion of $2.50 Strike Price Program).
    \14\ 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-ISE-2011-23 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-ISE-2011-23. 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

[[Page 20767]]

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-ISE-
2011-23 and should be submitted on or before May 4, 2011.

    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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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8856 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P


