
[Federal Register Volume 77, Number 109 (Wednesday, June 6, 2012)]
[Notices]
[Pages 33543-33546]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13640]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67083; File No. SR-ISE-2012-33]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Regarding Strike Price 
Intervals for Certain Option Classes

May 31, 2012.
    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 May 21, 2012, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'')

[[Page 33544]]

the proposed rule change as described in Items I and II below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules to modify the Short Term 
Option Series Program (``STOS Program'') to permit, during the 
expiration week of an option class that is selected for the STOS 
Program, the strike price intervals for the related non-STOS options to 
be the same as the strike price interval for the STOS options. The 
Exchange also proposes to adopt a rule to open for trading Short Term 
Option Series at $0.50 strike price intervals for option classes that 
trade in one dollar increments and are in the STOS Program.
    The text of the proposed rule change is available on the Exchange's 
Internet Web site at 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 amend ISE Rules 504 
and 2009 regarding the STOS Program.\3\ Specifically, the Exchange 
proposes to amend its rules to indicate that during the expiration week 
of an option class that is selected for the STOS Program, the strike 
price intervals for the related non-STOS option \4\ shall be the same 
as the strike price interval for the STOS option. The purpose of this 
proposed rule change is also to adopt a rule to permit the Exchange to 
list Short Term Option Series at $0.50 strike price intervals for 
option classes that trade in one dollar increments and are in the STOS 
Program (``Eligible Option Classes''). As of April 13, 2012, there are 
95 Eligible Option Classes.\5\
---------------------------------------------------------------------------

    \3\ The Exchange adopted the STOS Program on a pilot basis in 
2005. See Securities Exchange Act Release No. 52012 (July 12, 2005), 
70 FR 41246 (July 18, 2005) (SR-ISE-2005-17). The STOS Program was 
approved on a permanent basis in 2010. See Securities Exchange Act 
Release No. 62444 (July 2, 2010), 75 FR 39595 (July 9, 2010) (SR-
ISE-2010-72).
    \4\ The related non-STOS option will be the same option class as 
the STOS option but will have a longer expiration cycle (e.g., a SPY 
monthly option as compared to a SPY weekly option.)
    \5\ As of April 13, 2012, there are 141 option classes across 
all options exchanges that have STOS options expiring on April 13, 
2012. Of these 141 option classes, only 95 would qualify to have 
series listed at $0.50 strikes because these 95 classes currently 
trade in one dollar increments and are selected to participate in 
the STOS Program.
---------------------------------------------------------------------------

    The STOS Program is codified in ISE Rules 504 and 2009. These rules 
state that after an option class has been approved for listing and 
trading on the Exchange, the Exchange may open for trading on any 
Thursday or Friday that is a business day series of options on no more 
than thirty option classes that expire on the Friday of the following 
business week that is a business day. In addition to the thirty-option 
class limitation, there is also a limitation that no more than twenty 
series for each expiration date in those classes that may be opened for 
trading.\6\ Furthermore, the strike price of each short term option has 
to be fixed with approximately the same number of strike prices being 
opened above and below the value of the underlying security at about 
the time that the short term options are initially opened for trading 
on the Exchange, and with strike prices being within thirty percent 
(30%) above or below the closing price of the underlying security from 
the preceding day. The Exchange does not propose any changes to the 
current program limitations. The Exchange only proposes to specify that 
Eligible Option Classes can have interval prices of $0.50, as proposed 
under Supplementary Material .12 to Rule 504 and Supplementary Material 
.05 to Rule 2009.
---------------------------------------------------------------------------

    \6\ The Exchange may open up to 10 additional series for each 
option class that participates in the Short Term Option Series 
Program when the Exchange deems it necessary to maintain an orderly 
market, to meet customer demand or when the market price of the 
underlying security moves substantially from the exercise price or 
prices of the series already opened. Any additional strike prices 
listed by the Exchange shall be within thirty percent (30%) above or 
below the current price of the underlying security. The Exchange may 
also open additional strike prices on Short Term Option Series that 
are more than 30% above or below the current price of the underlying 
security 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 shall not be considered when determining customer interest 
under this provision. Supplementary Material .02(d) to Rule 504 and 
Supplementary Material .01(d) to Rule 2009.
---------------------------------------------------------------------------

    The principal reason for the proposed interval pricing structure is 
market and customer demand. The Exchange has received numerous requests 
to list actively traded products, such as the Eligible Option Classes, 
in more granular strike price intervals, especially as they approach 
expiration to provide Members and their customers more trading 
opportunities for short term options.
    In the almost two years since the inception of the STOS Program, it 
has steadily expanded to the point that in the 1st quarter of 2012, 
STOS options represented 9.0% of the total options volume on the 
Exchange and 9.2% of the total options volume in the United States. The 
STOS options volume becomes even more significant when the volume of an 
STOS option class is compared to the volume of the related non-STOS 
option class. As an example, in the first three months of 2012, on the 
Exchange there were 10,399,842 contracts of SPY STOS options traded and 
18,354,779 contracts of SPY monthly options traded; and 1,319,580 
contracts of AAPL STOS options traded and 3,975,896 contracts of AAPL 
monthly options traded. From the 4th quarter of 2010 to the 4th quarter 
of 2011, STOS options volume increased by more than 40%,\7\ and the 
Exchange believes that STOS options volume will continue to rise as a 
percentage of overall activity in 2012.
---------------------------------------------------------------------------

    \7\ During the same time period, monthly options volume 
decreased by 8%.
---------------------------------------------------------------------------

    Moreover, the Commission has previously approved the use of $0.50 
strike price intervals. Numerous options products are listed (trade) on 
the Exchange at $0.50 strike price intervals. For example, pursuant to 
ISE Rule 504(h), there are six individual ETF options listed on the 
Exchange at $0.50 strike price intervals. There are approximately 53 
options listed on the Exchange at $0.50 strike price intervals pursuant 
to the $0.50 Strike Program. The Exchange further notes that while 
there are more than 1,000 options listed on the Exchange with one 
dollar strike price intervals, under this proposed rule change, the 
Exchange would currently offer only 95 option classes in more granular 
strike intervals.\8\
---------------------------------------------------------------------------

    \8\ The Exchange notes that Supplementary Material .02(a) to ISE 
Rule 504 limits the Exchange's ability to list series unless another 
exchange lists a similar series at $0.50 strike interval. In other 
words, if another exchange opens a $40 strike in an Eligible Option 
Class, and ISE lists that $40 strike pursuant to Supplementary 
Material .02(a), ISE would not therefore be permitted to open 
strikes of $39.50 or $40.50 in that class of option.

---------------------------------------------------------------------------

[[Page 33545]]

    The Exchange believes that there are substantial benefits to market 
participants in the ability to trade the Eligible Option Classes at 
more granular strike price intervals. The proposed interval for the 
Eligible Option Classes would allow traders and investors, and in 
particular public (retail) investors to more effectively and with 
greater precision consummate trading and hedging strategies on the 
Exchange. The Exchange believes that this precision is increasingly 
necessary, and in fact crucial, as traders and investors engage in 
trading and hedging strategies across various investment platforms 
(e.g., equity and ETF, index, derivatives, futures, foreign currency, 
and even commodities products); particularly when many of these 
platforms enjoy substantially smaller strike price differentiations 
(e.g., as low as $.05).\9\
---------------------------------------------------------------------------

    \9\ As an example, per the CME Group Web site, http://www.cmegroup.com/trading/metals/precious/ProductOverride/SO-silver-options.html, strike prices for options on futures may be at an 
interval of $.05 and $.25 per specified parameters.
---------------------------------------------------------------------------

    The Exchange notes that this proposed rule change has the support 
of several ISE market makers. This proposal was developed in 
consultations with one such market-making firm. The ISE Board of 
Directors, which includes several major market makers, also voted in 
favor of this proposal.
    Following is an example of how existing strike intervals in the 
Eligible Option Classes negatively impact trading and hedging 
opportunities. If an investor needs to purchase a call option in CSCO 
(03/26/12 closing price $20.84), the current one dollar strike interval 
would offer less opportunity and choice for an investor seeking to keep 
cash expenditures low. For example, an investor wishing to buy an in-
the-money call option for less than a $2.50 investment per call 
purchase has only two strike prices that meet his criteria from which 
to choose: the 19 strike and the 20 strike. Such call options with five 
days until expiration might offer ``ask prices'' (option premiums) of 
$1.75 and $.75. However, if CSCO had $0.50 strike prices as proposed, 
the same investor would have a selection of March 18.50, 19.00, 19.50, 
20.00, and the 20.50 strike call options that may have options premiums 
from approximately $2.25 down to approximately $.25. This expanded 
range of strikes, and commensurate option premiums, offers far more 
choice and a considerably lower cost of entry to the investor, thereby 
garnering the investor more than a 66% options premium savings. Lower 
intervals offer more trading and hedging opportunity at lower cost. 
Clearly, more efficient pricing is advantageous to all market 
participants, from retail to institutional investors. The changes 
proposed by the Exchange should allow execution of more trading and 
hedging strategies on the Exchange. The Exchange notes that in 
conformance with ISE Rules, the Exchange shall not list $0.50 strike 
price intervals on non-STOS options within five (5) days of expiration. 
For example, if a non-STO in an options class is set to expire on 
Friday, March 16, the Exchange could begin to trade $0.50 strike price 
intervals surrounding that non-STO on Monday, March 12, but no later.
    The Exchange notes that liquidity levels at each individual option 
series could decrease as a result of listing short term options series 
at more granular strike increments. ISE, however, does not expect a 
significant change in liquidity, nor does the Exchange expect overall 
liquidity in these products to decline. Moreover, this proposal will 
result in more targeted liquidity being available for industry 
participants, allowing liquidity providers to better concentrate their 
efforts in parts of the markets where liquidity is most needed.
    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 trading 
Eligible Option Classes in narrower strike price intervals. Further, 
the Exchange notes that this proposal, if approved, would not increase 
the number of listed short-term series.
    The Exchange also proposes that during the expiration week of an 
option class that is selected for the STOS Program, the strike price 
intervals for the related non-STOS option shall be the same as the 
strike price intervals for the STOS option. The Exchange proposes to 
make this change to ensure conformity between STOS options and non-STOS 
options that are in the same options class (e.g., weekly and monthly 
SPY options). The Exchange believes that not having such a conforming 
change would be counter-productive and not beneficial for trading and 
hedging purposes.\10\
---------------------------------------------------------------------------

    \10\ Moreover, the Exchange notes that STOS options are not 
listed and traded during the expiration week of the related non-STOS 
options. During this week, the non-STOS options are materially and 
financially equivalent to the STOS options. The proposed change 
would allow traders and hedgers to have the noted benefits of the 
STOS Program during each week in a month.
---------------------------------------------------------------------------

    The Exchange believes that listing $0.50 strike prices in a handful 
of option classes has provided investors with greater trading 
opportunities and the ability to more closely tailor their investment 
and risk management strategies and decisions. However, due to 
limitations imposed by ISE's rules, the Exchange has had to reject 
trading requests to list more option classes in narrower strike prices. 
The Exchange believes a gradual expansion of strike price intervals, as 
proposed herein, and limiting it to the Eligible Option Classes will 
provide investors with better and more choices for investment, trading 
and risk management purposes.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 \11\ (the 
``Act'') in general, and furthers the objectives of Section 6(b)(5) of 
the Act \12\ 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. The Exchange 
believes that providing strike prices of $0.50 in the Eligible Option 
Classes is reasonable because doing so will result in a continuing 
benefit to investors by giving them more flexibility to closely tailor 
their investment and hedging decisions in a greater number of 
securities. The Exchange also believes it is reasonable to provide the 
same strike price intervals for option classes that are in the STOS 
Program and for the related non-STOS option during expiration week 
because doing so will ensure conformity between STOS options and non-
STOS options that are in the same options class. While the proposed 
rule change will generate additional quote traffic, the Exchange does 
not believe that this increased traffic will become unmanageable since 
the proposal remains limited to a fixed number of classes.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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.

[[Page 33546]]

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

    Within 45 days of the publication date of this notice or within 
such longer period (1) as the Commission may designate up to 45 days of 
such date if it finds such longer period to be appropriate and 
publishes its reasons for so finding or (2) as to which the self-
regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such Proposed Rule Change; or
    (B) institute proceedings to determine whether the Proposed Rule 
Change should be disapproved.

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 email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2012-33 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-2012-33. This file 
number should be included on the subject line if email 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 
10:00 a.m. and 3:00 p.m. The text of the proposed rule change is 
available on the Commission's Web site at http://www.sec.gov. 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-ISE-2012-33 and should be submitted on or before June 
27, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13640 Filed 6-5-12; 8:45 am]
BILLING CODE 8011-01-P


