
[Federal Register Volume 79, Number 91 (Monday, May 12, 2014)]
[Notices]
[Pages 27006-27009]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10771]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72098; File No. SR-ISE-2014-23]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment 
No. 2, Regarding the Short Term Option Series Program

May 6, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on April 22, 2014, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission the proposed rule change as described in Items I 
and II below, which items have been prepared by the self-regulatory 
organization. On May 1, 2014, the Exchange filed Amendment No. 2 to the 
proposal.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as modified by Amendment No. 2, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 was filed on April 29, 2014 and withdrawn on 
May 1, 2014. In Amendment No. 2, the Exchange modified Exhibit 1 to 
add an additional sentence to Section II.A.1 to clarify when the 
Exchange may add additional series pursuant to the proposed rule 
change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend its rules governing the Short Term Option 
Series Program to introduce finer strike price intervals for standard 
expiration contracts in option classes that also have short term 
options listed on them (``related non-short term options''), and to 
remove obsolete rule text concerning the listing of new series during 
the week of expiration. 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 self-regulatory organization 
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 Exchange proposes to amend its rules governing the Short Term 
Option Series Program to introduce finer strike price intervals for 
related non-short term options. In particular, the Exchange proposes to 
amend its rules to permit the listing of related non-short term options 
during the month prior to expiration in the same strike price intervals 
as allowed for short term option series. The Exchange also proposes to 
remove obsolete rule text concerning the listing of new short term 
option series, including related non-short term option series, during 
the week of expiration.
    Under the ISE's current rules, the Exchange may list short term 
options in

[[Page 27007]]

up to fifty option classes,\4\ including up to thirty index option 
classes,\5\ in addition to option classes that are selected by other 
securities exchanges that employ a similar program under their 
respective rules. For each of these option classes, the Exchange may 
list five short term option expiration dates at any given time, not 
counting monthly or quarterly expirations.\6\ Specifically, on any 
Thursday or Friday that is a business day, the Exchange may list short 
term option series in designated option classes that expire at the 
close of business on each of the next five Fridays that are business 
days and are not Fridays in which monthly or quarterly options 
expire.\7\ These short term option series, which can be several weeks 
or more from expiration, may be listed in strike price intervals of 
$0.50, $1, or $2.50, with the finer strike price intervals being 
offered for lower priced securities, and for options that trade in the 
Exchange's dollar strike program.\8\ More specifically, the ISE may 
list short term options in $0.50 intervals for strike prices less than 
$75, or for option classes that trade in one dollar increments in the 
related non-short term option, $1 intervals for strike prices that are 
between $75 and $150, and $2.50 intervals for strike prices above 
$150.\9\
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    \4\ See Supplementary Material .02(a) to Rule 504.
    \5\ See Supplementary Material .01(a) to Rule 2009.
    \6\ See Supplementary Material .02 to Rule 504; Supplementary 
Material .01 to Rule 2009.
    \7\ Id.
    \8\ See Supplementary Material .12 to Rule 504; Supplementary 
Material .05 to Rule 2009.
    \9\ Id. Strike price intervals of $2.50 are only available for 
non-index options. Short term index option contracts are subject to 
the same strike price intervals as non-short term options for strike 
prices above $150. See Securities Exchange Act Release No. 71034 
(December 11, 2013), 78 FR 76363 (December 17, 2013) (SR-ISE-2013-
69).
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    The Exchange may also list standard expiration contracts, which are 
listed in accordance with the regular monthly expiration cycle. These 
standard expiration contracts must be listed in wider strike price 
intervals of $2.50, $5, or $10,\10\ though the ISE also operates strike 
price programs, such as the dollar strike program mentioned above,\11\ 
that allow the Exchange to list a limited number of option classes in 
finer strike price intervals. In general, the ISE must list standard 
expiration contracts in $2.50 intervals for strike prices of $25 or 
less, $5 intervals for strike prices greater than $25, and $10 
intervals for strike prices greater than $200.\12\ During the week 
prior to expiration only, the Exchange is permitted to list related 
non-short term option contracts in the narrower strike price intervals 
available for short term option series.\13\ Since this exception to the 
standard strike price intervals is available only during the week prior 
to expiration, however, standard expiration contracts regularly trade 
at significantly wider intervals than their weekly counterparts, as 
illustrated below.
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    \10\ See Rule 504(d).
    \11\ See Supplementary Material .01 to Rule 504, which allows 
the ISE to designate up to 150 option classes on individual stocks 
to be traded in $1 strike price intervals where the strike price is 
between $50 and $1. See also Rule 504(g) ($2.50 Strike Program) and 
Supplementary .05 to Rule 504 ($0.50 Strike Program).
    \12\ See Rule 504(d).
    \13\ See Supplementary Material .02(e) to Rule 504; 
Supplementary Material .01(e) to Rule 2009.
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    For example, assume ABC is trading at $56.54 and the monthly 
expiration contract is three weeks to expiration. Assume also that the 
ISE has listed all available short term option expirations and thus has 
short term option series listed on ABC for weeks one, two, four, five, 
and six. Each of the five weekly ABC expiration dates can be listed 
with strike prices in $0.50 intervals, including, for example, the 
$56.50 at-the-money strike. Because the monthly expiration contract has 
three weeks to expiration, however, the near-the-money strikes must be 
listed in $5 intervals unless those options are eligible for one of the 
ISE's other strike price programs. In this instance, that would mean 
that investors would be limited to choosing, for example, between the 
$55 and $60 strike prices instead of the $56.50 at-the-money strike 
available for short term options. This is the case even though 
contracts on the same option class that expire both several weeks 
before and several weeks after the monthly expiration are eligible for 
finer strike price intervals. Under the proposed rule change, the 
Exchange would be permitted to list the related non-short term option 
on ABC, which is less than a month to expiration, in the same strike 
price intervals as allowed for short term option series. Thus, the 
Exchange would be able to list, and investors would be able to trade, 
all expirations described above with the same uniform $0.50 strike 
price interval.
    As proposed, the ISE would be permitted to begin listing the 
monthly expiration contract in these narrower intervals at any time 
during the month prior to expiration, which begins on the first trading 
day after the prior month's expiration date, subject to the provisions 
of Rule 504(f). For example, since the April 2014 monthly option 
expired on Saturday, April 19, the proposed rule change would allow the 
Exchange to list the May 2014 monthly option in short term option 
intervals starting Monday, April 21.
    The ISE believes that introducing consistent strike price intervals 
for short term options and related non-short term options during the 
month prior to expiration will benefit investors by giving them more 
flexibility to closely tailor their investment decisions. The Exchange 
also believes that the proposed rule change will provide the investing 
public and other market participants with additional opportunities to 
hedge their investments, thus allowing these investors to better manage 
their risk exposure.
    In addition, the Exchange notes that it recently adopted rule text 
that states that, notwithstanding any language to the contrary, short 
term options may be added up to and including on the expiration 
date.\14\ Other exchanges that have adopted similar rule text have, 
correspondingly, deleted related language that restricts the opening of 
additional short term option series, including additional series of the 
related non-short term option, during the week of expiration.\15\ 
Consistent with the rules proposed by other options exchanges, the ISE 
proposes to delete rule text that prohibits the opening of additional 
series listed pursuant to Supplementary Material .12 to Rule 504 and 
Supplementary Material .05 to Rule 2009 during the week of expiration.
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    \14\ See Securities Exchange Act Release No. 71033 (December 11, 
2013), 78 FR 76375 (December 17, 2013) (SR-ISE-2013-68).
    \15\ See SR-BATS-2014-13 (citation pending publication by the 
Commission).
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 2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6(b) of the Act.\16\ In 
particular, the proposal is consistent with Section 6(b)(5) of the 
Act,\17\ because is designed to promote just and equitable principles 
of trade, 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.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    As noted above, standard expiration options currently trade in 
wider intervals than their weekly counterparts, except during the week 
prior to expiration. This creates a situation where contracts on the 
same option class that expire both several weeks

[[Page 27008]]

before and several weeks after the standard expiration are eligible to 
trade in strike price intervals that the standard expiration contract 
is not. When the ISE originally filed to list related non-short term 
options in the same intervals as short term options in the same option 
class during the week prior to expiration,\18\ the Exchange was limited 
to listing one short term option expiration date at a time. Thus, there 
was no inconsistency between standard expiration contracts, which 
traded in finer intervals in the week prior to expiration, and short 
term options, which were only listed on the week prior to expiration. 
The Short Term Option Series Program has since grown in response to 
customer demand, and the ISE is now permitted to list up to five short 
term option expiration dates in addition to standard expiration 
options.\19\ There is continuing strong customer demand to have the 
ability to execute hedging and trading strategies in the finer strike 
price intervals available in short term options, and the Exchange 
believes that the proposed rule change will increase market efficiency 
by harmonizing strike price intervals for contracts that are close to 
expiration, whether those contracts happen to be listed pursuant to 
weekly or monthly expiration cycles.
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    \18\ See Securities Exchange Act Release No. 67754 (August 29, 
2012), 77 FR 54629 (September 5, 2012) (SR-ISE-2012-33) (Approval); 
67083 (May 31, 2012), 77 FR 33543 (June 6, 2012) (SR-ISE-2012-33) 
(Notice).
    \19\ See Securities Exchange Act Release No. 68318 (November 29, 
2013), 77 FR 72426 (December 5, 2012) (SR-ISE-2012-90); 71033 
(December 11, 2013), 78 FR 76375 (December 17, 2013 (SR-ISE-2013-
68).
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    The Exchange notes that, in addition to listing standard expiration 
contracts in short term option intervals during the expiration week, it 
already operates several programs that allow for strike price intervals 
for standard expiration contracts that range from $0.50 to $2.50.\20\ 
The Exchange believes that each of these programs has been successful 
but notes that limitations on the number of option classes that may be 
selected for each of these programs means that many standard expiration 
contracts must still be listed in wider intervals than their short term 
option counterparts. For example, the $0.50 strike price program, which 
offers the narrowest strike price interval, only permits the ISE to 
designate up to 20 option classes to trade in $0.50 intervals in 
addition to option classes selected by other exchanges that employ a 
similar program.\21\ Thus, the proposed rules are necessary to fill the 
gap between strike price intervals allowed for short term options and 
related non-short term options. The Exchange believes that the proposed 
rule change, like the other strike price programs currently offered by 
the ISE, will benefit investors by giving them more flexibility to 
closely tailor their investment and hedging decisions.
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    \20\ See supra note 11.
    \21\ See Supplementary .05 to Rule 504.
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    Furthermore, the Exchange continues to believe that the ability to 
list new series during the week of expiration is appropriate given the 
short lifespan of short term options. The proposed change clarifies 
that the Exchange may open additional series listed pursuant to 
Supplementary Material .12 to Rule 504 and Supplementary Material .05 
to Rule 2009 during the week of expiration, consistent with changes 
proposed by other exchanges.
    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 (``OPRA'') have the necessary systems 
capacity to handle any potential additional traffic associated with 
this proposed rule change. The Exchange believes that its members will 
not have a capacity issue as a result of this proposal. The Exchange 
also represents that it does not believe this expansion will cause 
fragmentation of liquidity.

 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. To the contrary, the 
Exchange believes that the proposed rule change will result in 
additional investment options and opportunities to achieve the 
investment objectives of market participants seeking efficient trading 
and hedging vehicles, to the benefit of investors, market participants, 
and the marketplace in general. Specifically, the Exchange believes 
that investors will benefit from the availability of strike price 
intervals in standard expiration contracts that match the intervals 
currently permitted for short term options with a similar time to 
expiration, and from the clarification regarding the listing of 
additional series during the week of expiration.

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, as modified by Amendment No. 2, 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-2014-23 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2014-23. 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.,

[[Page 27009]]

Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 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-ISE-2014-23 and should be 
submitted on or before June 2, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10771 Filed 5-9-14; 8:45 am]
BILLING CODE 8011-01-P


