
[Federal Register Volume 79, Number 175 (Wednesday, September 10, 2014)]
[Notices]
[Pages 53799-53802]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21524]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72990; File No. SR-CBOE-2014-068]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Strike Setting Regimes for SPY and 
DIA Options

September 4, 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 August 28, 2014, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``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 proposes to amend Interpretation .08 to Rule 5.5 
(Series of Option Contracts Open for Trading) to modify the strike 
setting regimes for options on The Standard & Poor's Depository 
Receipts Trust (``SPY'') and The DIAMONDS Trust (``DIA''). The text of 
the proposed rule change is provided below. (additions are italicized; 
deletions are [bracketed])
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

[[Page 53800]]

Rule 5.5.--Series of Option Contracts Open for Trading

    RULE 5.5. (a)-(e) No change.
    . . . Interpretations and Policies:
    .01-.07 No change.
    .08
    (a) Notwithstanding Interpretation and Policy .01 above, and except 
for options on Units covered under Interpretation and Policies .06 and 
.07 above, the interval between strike prices of series of options on 
Units, as defined under Interpretation and Policy .06 to Rule 5.3, will 
be $1 or greater where the strike price is $200 or less and $5.00 or 
greater where the strike price is greater than $200. For options on 
Units that are used to calculate a volatility index, the Exchange may 
open for trading $0.50 strike price intervals as provided for in 
Interpretation and Policy .19 to this Rule 5.5.
    (b) Notwithstanding Interpretation and Policy .01 and 
Interpretation and Policy .08(a) above, the interval between strike 
prices of series of options on Units of the Standard & Poor's 
Depository Receipts Trust (``SPY'') and The DIAMONDS Trust (``DIA'') 
will be $1 or greater.
    .09-.23 No change.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, 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 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 Interpretation and Policy .08 to 
Rule 5.5 to modify the strike setting regimes for SPY and DIA options. 
Specifically, the Exchange proposes to modify the interval setting 
regimes for SPY and DIA options to allow $1 strike price intervals 
above $200. The Exchange believes that the proposed rule change would 
make SPY and DIA options easier for investors and traders to use and 
more tailored to their investment needs. The Exchange's filing is 
substantially similar in all material respects to similar changes to 
Commentary .05 to NASDAQ OMX PHLX LLC Rule 1012 (Series of Options Open 
for Traded) that were recently proposed.\3\
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    \3\ See Securities and Exchange Act Release 34-72664 (July 24, 
2014), 79 FR 44231 (July 30, 2014) (Notice of Filing of Proposed 
Rule Change, as Modified by Amendment No. 1, Relating to SPY and DIA 
Options) (SR-Phlx-2014-046).
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    The SPY and DIA exchange-traded funds (``ETFs'') are designed to 
roughly track the performance of the S&P 500 Index and Dow Jones 
Industrial Average (``DJIA'') with the price of SPY designed to roughly 
approximate 1/10th of the price of the S&P 500 Index and the price of 
DIA designed to roughly approximate 1/100th of the price of the DJIA. 
Accordingly, SPY strike prices reflect a value roughly equal to 1/10th 
of the value of the S&P 500 Index and DIA strike prices reflect a value 
roughly equal to 1/100th of the value of the DJIA with each having a 
multiplier of $100. For example, if the S&P 500 Index is at 1972.56, 
SPY options might have a value of approximately 197.26 with a notional 
value of $19,726. If the DJIA is at 16,569.98, DIA options may have a 
value of 165.70 with a notional value of $16,570. In general, SPY and 
DIA options provide retail investors and traders with the benefit of 
trading the broad market in a manageably sized contract. As options 
with an ETP underlying, SPY and DIA options are listed in the same 
manner as equity options under the Rules.
    Under current Interpretation and Policy .08 to Rule 5.5, the 
interval between strike prices in series of options on ETPs, including 
SPY and DIA options will be $1 or greater where the strike price is 
$200 or less and $5.00 or greater where the strike price is greater 
than $200.'' In addition, under Rule 5.5(d)(5),

    The interval between strike prices on Short Term Option Series 
may be: (i) $0.50 or greater where the strike price is less than 
$75, and $1 or greater where the strike price is between $75 and 
$150 for all classes that participate in the Short Term Option 
Series Program; (ii) $0.50 for classes that trade in one dollar 
increments in non-Short Term Options and that participate in the 
Short Term Option Series Program; or (iii) $2.50 or greater where 
the strike price is above $150.

The Exchange's proposal seeks to narrow the strike price intervals to 
$1 for SPY and DIA options above $200, in effect matching the strike 
setting regime for strike intervals in these products below $200.
    Currently, the S&P 500 Index is hovering close to 2000. The DJIA is 
hovering near 17000. As the option strike prices for SPY and DIA 
options have continued to appreciate, the Exchange has received Trading 
Permit Holder (``TPH'') requests to list additional strike prices in 
SPY and DIA options above $200. The S&P 500 Index is widely regarded as 
the best single gauge of large cap U.S. equities and the DJIA is the 
most popular, and is widely quoted as an indicator of stock prices and 
investor confidence in the securities market. As a result, individual 
investors often use S&P 500 Index- and DJIA-related products to 
diversify their portfolios and benefit from market trends--options on 
the SPY and DIA ETFs account for nearly 25% of all U.S. options trading 
volume. Moreover, the popularity of SPY and DIA options is reflected in 
the fact that they have options contracts reflecting monthly, 
quarterly, and weekly expiration cycles.\4\ Accordingly, the Exchange 
believes that offering a wide range of S&P 500 Index- and DJIA-based 
options affords traders and investors important hedging and trading 
opportunities. The Exchange believes that not having the proposed $1 
strike price intervals above $200 in SPY and DIA significantly 
constricts investors' hedging and trading possibilities.
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    \4\ See Rule 5.5.
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    The Exchange proposes to amend Interpretation and Policy .08 to 
Rule 5.5 to allow SPY and DIA options to trade in $1 increments above a 
strike price of $200. Specifically, the Exchange proposes to amend 
Interpretation and Policy .08 to Rule 5.5 to state that notwithstanding 
other provisions limiting the ability of the Exchange to list $1 
increment strike prices on equity and ETF options above $200, the 
interval between strike prices of series of options on Units of SPY and 
DIA will be $1 or greater.\5\ The Exchange believes

[[Page 53801]]

that by having smaller strike intervals in SPY and DIA, investors would 
have more efficient hedging and trading opportunities due to the higher 
$1 interval ascension. The proposed $1 intervals, particularly above 
the $200 strike price, will result in having at-the-money series based 
upon the underlying SPY or DIA moving less than 1%. The Exchange 
believes that the proposed strike setting regime is in line with the 
slower movements of broad-based indices. Furthermore, the proposed $1 
intervals would allow currently employed option trading strategies 
(such as, for example, risk reduction/hedging strategies using SPY 
weekly options), to remain viable. Considering the fact that $1 
intervals already exist below the $200 price point and that SPY and DIA 
are approaching the $200 level, the Exchange believes that continuing 
to maintain the artificial $200 level (above which intervals increase 
500% to $5), would have a negative effect on investing, trading and 
hedging opportunities, and volume. The Exchange believes that the 
continued demand for highly liquid options such as options on SPY and 
DIA, and the investing, trading, and hedging opportunities they 
represent, far outweighs any potential negative impact of allowing SPY 
and DIA options to trade in more finely tailored intervals above the 
$200 price point.
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    \5\ The Exchange notes that the proposed rule change would also 
affect the strike setting regime of these products under the Short 
Term Option Series Program and permit the Exchange to list SPY and 
DIA Short Term Options in $0.50 increments above $200. Both SPY and 
DIA participate in the Short Term Option Series Program under Rule 
5.5(d). Under Rule 5.5(d)(5), ``[t]he interval between strike prices 
on Short Term Option Series may be: (i) $0.50 or greater where the 
strike price is less than $75, and $1 or greater where the strike 
price is between $75 and $150 for all classes that participate in 
the Short Term Option Series Program; (ii) $0.50 for classes that 
trade in one dollar increments in non-Short Term Options and that 
participate in the Short Term Option Series Program; or (iii) $2.50 
or greater where the strike price is above $150.'' Accordingly, if 
the Exchange were to adopt the proposed rule change, SPY and DIA 
options would trade in $1 strike price increments above $200 
increments and thus, be subject to the parameters described in Rule 
5.5(d)(5)(ii), which permit the listing of $0.50 strike prices above 
$200 under the Short Term Options Program.
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    The proposed strike setting regime would permit strikes to be set 
to more closely reflect values in the underlying S&P 500 Index and DJIA 
and allow investors and traders to roll open positions from a lower 
strike to a higher strike in conjunction with the price movement of the 
underlying. Under the current rule, where the next higher available 
series would be $5 away above a $200 strike price, the ability to roll 
such positions is effectively negated. Accordingly, to move a position 
from a $200 strike to a $205 strike under the current rule, an investor 
would need for the underlying product to move 2.5%, and would not be 
able to execute a roll up until such a large movement occurred. With 
the proposed rule change, however, the investor would be in a 
significantly safer position of being able to roll his open options 
position from a $200 to a $201 strike price, which is only a 0.5% move 
for the underlying. The proposed rule change will allow the Exchange to 
better respond to customer demand for SPY strike prices more precisely 
aligned with current S&P 500 Index values and allow the Exchange to 
respond similarly with additional $1 interval strike prices above $200 
in DIA should the DJIA approach corresponding levels. The Exchange 
believes that the proposed rule change, like the other strike price 
programs currently offered by the Exchange, will benefit investors by 
providing investors the flexibility to more closely tailor their 
investment and hedging decisions using SPY and DIA options.
    By allowing series of SPY and DIA options to be listed in $1 
intervals between strike prices over $200, the proposal will moderately 
augment the potential total number of options series available on the 
Exchange. However, 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 also 
believes that Trading Permit Holders will not have a capacity issue due 
to the proposed rule change. In addition, the Exchange represents that 
it does not believe that this expansion with cause fragmentation of 
liquidity.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\6\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \7\ requirements that the rules of 
an exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \8\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ Id.
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    In particular, the proposed rule change would add consistency to 
the options markets and allow investors to more easily use SPY and DIA 
options. Moreover, the proposed rule change would allow investors to 
better trade and hedge positions in SPY and DIA options where the 
strike price is greater than $200, and ensure that SPY and DIA options 
investors are not at a disadvantage simply because of the strike price.
    The Exchange also believes the proposed rule change is consistent 
with Section 6(b)(1) of the Act, which provides that the Exchange be 
organized and have the capacity to be able to carry out the purposes of 
the Act and the rules and regulations thereunder, and the rules of the 
Exchange. The rule change proposal allows the Exchange to respond to 
customer demand to allow SPY and DIA options to trade in $1 intervals 
above a $200 strike price. The Exchange does not believe that the 
proposed rule would create additional capacity issues or affect market 
functionality.
    As noted above, ETF options trade in wider $5 intervals above a 
$200 strike price, whereby options at or below a $200 strike price 
trade in $1 intervals. This creates a situation where contracts on the 
same option class effectively may not be able to execute certain 
strategies such as, for example, rolling to a higher strike price, 
simply because of the arbitrary $200 strike price above which options 
intervals increase by 500%. This proposal remedies the situation by 
establishing an exception to the current ETF interval regime, for SPY 
and DIA options only, to allow such options to trade in $1 or greater 
intervals at all strike prices.
    The Exchange believes that the proposed rule change, like other 
strike price programs currently offered by the Exchange, will benefit 
investors by giving them increased flexibility to more closely tailor 
their investment and hedging decisions. Moreover, the proposed rule 
change is consistent with changes proposed by other exchanges.\9\
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    \9\ See Securities and Exchange Act Release 34-72664 (July 24, 
2014), 79 FR 44231 (July 30, 2014) (Notice of Filing of Proposed 
Rule Change, as Modified by Amendment No. 1, Relating to SPY and DIA 
Options) (SR-Phlx-2014-046).
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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 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.

[[Page 53802]]

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. Rather, the Exchange 
believes that the proposed rule change will result in additional 
investment options and opportunities to achieve the investment and 
trading 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 
SPY and DIA option investors and traders will significantly benefit 
from the availability of finer strike price intervals above a $200 
price point. Furthermore, the Exchange's filing is substantially 
similar in all material respects to, and consistent with, similar 
changes to Commentary .05 to NASDAQ OMX PHLX LLC Rule 1012 (Series of 
Options Open for Traded) that were recently proposed.\10\ As such, the 
Exchange believes that the proposed rule change is essential for 
intermarket competitive purposes and to promote a free and open market 
for the benefit of investors and traders.
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    \10\ Id.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, the proposed rule change 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). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the 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.
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Exchange stated that waiver of this requirement would allow 
the Exchange to respond to current customer demand for strike prices in 
SPY options and more effectively tailor their investing, trading, and 
hedging decisions in respect of SPY and DIA options by using finer $1 
increments. The Exchange also stated that, given the current level of 
the S&P 500 Index, the Exchange believes that it is important to be 
able to list the requested strikes as soon as possible so that 
investors have the hedging tools they need given the current market 
conditions. For these reasons, the Commission believes that the 
proposed rule change presents no novel issues and that waiver of the 
30-day operative delay is consistent with the protection of investors 
and the public interest; and will allow the Exchange to remain 
competitive with other exchanges. Therefore, the Commission designates 
the proposed rule change to be operative upon filing.\13\
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    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-CBOE-2014-068 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-CBOE-2014-068. 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. 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-CBOE-2014-068 and should be 
submitted on or before October 1, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21524 Filed 9-9-14; 8:45 am]
BILLING CODE 8011-01-P


