
[Federal Register Volume 79, Number 175 (Wednesday, September 10, 2014)]
[Notices]
[Pages 53813-53816]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21529]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72998; File No. SR-ISE-2014-42]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Regarding Strike Price 
Intervals for SPY and DIA Options

September 4, 2014.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the

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``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, 
on September 3, 2014, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') 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 self-
regulatory organization. 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\ 15 U.S.C. 78a.
    \3\ 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 ISE proposes to amend its rules to allow $1 or greater strike 
price intervals for options on certain Exchange-Traded Fund Shares 
approved for options trading pursuant to Rule 502(h). 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 purpose of this proposed rule change is to amend ISE rules to 
allow $1 or greater strike price intervals for options listed on the 
SPDR S&P 500 ETF (``SPY'') and the SPDR Dow Jones Industrial Average 
ETF (``DIA''), consistent with recent changes proposed by NASDAQ OMX 
PHLX (``Phlx'') and approved by the Commission.\4\ Options on SPY and 
DIA have historically traded on the ISE with $1 intervals up to a 
strike price of $200 pursuant to Rule 504(h), which permits options on 
Exchange-Traded Fund Shares to be traded in intervals that were 
established on other exchanges prior to listing on the ISE.\5\ Above 
$200 these options classes trade with significantly wider $5 strike 
price intervals. As the underlying securities have been steadily 
approaching, and in the case of SPY has recently surpassed, the $200 
mark, and in response to increased investor and member demand to list 
additional strikes in these heavily traded options classes, the 
Exchange now proposes to list options on SPY and DIA in dollar 
intervals regardless of the strike price.
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    \4\ See Securities Exchange Act Release No.[sic] 72664 (July 24, 
2014), 79 FR 44231 (July 30, 2014) (SR-Phlx-2014-46) (Notice); 72949 
(August 29, 2014) (SR-Phlx-2014-46) (Approval).
    \5\ See Securities Exchange Act Release No. 44037 (March 2, 
2001), 66 FR 14613 (March 13, 2001) (SR-ISE-01-08).
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    Specifically, the Exchange proposes to add Supplementary Material 
.14 to state that notwithstanding any other provision regarding the 
interval of strike prices of series of options on Exchange-Traded Fund 
Shares in Rule 504, the interval of strike prices on SPY and DIA 
options will be $1 or greater. By having smaller strike intervals in 
SPY and DIA, investors will have more efficient hedging and trading 
opportunities. The proposed $1 intervals above a $200 strike price will 
result in having at-the-money series based on the underlying SPY or DIA 
moving less than 1%, which falls in line with slower price movements of 
a broad-based index. Furthermore, the proposed $1 intervals will allow 
members to continue to employ current option trading and hedging 
strategies in SPY and DIA. Considering that $1 intervals already exist 
below the $200 price point, and that SPY and DIA are both trading close 
to or at the $200 level, continuing to maintain the artificial $200 
ceiling (above which intervals increase 500% to $5), will have a 
negative effect on investing, trading and hedging opportunities and 
volume. The continued demand for highly liquid options such as 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 a $200 
price point.
    With the proposal, for example, investors and traders would be able 
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. Thus, 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.
    By allowing SPY and DIA options in $1 intervals over a $200 strike 
price, the proposal will moderately augment the 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 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. The 
Exchange's beliefs are supported by the limited nature of the proposal, 
which applies to two symbols rather than to all Exchange-Traded Fund 
Shares. Moreover, while under current rules there is ample liquidity, 
such liquidity is constricted above $200. This proposal enhances 
liquidity by offering more rational strike price intervals as the stock 
market appreciates in value.
    The Exchange believes that the proposed rule change, like the other 
strike price programs currently offered by the Exchange, will benefit 
investors by giving them more flexibility to more closely tailor their 
investment and hedging decisions.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Securities Exchange Act of 1934 
(the ``Act''),\6\ in general, and with Section 6(b)(5) of the Act,\7\ 
in particular, in that it is 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

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general, to protect investors and the public interest.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change would add consistency to 
the SPY and DIA options markets and allow investors to use SPY and DIA 
options more easily and effectively. Moreover, the proposed rule change 
would allow investors and traders, whether big or small, 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 and 
traders 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,\8\ 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.
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    \8\ 15 U.S.C. 78f(b)(5).
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    As noted above, options on Exchange-Traded Fund Shares generally 
trade in wider $5 intervals above a $200 strike price, whereas options 
at or below a $200 strike price trade in $1 intervals. This creates a 
situation where contracts on the same option class, namely SPY and DIA 
options, effectively may not be able to execute certain strategies, 
such as 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 strike price 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 Phlx and approved by the 
Commission.\9\
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    \9\ See supra note 4.
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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.

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 
proposed rule change is a competitive response to a recent Phlx filing 
approved by the Commission.\10\ The Exchange believes that the proposed 
rule change is essential to ensure fair competition between markets, 
and 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.
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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 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 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. The 
Commission has waived the pre-filing requirement in this case.
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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 will ensure 
fair competition among options exchanges by allowing the Exchange to 
establish smaller strike price intervals in these highly traded 
products at the same time as at least one other options exchange. 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-ISE-2014-42 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-2014-42. 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

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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-ISE-2014-42 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. 2014-21529 Filed 9-9-14; 8:45 am]
BILLING CODE 8011-01-P


