[Federal Register: June 17, 2004 (Volume 69, Number 116)]
[Notices]
[Page 33966-33968]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jn04-101]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49827; File No. SR-ISE-2004-21]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the International Securities
Exchange, Inc. To Extend a Pilot Program Under Which It Lists Options
on Selected Stocks Trading Below $20 at One-Point Intervals Until
August 5, 2004
June 8, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\
[[Page 33967]]
notice is hereby given that on June 4, 2004, the International
Securities Exchange, Inc. (``ISE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by ISE. 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
ISE proposes to extend its pilot program under which it lists
options on selected stocks trading below $20 at $1 strike price
intervals (``$1 Pilot Program'') until August 5, 2004. The text of the
proposed rule change is available at the Office of the Secretary, ISE,
and the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, ISE 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. ISE 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
On June 16, 2003, the Commission approved the ISE's $1 Strike Pilot
Program enabling it to list series with $1 strike price intervals on
equity option classes that overlie up to five individual stocks,
provided that the strike prices are $20 or less, but not less than
$3.\3\ Although ISE may select only up to five individual stocks to be
included in the Pilot Program, ISE is also permitted to list options on
other individual stocks at $1 strike price intervals if other options
exchanges listed those series pursuant to their respective rules. ISE
selected the following five options classes to participate in the Pilot
Program: AMR Corp. [AMR], Calpine Corp. [CPN], EMC Corp. [EMC], El Paso
Corp. [EP], and Sun Microsystems Inc. [SUNW]. The Pilot Program is set
to expire on June 5, 2004.
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\3\ See Securities Exchange Act Release No. 48033 (June 13,
2003), 68 FR 37036 (June 20, 2004) (``Pilot Program Approval
Order'').
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The Pilot Program Approval Order requires ISE to provide the
Commission with certain information and data covering the entire time
the Pilot Program was in effect in the event ISE proposes to, among
other things, extend the $1 Pilot Program beyond June 5, 2004.\4\ ISE
has conducted a study into the impact that $1 strikes have made on the
participating $1 Pilot Program classes (``Pilot Program Report'') which
provides certain data and written analysis relating to the five options
classes the exchange selected to participate in the $1 Pilot Program.
Generally, this data shows that there is meaningful trading volume and
open interest in the $1 strikes, as compared to the non-$1 strikes in
the same class. For example, an analysis of the trading in AMR options
for the November 2003 series with the April 2004 series indicates that
there is a growing interest by investors in the $1 Pilot Program. In
AMR, for the November 2003 series, the collective open interest and
trading volume among the $1 strikes (e.g., $6, $9, $11 and $14) was
48,122 contracts and 8,872 contracts, respectively, compared to the
collective open interest and trading volume among the non-$1 strikes
(e.g., $7.50, $10, $12.50 and $15) of 134,221 contracts and 23,259
contracts, respectively. For the April 2004 series, the collective open
interest and trading volume among the $1 strikes, (e.g., $11, $12, $13
and $14) was 36,882 contracts and 45,415 contracts, respectively,
compared to the collective open interest and trading volume among the
non-$1 strikes, (e.g., $10 and $15) of 49,145 contracts and 9,860
contracts, respectively.
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\4\ ISE attached the Pilot Program Report as an exhibit to this
proposed rule change. Copies of the Pilot Program Report are
available at ISE and the Commission's Public Reference Room.
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A similar analysis of the trading in CPN options for the October
2003 series with the March 2004 series further lends support for
extending the $1 Pilot Program. For example, in CPN, for the October
2003 series, the collective open interest and trading volume among the
$1 strikes (e.g., $4, $6 and $9) was 22,855 contracts and 3,397
contracts, respectively, compared to the collective open interest and
trading volume among the non-$1 strikes (e.g., $5, $7.50 and $10) of
69,983 contracts and 13,686 contracts, respectively. For the March 2004
series, the collective open interest and trading volume among the $1
strikes (e.g., $4, $6 and $7) was 54,853 contracts and 16,153
contracts, respectively, compared to the collective open interest and
trading volume among the non-$1 strikes (e.g., $5) of 16,441 contracts
and 13,848 contracts, respectively. An analysis of the trading in the
options for EMC, EP and SUNW revealed similar findings.
While the trading volume and open interest in the $1 strikes is not
always as high as it is the non-$1 strikes, ISE believes that this can
at least partially be attributed to the industry convention of $2.50
strikes in low priced stocks, and that, over time, this convention will
break down and result in a more even distribution in volume and open
interest in $1 strikes. ISE believes that this information and data
demonstrates that the five classes it selected to participate were
appropriate for the $1 Pilot Program. The underlying stocks are highly
capitalized with low stock prices and generally in different
industries, yet the $1 strike data appears relatively consistent across
all five stocks. Moreover, ISE did not experience any capacity issues
related to the $1 Pilot Program, nor does it believe there has been any
negative impact on OPRA's capacity as a result of the $1 Pilot Program.
In general, ISE states the $1 Pilot Program was well received by its
Members, and ISE did not receive any complaints from Members or
investors regarding the listing of $1 strikes.
ISE believes that this information and data shows that there is
sufficient investor interest and demand to justify extending the $1
Pilot Program until August 5, 2004. ISE continues to believe that the
$1 Pilot Program has provided investors with greater trading
opportunities and flexibility. ISE further believes the $1 Pilot
Program has provided investors with the ability to more closely tailor
their investment strategies and decisions to the movement of the
underlying security. ISE has not detected any material proliferation of
illiquid options series resulting from the narrower strike price
intervals.
2. Statutory Basis
ISE believes the proposed rule change is consistent with the Act
and the rules and regulations thereunder and, in particular, the
requirements of section 6(b) of the Act.\5\ Specifically, ISE believes
the proposed rule change is consistent with requirements under Section
6(b)(5) of the Act \6\ that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, to remove impediments to and perfect the
mechanism for a free and
[[Page 33968]]
open market and a national market system, and, in general, to protect
investors and the public interest. ISE believes that extension of the
$1 Pilot Program until August 5, 2004 will result in a continuing
benefit to investors, by allowing them to more closely tailor their
investment decisions, and will allow ISE to further study investor
interest in $1 strike price intervals.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
ISE does not believe that the proposed rule change will impose any
burden on competition 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 ISE has not solicited, and does not intend to solicit, comments
on this proposed rule change. The ISE has not received any unsolicited
written comments from its members of other interested persons.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \7\ and subparagraph (f)(6) of Rule 19b-4 \8\
thereunder because it does not: (i) Significantly affect the protection
of investors or the public interest; (ii) impose any significant burden
on competition; (iii) become operative for 30 days from the date on
which it was filed, or such shorter time as the Commission may
designate; and ISE has given the Commission written notice of its
intention to file the proposed rule change at least five business days
prior to filing. At any time within 60 days of the filing of such
proposed rule change, the Commission may summarily abrogate 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.
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\7\ 15 U.S.C. 78s(b)(3)(A).
\8\ 17 CFR 240.19b-4(f)(6).
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Under Rule 19b-4(f)(6)(iii) of the Act,\9\ the proposal does not
become operative for 30 days after the date of its filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest and ISE is required to
give the Commission written notice of its intention to file the
proposed rule change at least five business days prior to filing. ISE
has requested that the Commission waive 30-day operative delay so that
the $1 Pilot Program may continue without interruption after it would
have otherwise expired on June 5, 2004. For this reason, the
Commission, consistent with the protection of investors and the public
interest, has determined to waive the 30-day operative delay,\10\ and,
therefore, the proposal is effective and operative upon filing with the
Commission.\11\
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\9\ 17 CFR 240.19b-4(f)(6)(iii).
\10\ For purposes only of waiving the 30-day operative delay for
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. 15 U.S.C.
78c(f).
\11\ In its Pilot Program Approval Order, the Commission stated
that if ISE proposed to (1) extend the $1 Pilot Program beyond June
5, 2004; (2) expand the number of options eligible for inclusion in
the $1 Pilot Program; or (3) seek permanent approval of the $1 Pilot
Program, the ISE would be required to submit a Pilot Program Report
to the Commission along with the filing of such proposal. The Pilot
Program Approval Order required the ISE to submit a proposed rule
change with the Pilot Program Report at least 60 days prior to the
expiration of the $1 Pilot Program. Because ISE failed to provide
its Pilot Program Report to the Commission with sufficient time for
the Commission staff to review the report, the Commission is
extending the ISE's $1 Pilot Program only until August 5, 2004, to
provide the Commission staff with time to review the ISE's Pilot
Program Report.
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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-2004-21 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-ISE-2004-21. 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 inspection
and copying in the Commission's Public Reference Room, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal office of ISE.
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-2004-21
and should be submitted on or before July 8, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-13638 Filed 6-16-04; 8:45 am]
BILLING CODE 8010-01-P