Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval to a Proposed Rule Change Relating to an Extension and Expansion of the Penny Pilot Program, 56422-56425 [E7-19498]

Download as PDF 56422 Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Notices significant burden on competition; and (iii) does not become operative for 30 days after the date of the filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 9 and Rule 19b– 4(f)(6) thereunder.10 A proposed rule change filed pursuant to Rule 19b–4(f)(6) under the Act 11 normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6)(iii)12 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The NYSE has requested that the Commission waive the 30-day operative delay. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because it would allow the moratorium to continue without interruption so that the Exchange may have additional time to make a final determination as to the future roles of RCMMs and CTs in the Hybrid Market, if any, and to file with the Commission a proposed rule change outlining such roles. For these reasons, the Commission designates that the proposed rule change become operative immediately.13 At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate the 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. 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: 9 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). Pursuant to Rule 19b– 4(f)(6)(iii) under the Act, the Exchange is required to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and 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 Exchange has satisfied the five-day pre-filing requirement. 11 17 CFR 240.19b–4(f)(6). 12 17 CFR 240.19b–4(f)(6)(iii). 13 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). rwilkins on PROD1PC63 with NOTICES 10 17 VerDate Aug<31>2005 18:31 Oct 02, 2007 Jkt 211001 Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml ); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSE–2007–86 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56568; File No. SR– NYSEArca–2007–88] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval to a Proposed Rule Change Relating to an Extension and Expansion of the Penny Pilot Program September 27, 2007. I. Introduction On August 16, 2007, NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant All submissions should refer to File to Section 19(b)(1) of the Securities Number SR–NYSE–2007–86. This file Exchange Act of 1934 (‘‘Act’’),1 and number should be included on the Rule 19b–4 thereunder,2 a proposed rule subject line if e-mail is used. To help the change to extend and expand a pilot Commission process and review your program to quote certain options in comments more efficiently, please use smaller increments (‘‘Pilot Program’’ or only one method. The Commission will ‘‘Pilot’’). The proposed rule change was post all comments on the Commission’s published for comment in the Federal Register on August 24, 2007.3 The Internet Web site (http://www.sec.gov/ Commission received one comment rules/sro.shtml ). Copies of the letter on the proposed rule change.4 submission, all subsequent This order approves the proposed rule amendments, all written statements change. with respect to the proposed rule change that are filed with the II. Description of the Proposal Commission, and all written Currently, the six options exchanges, communications relating to the including NYSE Arca, participate in the proposed rule change between the thirteen class Pilot Program,5 which is Commission and any person, other than scheduled to expire on September 27, those that may be withheld from the 2007.6 The Exchange proposes to extend public in accordance with the and expand the Pilot Program to include provisions of 5 U.S.C. 552, will be fifty additional classes, in two phases. available for inspection and copying in Phase One will begin on September the Commission’s Public Reference 28, 2007 and will continue for six Room, on official business days between months, until March 27, 2008. Phase One will add the following twenty-two the hours of 10 a.m. and 3 p.m. Copies options classes to the Pilot: SPDRs of the filing also will be available for inspection and copying at the principal 1 15 U.S.C. 78s(b)(1). office of the Exchange. All comments 2 17 CFR 240.19b–4. received will be posted without change; 3 See Securities Exchange Act Release No. 56280 the Commission does not edit personal (August 17, 2007), 72 FR 48717. 4 See letter to Nancy Morris, Secretary, identifying information from Commission, from John C. Nagel, Director & submissions. You should submit only Associate General Counsel, Citadel, dated information that you wish to make September 12, 2007 (‘‘Citadel Letter’’). available publicly. All submissions 5 The thirteen option classes currently in the Pilot should refer to File Number SR–NYSE– are: Ishares Russell 2000 (IWM); NASDAQ–100 2007–86 and should be submitted on or Index Tracking Stock (QQQQ); SemiConductor Holders Trust (SMH); General Electric Company before October 24, 2007. (GE); Advanced Micro Devices, Inc. (AMD), For the Commission, by the Division of Market Regulation, pursuant to delegated authority.14 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–19537 Filed 10–2–07; 8:45 am] BILLING CODE 8011–01–P 14 17 PO 00000 CFR 200.30–3(a)(12). Frm 00092 Fmt 4703 Sfmt 4703 Microsoft Corporation (MSFT); Intel Corporation (INTC); Caterpillar, Inc. (CAT); Whole Foods Market, Inc. (WFMI); Texas Instruments, Inc. (TXN); Flextronics International Ltd. (FLEX); Sun Microsystems, Inc. (JAVA); and Agilent Technologies, Inc. (A). 6 The Pilot Program began on January 26, 2007 and is currently set to expire on September 27, 2007. See Securities Exchange Act Release No. 56150 (July 26, 2007), 72 FR 42460 (August 2, 2007) (SR–NYSEArca–2007–56). See also Securities Exchange Act Release No. 55156 (January 23, 2007), 72 FR 4759 (February 1, 2007) (SR–NYSEArca– 2006–73) (‘‘Original Pilot Program Approval Order’’). E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Notices rwilkins on PROD1PC63 with NOTICES (SPY); Apple, Inc. (AAPL); Altria Group Inc. (MO); Dendreon Corp. (DNDN); Amgen Inc. (AMGN); Yahoo! Inc. (YHOO); QUALCOMM Inc. (QCOM); General Motors Corporation (GM); Energy Select Sector (XLE); DIAMONDS Trust, Series 1 (DIA); Oil Services HOLDRs (OIH); NYSE Euronext, Inc. (NYX); Cisco Systems, Inc. (CSCO); Financial Select Sector SPDR (XLF); AT&T Inc. (T); Citigroup Inc. (C); Amazon.com Inc. (AMZN); Motorola Inc. (MOT); Research in Motion Ltd. (RIMM); Freeport-McMoRan Copper & Gold Inc. (FCX); ConocoPhillips (COP); and Bristol-Myers Squibb Co. (BMY). These twenty-two options classes are among the most actively-traded, multiply-listed options classes, and account, together with the current thirteen Pilot classes, for approximately 35% of total industry trading volume.7 Phase Two will begin on March 28, 2008, and will continue for one year, until March 27, 2009. During the second phase, the number of options classes trading in pennies will again increase. The Exchange proposes to add twentyeight more classes from among the most actively-traded, multiply-listed options classes.8 The minimum price variation for all classes to be included in the Pilot Program, except for the QQQQs, will continue to be $0.01 for all quotations in option series that are quoted at less than $3 per contract and $0.05 for all quotations in option series that are quoted at $3 per contract or greater. The QQQQs will continue to be quoted in $0.01 increments for all options series. During the extended and expanded Pilot Program, NYSE Arca commits to deliver four reports to the Commission. Each report will analyze the impact of penny pricing on market quality and options system capacity. The first report will analyze the penny pilot results from May 1, 2007 through September 27, 2007; the second will analyze the results from September 28, 2007 through January 31, 2008; the third will analyze the results from February 1, 2008 through July 31, 2008; and the fourth and final report will examine the results from August 1, 2008 through January 31, 2009. These reports will be provided to the Commission within thirty days of the conclusion of the reporting period. 7 This volume is based on the Options Clearing Corporation (‘‘OCC’’) year-to-date trading volume data through July 16, 2007. 8 The Exchange has committed to file a proposed rule change under Section 19(b)(3)(A) of the Act to identify the options classes to be included in the second expansion. VerDate Aug<31>2005 18:31 Oct 02, 2007 Jkt 211001 III. Discussion After careful review of the proposal and the comment letter, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.9 In particular, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,10 which requires, among other things, that the rules of an exchange be 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. On June 28, 2005, the Pacific Exchange (now known as NYSE Arca) announced its intention to begin quoting and trading all listed options in penny increments.11 In June 2006, to facilitate the orderly transition to quoting a limited number of options in penny increments, Chairman Cox sent a letter to the six options exchanges urging the exchanges that chose to begin quoting in smaller increments to plan for the implementation of a limited penny pilot program to commence in January 2007.12 All six of the options exchanges submitted proposals to permit quoting a limited number of classes in smaller increments, and, in January 2007, the Commission approved those proposals to implement the current Pilot Program.13 The exchanges have now submitted proposals to extend and further expand the Pilot. The continued operation and phased expansion of the Pilot Program will provide further valuable information to the exchanges, the Commission, and others about the impact of penny quoting in the options market. In particular, extending and expanding the 9 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 10 15 U.S.C. 78f(b)(5). 11 PCX News Release, ‘‘Pacific Exchange to Trade Options in Pennies,’’ June 28, 2005. 12 Commission Press Release 2006–91, ‘‘SEC Chairman Cox Urges Options Exchanges to Start Limited Penny Quoting,’’ June 7, 2006. 13 See Securities Exchange Act Release Nos. 55156 (January 23, 2007), 72 FR 4759 (February 1, 2007) (SR–NYSEArca–2006–73); 55162 (January 24, 2007), 72 FR 4738 (February 1, 2007) (Amex–2006– 106); 55155 (January 23, 2007), 72 FR 4741 (February 1, 2007) (SR–BSE–2006–49); 55154 (January 23, 2007), 72 FR 4743 (February 1, 2007) (SR–CBOE–2006–92); 55161 (January 24, 2007), 72 FR 4754 (February 1, 2007) (SR–ISE–2006–62); and 55153 (January 23, 2007), 72 FR 4553 (January 31, 2007) (SR–Phlx–2006–74). As noted above, supra note 6 and accompanying text, the current Pilot is scheduled to expire on September 27, 2007. PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 56423 Pilot Program as proposed by NYSE Arca will allow further analysis of the impact of penny quoting in the Pilot classes over a longer period of time on, among other things: (1) Spreads; (2) peak quote rates; (3) quote message traffic; (4) displayed size; (5) ‘‘depth of book’’ liquidity; and (6) market structure. NYSE Arca has committed to provide the Commission with periodic reports, which will analyze the impact of the expanded Pilot Program. The Commission expects the Exchange to include statistical information relating to these factors in its periodic reports. An analysis of the current Pilot shows that the reduction in the minimum quoting increment has resulted in narrowing the average quoted spreads in all classes in the Pilot.14 A reduction in quoted spreads means that customers and other market participants may be able to trade options at better prices. The reduction in spreads also has led the exchanges to reduce or eliminate their exchange-sponsored payment-fororder-flow programs.15 The Commission believes that the proposed rule change is designed to continue the narrowing of spreads. The Commission notes that, as anticipated, the Pilot has contributed to the increase in quotation message traffic from the options markets. However, while the increase in quotation message traffic is appreciable, it has been manageable by the exchanges and the Options Price Reporting Authority, and the Commission did not receive any reports of disruptions in the dissemination of pricing information as a result of quote capacity restraints. Although the Commission anticipates that the proposed expansion of the Pilot Program may contribute to further increases in quote message traffic, the Commission believes that NYSE Arca’s proposal is sufficiently limited such that it is unlikely to increase quote message traffic beyond the capacity of market participants’ systems and disrupt the 14 See NYSE Arca Options, Understanding Economic and Capacity Impacts of the Penny Pilot, May 31, 2007 (‘‘NYSE Arca Report’’). See also Amex, Penny Quoting Pilot Program Report, June 8, 2007 (‘‘Amex Report’’); Box, Penny Pilot Data Review, June 18, 2007 (‘‘Box Report’’); CBOE, Penny Pilot Report, June 1, 2007 (‘‘CBOE Report’’); ISE, Penny Pilot Analysis, May 23, 2007 (‘‘ISE Report’’); and Phlx, Options Penny Pricing Pilot Report, May 31, 2007 (‘‘Phlx Report’’). 15 See Securities Exchange Act Release Nos. 55328 (February 21, 2007), 72 FR 9050 (February 28, 2007) (SR–Amex–2007–16); 55197 (January 30, 2007), 72 FR 5772 (February 7, 2007) (SR–BSE– 2007–02); 55265 (February 9, 2007), 72 FR 7697 (February 16, 2007) (SR–CBOE–2007–11); 55271 (February 12, 2007), 72 FR 7699 (February 16, 2007) (SR–ISE–2007–08); 55223 (February 1, 2007) 72 FR 6306 (February 9, 2007) (SR–NYSEArca–2007–07); and 55290 (February 13, 2007), 72 FR 8051 (February 22, 2007) (SR–Phlx–2007–05). E:\FR\FM\03OCN1.SGM 03OCN1 56424 Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Notices timely receipt of quote information. The Commission also notes that NYSE Arca has adopted and will continue to utilize quote mitigation strategies that should mitigate the expected increase in quote traffic.16 Overall trading activity in the options markets is very concentrated, with a relatively few options classes accounting for a significant share of total options volume. NYSE Arca’s proposal, which will expand the Pilot to include a limited number of options from among the most actively-traded classes (based on average trading volume), will provide an opportunity for reduced spreads where the greatest amount of trading occurs, thus maximizing the economic benefit of the Pilot while minimizing the impact of increased quote traffic. The commenter suggests that relative trading volume is the measure that should be used to assess the success of quoting in smaller increments.17 The commenter reported the percentage change in the relative trading volume before and after the Pilot for each of the thirteen classes.18 The commenter’s data shows an increase in relative trading volume for QQQQ, IWM, SHM, AMD, and SUNW, and a decrease in relative trading volume for MSFT, INTC, GE, TXN, A, CAT, WFMI and FLEX. The commenter believes the data shows that the Pilot works well for index and sector products, but smaller increments caused a decline in the relative trading volume for single stock options. The commenter argues that much of the decrease in relative trading volume in Pilot classes is a symptom of the decrease in displayed size available for those classes. On the basis of a decline in the relative trading volume, the commenter argues that single stock option classes should be removed from the Pilot and replaced with liquid index or sector option classes. Much of the recent growth in options volume has been in the large index and ETF products, such as the SPX, SPY, and the QQQQ. As their relative trading volume increases, the aggregate relative trading volume of other products rwilkins on PROD1PC63 with NOTICES 16 See Securities Exchange Act Release No. 56157 (July 27, 2007), 72 FR 42459 (August 2, 2007) (SR– NYSEArca–2007–71). Further, the Commission notes that the other options exchanges participating in the Pilot also have adopted and will continue to utilize quote mitigation strategies. 17 See Citadel Letter, supra note 4. 18 The commenter measures the relative trading volume of a class as that class’ trading volume as a percentage of total OCC volume. The change in relative trading volume is the relative trading volume from date of entrance into the Pilot to August 27, 2007 divided by the relative trading volume from November 1, 2006 through entrance in the Pilot. VerDate Aug<31>2005 18:31 Oct 02, 2007 Jkt 211001 necessarily declines (although actual volume levels may increase). For example, the SPX, SPY, QQQQ, and IWM accounted for 16.1% of total options volume in the four months before the pilot and rose to 21.7% of volume in the five months after the pilot.19 By definition, the relative trading volume of all other classes (Pilot and non-Pilot) falls from 83.9% in the pre-Pilot period to 78.3% in the postPilot period. Using the commenter’s numerical approach, the relative market share of SPX, SPY, QQQ, and IWM increased by 34.8% ((21.7%/ 16.1%)¥1). In contrast, the relative trading volume of all other classes fell by 6.7% (78.3/83.9%)¥1) in the postPilot period compared to the pre-Pilot period. Thus, in addition to the random variation in market shares that occur over time, there was an overall decline in the relative trading volume of issues outside the four largest index and ETF options although their actual aggregate volume levels increased. More specifically, for the 100 and 500 most active classes,20 relative trading volume fell for 63% and 56%, respectively, of non-Pilot classes. In the Pilot classes, seven, or 54%, of the thirteen Pilot classes had a decline in market share and seven, or 70%, of the ten single stock option classes had a decline in relative trading volume.21 The Commission does not believe that the data at this time supports the conclusion that a decrease in relative trading volume in the Pilot classes is due to a reduction of the minimum quoting variation. In fact, the data demonstrates that declines in relative trading volume were not limited to stocks included in the Pilot, and substantial declines in relative trading volume, as defined by the commenter, describe a large portion of classes that were not in the Pilot. Therefore, based on the data reviewed to date, the Commission cannot conclude that the Pilot has had an adverse impact on volume in the Pilot securities. Therefore, the Commission believes that 19 The pre-Pilot period consists of the four months before the Pilot commenced (October 1– January 25, 2007) and the post-Pilot period consists of the five months after the Pilot commenced (February 9, 2007–June 30, 2007). The two week period when the Pilot classes were introduced are excluded from the analysis. 20 All of the thirteen Pilot classes fall into the 500 most actively-traded, and nine are within the 100 most actively-traded group. 21 The change in relative trading volume for the median stock for the top 500 (100) classes is ¥8% (¥13%), compared to a change of ¥3% for the thirteen Pilot stocks and a change of ¥24% for the ten single stock options. The Commission notes that, with a Pilot sample size of thirteen or ten, these statistics will be highly sensitive to the performance of one or two classes. PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 NYSE Arca’s proposal to select additional classes from among the most actively-traded options has a reasonable basis and is consistent with the Act.22 The Commission believes that the impact of smaller increments on trading volume is one of the more difficult aspects of the Pilot to assess, and notes that the exchange reports did not show a clear change in trading volume.23 While some industry participants expressed disappointment that volume had not increased, the bid-ask spread is only one factor that influences volume. Other factors that impact option volume are trading activity in the underlying security and in related products, volatility in the market and in the underlying security, as well as firm and market specific information and events. The Commission believes that the addition of more securities in the next phase will increase the sample size and should help in further analysis of such issues. The commenter also expressed concern that the quoted size in the Pilot classes is dropping to levels that are ‘‘sub-optimal’’ or ‘‘inadequate’’ for institutional size orders, and recommended that the Commission carefully evaluate the impact of penny quoting on liquidity before allowing the exchanges to expand the Pilot. The Commission fully agrees that the impact of the Pilot on displayed size, as well as non-displayed ‘‘depth of book,’’ and the impact of any decreased size on market and execution quality, is an area that should be carefully analyzed as the Pilot continues. The Commission also recognizes that the exchange reports show there has, in fact, been a reduction in the displayed size available in the Pilot classes.24 The Commission is not at this time, however, able to conclude that this decrease has caused a decrease in trading volume or relative trading volume, or other harm to the market, as a result of the Pilot Program. The Commission does, however, expect NYSE Arca to include in its reports an analysis of the market impact of reducing the minimum price increment, particularly on the ability of market 22 The Commission notes that the classes the commenter specifically recommends for inclusion in the expanded Pilot—SPY, DIA OIH, XLF, and XLE—are among classes proposed by NYSE Arca to be included in the Pilot Program beginning September 28, 2007. 23 See Amex Report, supra note 14, at 6–7; CBOE Report, supra note 14, Attachment at pages 5–6; ISE Report, supra note 14, at 17–20; and NYSE Arca Report, supra note 14, at 15. 24 See Amex Report, supra note 14, at 6; BOX Report, supra note 14, at 2; CBOE Report, supra note 14, at Attachment page 2; ISE Report, supra note 14, at 7–8; NYSE Arca Report, supra note 14, at 9–10; and Phlx Report, supra note 14, at 3–4 and 6–7. E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Notices rwilkins on PROD1PC63 with NOTICES participants to effectively execute largesized orders. The Commission will analyze the information provided in the Exchange’s reports, in conjunction with the information provided by other exchanges and market participants, to inform its evaluation and consideration of any exchange’s proposed further expansion of the Pilot. The commenter further noted, to the extent that additional size may be available below the best bid or offer,25 options market participants discount the value of such liquidity because it is generally not transparent to the market and is not easily accessible even if displayed.26 The commenter noted that, unlike in the equities markets, market participants cannot quickly sweep multiple markets through multiple price levels to reach such additional liquidity. The Commission encourages the exchanges to consider measures that would facilitate access to depth of book quotes. Finally, the commenter recommends removing the poorest performing single stock names from the Pilot and replacing them with liquid index or sector products.27 The Commission agrees that there should be a mechanism for removing option classes from the Pilot. The Commission specifically requested comment in the notice of NYSE Arca’s proposal on: (1) Whether there are circumstances under which classes included in the Pilot should be removed; (2) if so, what factors should be considered in making the determination to remove a class from the Pilot, specifically whether an objective standard should be used or whether a more subjective analysis should be allowed; (3) what concerns might arise by removing a class from the Pilot, and how could such concerns be ameliorated; (4) how frequently should such an analysis be undertaken, or should the evaluation be automated; 25 Only two exchanges provided information on ‘‘depth of book’’ on their markets in the Pilot classes. See NYSE Arca Report at 8–10, supra note 14, and ISE Report, supra note 14, at 9. ISE reported that the average total size of all quotes on its book at all price levels, weighted for volume, for all thirteen Pilot classes was reduced by 61%. See ISE Report, supra note 14, at 9. NYSE Arca compared liquidity resident in its book within the legacy minimum price variation to pre-Pilot top of book liquidity and reported that volume weighted liquidity across all thirteen Pilot classes decreased 1%. See NYSE Arca Report, supra note 14, at 8. 26 The Commission notes that currently only NYSE Arca makes available quotes and orders on its book below the NBBO. See http:// www.nysedata.com/nysedata/InformationProducts/ ArcaBook/tabid/293/Default.aspx. The Commission anticipates that to the extent this display of information proves to be valuable to the options market as a whole, other exchanges may choose to make this information available as well. 27 See supra, note 22. VerDate Aug<31>2005 18:31 Oct 02, 2007 Jkt 211001 and (5) if a class is to be removed from the Pilot, how much notice should be given to market participants that the quoting increment will change, but did not receive any comments. The Commission will continue to consider comments on how to fairly and objectively determine if a class should be removed from the Pilot. Finally, to the extent that the Exchange files a proposed rule change to further expand the Pilot, the Commission urges it to include in any such proposal a methodology for removing classes from the Pilot. For the reasons discussed above, the Commission believes that the proposed rule change is consistent with the Act. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,28 that the proposed rule change (SR–NYSEArca– 2007–88) be, and hereby is, approved on a pilot basis, which will end on March 27, 2009. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.29 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–19498 Filed 10–2–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56545; File No. SR– NYSEArca–2007–95] Self-Regulatory Organizations; NYSEArca, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rules 7.34 and 7.35 September 27, 2007. 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 September 17, 2007, NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’), through its wholly owned subsidiary, NYSE Arca Equities, Inc. (‘‘NYSE Arca Equities’’ or ‘‘Corporation’’), filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) the proposed rule change as described in Items I, II and III below, which Items have been substantially prepared by the Exchange. NYSE Arca has designated this proposal pursuant to Section 28 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 29 17 PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 56425 19(b)(3)(A) of the Act 3 and Rule 19b– 4(f)(5) 4 thereunder, which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes, among other minor changes, to amend NYSE Arca Equities Rule 7.35 in order to reduce the Opening, Market Order, and Closing auction lock-out period to one minute. The text of the proposed rule change is available at the Exchange, the Commission’s Public Reference Room, and www.nyse.com. 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. The text of these statements may be examined at the places specified in Item IV below. The Exchange has substantially 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 NYSE Arca Equities Rule 7.35 in order to reduce the Opening, Market Order, and Closing Auction lock-out periods to one minute.5 The Exchange believes that compressing the lock-out periods will offer its Users 6 greater order entry or cancellation flexibility and more informed market participation by allowing its Users to benefit from the dissemination of auction related information for an additional minute prior to the lock-out periods. Opening Auction Pursuant to NYSE Arca Rule 7.35(a)(4), Users are currently prevented from cancelling orders that are eligible 3 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(5). 5 NYSE Arca Equities Rule 7.34(a) provides for three equities trading sessions on the Exchange: The Opening Session (4 a.m. to 9:30 a.m. Eastern Time (‘‘E.T.’’)), the Core Trading Session (9:30 a.m. to 4 p.m. E.T.), and the Late Trading Session (4 p.m. to 8 p.m. E.T.). 6 See NYSE Arca Rule 1.1(yy) for the definition of ‘‘User.’’ 4 17 E:\FR\FM\03OCN1.SGM 03OCN1

Agencies

[Federal Register Volume 72, Number 191 (Wednesday, October 3, 2007)]
[Notices]
[Pages 56422-56425]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-19498]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56568; File No. SR-NYSEArca-2007-88]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval to a Proposed Rule Change Relating to an Extension and 
Expansion of the Penny Pilot Program

September 27, 2007.

I. Introduction

    On August 16, 2007, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
extend and expand a pilot program to quote certain options in smaller 
increments (``Pilot Program'' or ``Pilot''). The proposed rule change 
was published for comment in the Federal Register on August 24, 
2007.\3\ The Commission received one comment letter on the proposed 
rule change.\4\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 56280 (August 17, 
2007), 72 FR 48717.
    \4\ See letter to Nancy Morris, Secretary, Commission, from John 
C. Nagel, Director & Associate General Counsel, Citadel, dated 
September 12, 2007 (``Citadel Letter'').
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II. Description of the Proposal

    Currently, the six options exchanges, including NYSE Arca, 
participate in the thirteen class Pilot Program,\5\ which is scheduled 
to expire on September 27, 2007.\6\ The Exchange proposes to extend and 
expand the Pilot Program to include fifty additional classes, in two 
phases.
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    \5\ The thirteen option classes currently in the Pilot are: 
Ishares Russell 2000 (IWM); NASDAQ-100 Index Tracking Stock (QQQQ); 
SemiConductor Holders Trust (SMH); General Electric Company (GE); 
Advanced Micro Devices, Inc. (AMD), Microsoft Corporation (MSFT); 
Intel Corporation (INTC); Caterpillar, Inc. (CAT); Whole Foods 
Market, Inc. (WFMI); Texas Instruments, Inc. (TXN); Flextronics 
International Ltd. (FLEX); Sun Microsystems, Inc. (JAVA); and 
Agilent Technologies, Inc. (A).
    \6\ The Pilot Program began on January 26, 2007 and is currently 
set to expire on September 27, 2007. See Securities Exchange Act 
Release No. 56150 (July 26, 2007), 72 FR 42460 (August 2, 2007) (SR-
NYSEArca-2007-56). See also Securities Exchange Act Release No. 
55156 (January 23, 2007), 72 FR 4759 (February 1, 2007) (SR-
NYSEArca-2006-73) (``Original Pilot Program Approval Order'').
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    Phase One will begin on September 28, 2007 and will continue for 
six months, until March 27, 2008. Phase One will add the following 
twenty-two options classes to the Pilot: SPDRs

[[Page 56423]]

(SPY); Apple, Inc. (AAPL); Altria Group Inc. (MO); Dendreon Corp. 
(DNDN); Amgen Inc. (AMGN); Yahoo! Inc. (YHOO); QUALCOMM Inc. (QCOM); 
General Motors Corporation (GM); Energy Select Sector (XLE); DIAMONDS 
Trust, Series 1 (DIA); Oil Services HOLDRs (OIH); NYSE Euronext, Inc. 
(NYX); Cisco Systems, Inc. (CSCO); Financial Select Sector SPDR (XLF); 
AT&T Inc. (T); Citigroup Inc. (C); Amazon.com Inc. (AMZN); Motorola 
Inc. (MOT); Research in Motion Ltd. (RIMM); Freeport-McMoRan Copper & 
Gold Inc. (FCX); ConocoPhillips (COP); and Bristol-Myers Squibb Co. 
(BMY). These twenty-two options classes are among the most actively-
traded, multiply-listed options classes, and account, together with the 
current thirteen Pilot classes, for approximately 35% of total industry 
trading volume.\7\
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    \7\ This volume is based on the Options Clearing Corporation 
(``OCC'') year-to-date trading volume data through July 16, 2007.
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    Phase Two will begin on March 28, 2008, and will continue for one 
year, until March 27, 2009. During the second phase, the number of 
options classes trading in pennies will again increase. The Exchange 
proposes to add twenty-eight more classes from among the most actively-
traded, multiply-listed options classes.\8\
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    \8\ The Exchange has committed to file a proposed rule change 
under Section 19(b)(3)(A) of the Act to identify the options classes 
to be included in the second expansion.
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    The minimum price variation for all classes to be included in the 
Pilot Program, except for the QQQQs, will continue to be $0.01 for all 
quotations in option series that are quoted at less than $3 per 
contract and $0.05 for all quotations in option series that are quoted 
at $3 per contract or greater. The QQQQs will continue to be quoted in 
$0.01 increments for all options series.
    During the extended and expanded Pilot Program, NYSE Arca commits 
to deliver four reports to the Commission. Each report will analyze the 
impact of penny pricing on market quality and options system capacity. 
The first report will analyze the penny pilot results from May 1, 2007 
through September 27, 2007; the second will analyze the results from 
September 28, 2007 through January 31, 2008; the third will analyze the 
results from February 1, 2008 through July 31, 2008; and the fourth and 
final report will examine the results from August 1, 2008 through 
January 31, 2009. These reports will be provided to the Commission 
within thirty days of the conclusion of the reporting period.

III. Discussion

    After careful review of the proposal and the comment letter, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\9\ In particular, the 
Commission finds that the proposal is consistent with Section 6(b)(5) 
of the Act,\10\ which requires, among other things, that the rules of 
an exchange be 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.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    On June 28, 2005, the Pacific Exchange (now known as NYSE Arca) 
announced its intention to begin quoting and trading all listed options 
in penny increments.\11\ In June 2006, to facilitate the orderly 
transition to quoting a limited number of options in penny increments, 
Chairman Cox sent a letter to the six options exchanges urging the 
exchanges that chose to begin quoting in smaller increments to plan for 
the implementation of a limited penny pilot program to commence in 
January 2007.\12\ All six of the options exchanges submitted proposals 
to permit quoting a limited number of classes in smaller increments, 
and, in January 2007, the Commission approved those proposals to 
implement the current Pilot Program.\13\ The exchanges have now 
submitted proposals to extend and further expand the Pilot.
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    \11\ PCX News Release, ``Pacific Exchange to Trade Options in 
Pennies,'' June 28, 2005.
    \12\ Commission Press Release 2006-91, ``SEC Chairman Cox Urges 
Options Exchanges to Start Limited Penny Quoting,'' June 7, 2006.
    \13\ See Securities Exchange Act Release Nos. 55156 (January 23, 
2007), 72 FR 4759 (February 1, 2007) (SR-NYSEArca-2006-73); 55162 
(January 24, 2007), 72 FR 4738 (February 1, 2007) (Amex-2006-106); 
55155 (January 23, 2007), 72 FR 4741 (February 1, 2007) (SR-BSE-
2006-49); 55154 (January 23, 2007), 72 FR 4743 (February 1, 2007) 
(SR-CBOE-2006-92); 55161 (January 24, 2007), 72 FR 4754 (February 1, 
2007) (SR-ISE-2006-62); and 55153 (January 23, 2007), 72 FR 4553 
(January 31, 2007) (SR-Phlx-2006-74). As noted above, supra note 6 
and accompanying text, the current Pilot is scheduled to expire on 
September 27, 2007.
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    The continued operation and phased expansion of the Pilot Program 
will provide further valuable information to the exchanges, the 
Commission, and others about the impact of penny quoting in the options 
market. In particular, extending and expanding the Pilot Program as 
proposed by NYSE Arca will allow further analysis of the impact of 
penny quoting in the Pilot classes over a longer period of time on, 
among other things: (1) Spreads; (2) peak quote rates; (3) quote 
message traffic; (4) displayed size; (5) ``depth of book'' liquidity; 
and (6) market structure. NYSE Arca has committed to provide the 
Commission with periodic reports, which will analyze the impact of the 
expanded Pilot Program. The Commission expects the Exchange to include 
statistical information relating to these factors in its periodic 
reports.
    An analysis of the current Pilot shows that the reduction in the 
minimum quoting increment has resulted in narrowing the average quoted 
spreads in all classes in the Pilot.\14\ A reduction in quoted spreads 
means that customers and other market participants may be able to trade 
options at better prices. The reduction in spreads also has led the 
exchanges to reduce or eliminate their exchange-sponsored payment-for-
order-flow programs.\15\ The Commission believes that the proposed rule 
change is designed to continue the narrowing of spreads.
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    \14\ See NYSE Arca Options, Understanding Economic and Capacity 
Impacts of the Penny Pilot, May 31, 2007 (``NYSE Arca Report''). See 
also Amex, Penny Quoting Pilot Program Report, June 8, 2007 (``Amex 
Report''); Box, Penny Pilot Data Review, June 18, 2007 (``Box 
Report''); CBOE, Penny Pilot Report, June 1, 2007 (``CBOE Report''); 
ISE, Penny Pilot Analysis, May 23, 2007 (``ISE Report''); and Phlx, 
Options Penny Pricing Pilot Report, May 31, 2007 (``Phlx Report'').
    \15\ See Securities Exchange Act Release Nos. 55328 (February 
21, 2007), 72 FR 9050 (February 28, 2007) (SR-Amex-2007-16); 55197 
(January 30, 2007), 72 FR 5772 (February 7, 2007) (SR-BSE-2007-02); 
55265 (February 9, 2007), 72 FR 7697 (February 16, 2007) (SR-CBOE-
2007-11); 55271 (February 12, 2007), 72 FR 7699 (February 16, 2007) 
(SR-ISE-2007-08); 55223 (February 1, 2007) 72 FR 6306 (February 9, 
2007) (SR-NYSEArca-2007-07); and 55290 (February 13, 2007), 72 FR 
8051 (February 22, 2007) (SR-Phlx-2007-05).
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    The Commission notes that, as anticipated, the Pilot has 
contributed to the increase in quotation message traffic from the 
options markets. However, while the increase in quotation message 
traffic is appreciable, it has been manageable by the exchanges and the 
Options Price Reporting Authority, and the Commission did not receive 
any reports of disruptions in the dissemination of pricing information 
as a result of quote capacity restraints. Although the Commission 
anticipates that the proposed expansion of the Pilot Program may 
contribute to further increases in quote message traffic, the 
Commission believes that NYSE Arca's proposal is sufficiently limited 
such that it is unlikely to increase quote message traffic beyond the 
capacity of market participants' systems and disrupt the

[[Page 56424]]

timely receipt of quote information. The Commission also notes that 
NYSE Arca has adopted and will continue to utilize quote mitigation 
strategies that should mitigate the expected increase in quote 
traffic.\16 \
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    \16\ See Securities Exchange Act Release No. 56157 (July 27, 
2007), 72 FR 42459 (August 2, 2007) (SR-NYSEArca-2007-71). Further, 
the Commission notes that the other options exchanges participating 
in the Pilot also have adopted and will continue to utilize quote 
mitigation strategies.
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    Overall trading activity in the options markets is very 
concentrated, with a relatively few options classes accounting for a 
significant share of total options volume. NYSE Arca's proposal, which 
will expand the Pilot to include a limited number of options from among 
the most actively-traded classes (based on average trading volume), 
will provide an opportunity for reduced spreads where the greatest 
amount of trading occurs, thus maximizing the economic benefit of the 
Pilot while minimizing the impact of increased quote traffic.
    The commenter suggests that relative trading volume is the measure 
that should be used to assess the success of quoting in smaller 
increments.\17\ The commenter reported the percentage change in the 
relative trading volume before and after the Pilot for each of the 
thirteen classes.\18\ The commenter's data shows an increase in 
relative trading volume for QQQQ, IWM, SHM, AMD, and SUNW, and a 
decrease in relative trading volume for MSFT, INTC, GE, TXN, A, CAT, 
WFMI and FLEX. The commenter believes the data shows that the Pilot 
works well for index and sector products, but smaller increments caused 
a decline in the relative trading volume for single stock options. The 
commenter argues that much of the decrease in relative trading volume 
in Pilot classes is a symptom of the decrease in displayed size 
available for those classes. On the basis of a decline in the relative 
trading volume, the commenter argues that single stock option classes 
should be removed from the Pilot and replaced with liquid index or 
sector option classes.
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    \17\ See Citadel Letter, supra note 4.
    \18\ The commenter measures the relative trading volume of a 
class as that class' trading volume as a percentage of total OCC 
volume. The change in relative trading volume is the relative 
trading volume from date of entrance into the Pilot to August 27, 
2007 divided by the relative trading volume from November 1, 2006 
through entrance in the Pilot.
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    Much of the recent growth in options volume has been in the large 
index and ETF products, such as the SPX, SPY, and the QQQQ. As their 
relative trading volume increases, the aggregate relative trading 
volume of other products necessarily declines (although actual volume 
levels may increase). For example, the SPX, SPY, QQQQ, and IWM 
accounted for 16.1% of total options volume in the four months before 
the pilot and rose to 21.7% of volume in the five months after the 
pilot.\19\ By definition, the relative trading volume of all other 
classes (Pilot and non-Pilot) falls from 83.9% in the pre-Pilot period 
to 78.3% in the post-Pilot period. Using the commenter's numerical 
approach, the relative market share of SPX, SPY, QQQ, and IWM increased 
by 34.8% ((21.7%/16.1%)-1). In contrast, the relative trading volume of 
all other classes fell by 6.7% (78.3/83.9%)-1) in the post-Pilot period 
compared to the pre-Pilot period. Thus, in addition to the random 
variation in market shares that occur over time, there was an overall 
decline in the relative trading volume of issues outside the four 
largest index and ETF options although their actual aggregate volume 
levels increased.
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    \19\ The pre-Pilot period consists of the four months before the 
Pilot commenced (October 1-January 25, 2007) and the post-Pilot 
period consists of the five months after the Pilot commenced 
(February 9, 2007-June 30, 2007). The two week period when the Pilot 
classes were introduced are excluded from the analysis.
---------------------------------------------------------------------------

    More specifically, for the 100 and 500 most active classes,\20\ 
relative trading volume fell for 63% and 56%, respectively, of non-
Pilot classes. In the Pilot classes, seven, or 54%, of the thirteen 
Pilot classes had a decline in market share and seven, or 70%, of the 
ten single stock option classes had a decline in relative trading 
volume.\21\
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    \20\ All of the thirteen Pilot classes fall into the 500 most 
actively-traded, and nine are within the 100 most actively-traded 
group.
    \21\ The change in relative trading volume for the median stock 
for the top 500 (100) classes is -8% (-13%), compared to a change of 
-3% for the thirteen Pilot stocks and a change of -24% for the ten 
single stock options. The Commission notes that, with a Pilot sample 
size of thirteen or ten, these statistics will be highly sensitive 
to the performance of one or two classes.
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    The Commission does not believe that the data at this time supports 
the conclusion that a decrease in relative trading volume in the Pilot 
classes is due to a reduction of the minimum quoting variation. In 
fact, the data demonstrates that declines in relative trading volume 
were not limited to stocks included in the Pilot, and substantial 
declines in relative trading volume, as defined by the commenter, 
describe a large portion of classes that were not in the Pilot. 
Therefore, based on the data reviewed to date, the Commission cannot 
conclude that the Pilot has had an adverse impact on volume in the 
Pilot securities. Therefore, the Commission believes that NYSE Arca's 
proposal to select additional classes from among the most actively-
traded options has a reasonable basis and is consistent with the 
Act.\22\
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    \22\ The Commission notes that the classes the commenter 
specifically recommends for inclusion in the expanded Pilot--SPY, 
DIA OIH, XLF, and XLE--are among classes proposed by NYSE Arca to be 
included in the Pilot Program beginning September 28, 2007.
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    The Commission believes that the impact of smaller increments on 
trading volume is one of the more difficult aspects of the Pilot to 
assess, and notes that the exchange reports did not show a clear change 
in trading volume.\23\ While some industry participants expressed 
disappointment that volume had not increased, the bid-ask spread is 
only one factor that influences volume. Other factors that impact 
option volume are trading activity in the underlying security and in 
related products, volatility in the market and in the underlying 
security, as well as firm and market specific information and events. 
The Commission believes that the addition of more securities in the 
next phase will increase the sample size and should help in further 
analysis of such issues.
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    \23\ See Amex Report, supra note 14, at 6-7; CBOE Report, supra 
note 14, Attachment at pages 5-6; ISE Report, supra note 14, at 17-
20; and NYSE Arca Report, supra note 14, at 15.
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    The commenter also expressed concern that the quoted size in the 
Pilot classes is dropping to levels that are ``sub-optimal'' or 
``inadequate'' for institutional size orders, and recommended that the 
Commission carefully evaluate the impact of penny quoting on liquidity 
before allowing the exchanges to expand the Pilot. The Commission fully 
agrees that the impact of the Pilot on displayed size, as well as non-
displayed ``depth of book,'' and the impact of any decreased size on 
market and execution quality, is an area that should be carefully 
analyzed as the Pilot continues. The Commission also recognizes that 
the exchange reports show there has, in fact, been a reduction in the 
displayed size available in the Pilot classes.\24\ The Commission is 
not at this time, however, able to conclude that this decrease has 
caused a decrease in trading volume or relative trading volume, or 
other harm to the market, as a result of the Pilot Program. The 
Commission does, however, expect NYSE Arca to include in its reports an 
analysis of the market impact of reducing the minimum price increment, 
particularly on the ability of market

[[Page 56425]]

participants to effectively execute large-sized orders. The Commission 
will analyze the information provided in the Exchange's reports, in 
conjunction with the information provided by other exchanges and market 
participants, to inform its evaluation and consideration of any 
exchange's proposed further expansion of the Pilot.
---------------------------------------------------------------------------

    \24\ See Amex Report, supra note 14, at 6; BOX Report, supra 
note 14, at 2; CBOE Report, supra note 14, at Attachment page 2; ISE 
Report, supra note 14, at 7-8; NYSE Arca Report, supra note 14, at 
9-10; and Phlx Report, supra note 14, at 3-4 and 6-7.
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    The commenter further noted, to the extent that additional size may 
be available below the best bid or offer,\25\ options market 
participants discount the value of such liquidity because it is 
generally not transparent to the market and is not easily accessible 
even if displayed.\26\ The commenter noted that, unlike in the equities 
markets, market participants cannot quickly sweep multiple markets 
through multiple price levels to reach such additional liquidity. The 
Commission encourages the exchanges to consider measures that would 
facilitate access to depth of book quotes.
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    \25\ Only two exchanges provided information on ``depth of 
book'' on their markets in the Pilot classes. See NYSE Arca Report 
at 8-10, supra note 14, and ISE Report, supra note 14, at 9. ISE 
reported that the average total size of all quotes on its book at 
all price levels, weighted for volume, for all thirteen Pilot 
classes was reduced by 61%. See ISE Report, supra note 14, at 9. 
NYSE Arca compared liquidity resident in its book within the legacy 
minimum price variation to pre-Pilot top of book liquidity and 
reported that volume weighted liquidity across all thirteen Pilot 
classes decreased 1%. See NYSE Arca Report, supra note 14, at 8.
    \26\ The Commission notes that currently only NYSE Arca makes 
available quotes and orders on its book below the NBBO. See http://
www.nysedata.com/nysedata/InformationProducts/ArcaBook/tabid/293/
Default.aspx. The Commission anticipates that to the extent this 
display of information proves to be valuable to the options market 
as a whole, other exchanges may choose to make this information 
available as well.
---------------------------------------------------------------------------

    Finally, the commenter recommends removing the poorest performing 
single stock names from the Pilot and replacing them with liquid index 
or sector products.\27\ The Commission agrees that there should be a 
mechanism for removing option classes from the Pilot. The Commission 
specifically requested comment in the notice of NYSE Arca's proposal 
on: (1) Whether there are circumstances under which classes included in 
the Pilot should be removed; (2) if so, what factors should be 
considered in making the determination to remove a class from the 
Pilot, specifically whether an objective standard should be used or 
whether a more subjective analysis should be allowed; (3) what concerns 
might arise by removing a class from the Pilot, and how could such 
concerns be ameliorated; (4) how frequently should such an analysis be 
undertaken, or should the evaluation be automated; and (5) if a class 
is to be removed from the Pilot, how much notice should be given to 
market participants that the quoting increment will change, but did not 
receive any comments. The Commission will continue to consider comments 
on how to fairly and objectively determine if a class should be removed 
from the Pilot. Finally, to the extent that the Exchange files a 
proposed rule change to further expand the Pilot, the Commission urges 
it to include in any such proposal a methodology for removing classes 
from the Pilot.
---------------------------------------------------------------------------

    \27\ See supra, note 22.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission believes that the 
proposed rule change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-NYSEArca-2007-88) be, and 
hereby is, approved on a pilot basis, which will end on March 27, 2009.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-19498 Filed 10-2-07; 8:45 am]
BILLING CODE 8011-01-P