Self-Regulatory Organizations; International Securities Exchange, LLC; Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendment No. 1, Relating to an Extension and Expansion of the Penny Pilot Program, 56412-56415 [E7-19500]

Download as PDF 56412 Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.23 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–19536 Filed 10–2–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56564; File No. SR–ISE– 2007–74] Self-Regulatory Organizations; International Securities Exchange, LLC; Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendment No. 1, Relating to an Extension and Expansion of the Penny Pilot Program September 27, 2007. I. Introduction On August 21, 2007, the International Securities Exchange, LLC (‘‘ISE’’ 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’’). On August 22, 2007, the Exchange filed Amendment No. 1 to the proposed rule change. The proposed rule change, as amended, was published for comment in the Federal Register on August 29, 2007.3 The Commission received one comment letter on the proposed rule change.4 This order approves the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. II. Description of the Proposal Currently, the six options exchanges, including ISE, participate in the thirteen class Pilot Program,5 which is CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 56306 (August 22, 2007), 72 FR 49753. 4 See letter to Nancy Morris, Secretary, Commission, from John C. Nagel, Director & Associate General Counsel, Citadel, dated September 12, 2007 (‘‘Citadel Letter). 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). 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. 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 (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.8 The Exchange proposes to add twentyeight more classes from among the most actively-traded, multiply-listed options classes.9 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, the ISE commits to 23 17 rwilkins on PROD1PC63 with NOTICES 1 15 VerDate Aug<31>2005 18:31 Oct 02, 2007 Jkt 211001 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. 56151 (July 26, 2007), 72 FR 42452 (August 2, 2007) (SR-ISE–2007–68). See also Securities Exchange Act Release No. 55161 (January 24, 2007), 72 FR 4754 (February 1, 2007) (SR–ISE–2006–62) (‘‘Original Pilot Program Approval Order’’). 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. 9 As proposed in its filing, ISE represents that options trading in penny increments will not be eligible for split pricing, as permitted under ISE Rule 716. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 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.10 In particular, the Commission finds that the proposal is consistent with section 6(b)(5) of the Act,11 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.12 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 2007.13 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.14 The exchanges 10 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). 11 15 U.S.C. 78f(b)(5). 12 PCX News Release, ‘‘Pacific Exchange to Trade Options in Pennies,’’ June 28, 2005. 13 Commission Press Release 2006–91, ‘‘SEC Chairman Cox Urges Options Exchanges to Start Limited Penny Quoting,’’ June 7, 2006. 14 See Securities Exchange Act Release Nos. 55161 (January 24, 2007), 72 FR 4754 (February 1, 2007) (SR-ISE–2006–62); 55162 (January 24, 2007), E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Notices rwilkins on PROD1PC63 with NOTICES 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 Pilot Program as proposed by ISE 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. ISE 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.15 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.16 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, 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); 55156 (January 23, 2007), 72 FR 4759 (February 1, 2007) (SR–NYSEArca–2006–73); 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. 15 See ISE, Penny Pilot Analysis, May 23, 2007 (‘‘ISE 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’’); NYSE Arca Options, Understanding Economic and Capacity Impacts of the Penny Pilot, May 31, 2007 (‘‘NYSE Arca Report’’); and Phlx, Options Penny Pricing Pilot Report, May 31, 2007 (‘‘Phlx Report’’). 16 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). VerDate Aug<31>2005 18:31 Oct 02, 2007 Jkt 211001 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 ISE’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 timely receipt of quote information. The Commission also notes that ISE has adopted and will continue to utilize quote mitigation strategies that should mitigate the expected increase in quote traffic.17 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. ISE’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.18 The commenter reported the percentage change in the relative trading volume before and after the Pilot for each of the thirteen classes.19 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 17 See Securities Exchange Act Release No. 55161 (January 24, 2007), 72 FR 4754 (February 1, 2007) (SR–ISE–2007–62). Further, the Commission notes that the other options exchanges participating in the Pilot also have adopted and will continue to utilize quote mitigation strategies. 18 See Citadel Letter, supra note 4. 19 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. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 56413 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 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.20 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 post-Pilot period compared to the pre-Pilot period. Thus, in addition to the random variation in relative trading volume that occurs 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,21 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.22 20 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. 21 All of the thirteen Pilot classes fall into the 500 most actively-traded, and nine are within the 100 most actively-traded group. 22 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. E:\FR\FM\03OCN1.SGM 03OCN1 56414 Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Notices rwilkins on PROD1PC63 with NOTICES 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 ISE’s proposal to select additional classes from among the most activelytraded options has a reasonable basis and is consistent with the Act.23 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.24 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 23 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 ISE to be included in the Pilot Program beginning September 28, 2007. 24 See Amex Report, supra note 15, at 6–7; CBOE Report, supra note 15, Attachment at pages 5–6; ISE Report, supra note 15, at 17–20; and NYSE Arca Report, supra note 15, at 15. VerDate Aug<31>2005 18:31 Oct 02, 2007 Jkt 211001 recognizes that the exchange reports show there has, in fact, been a reduction in the displayed size available in the Pilot classes.25 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 the Exchange to include in its reports an analysis of the market impact of reducing the minimum price increment, particularly on the ability of market 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,26 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.27 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.28 The Commission 25 See Amex Report, supra note 15, at 6; BOX Report, supra note 15, at 2; CBOE Report, supra note 15, at Attachment page 2; ISE Report, supra note 15, at 7–8; NYSE Arca Report, supra note 15, at 9–10; and Phlx Report, supra note 15, at 3–4 and 6–7. 26 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 15, and ISE Report, supra note 15, 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 15, 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 15, at 8. 27 The Commission notes that currently only NYSE Arca makes available quotes and orders on its book below the NBBO. See https:// 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. 28 See supra, note 23. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 agrees that there should be a mechanism for removing option classes from the Pilot. The Commission specifically requested comment in the notice of ISE’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. The Commission finds good cause for approving the proposed rule change, as amended, prior to the thirtieth day after publication of the notice in the Federal Register.29 The Commission notes that in this filing the ISE is proposing to participate in an industry-wide extension and expansion of the Penny Pilot, which is scheduled to begin on September 28, 2007. Concurrent with this approval, the Commission also is approving proposed rule changes submitted by the other five options exchanges to extend and expand the Pilot. Accelerating approval of this filing will permit the Exchange to continue its participation in the Pilot without interruption. Accordingly, the Commission finds good cause, consistent with section 19(b)(2) of the Act,30 to approve the proposal, as modified by Amendment No. 1, on an accelerated basis. For the reasons discussed above, the Commission believes that the proposed rule change is consistent with the Act. 29 The Commission notes that the thirtieth day after publication of notice of this filing in the Federal Register is September 28, 2007. 30 15 U.S.C. 78s(b)(2). E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 72, No. 191 / Wednesday, October 3, 2007 / Notices IV. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,31 that the proposed rule change (SR–ISE–2007– 74), as modified by Amendment No. 1, be, and hereby is, approved on an accelerated basis, for a pilot period, which will end on March 27, 2009. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.32 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–19500 Filed 10–2–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56551; File No. SR–NYSE– 2007–82] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to NYSE Rule 124 (Odd-Lot Orders) September 27, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 6, 2007, the New York Stock Exchange LLC (‘‘NYSE’’ 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 substantially prepared by the NYSE. The Exchange has filed the proposal pursuant to Section 19(b)(3)(A) of the Act,3 and Rule 19b–4(f)(5) thereunder,4 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 rwilkins on PROD1PC63 with NOTICES The Exchange proposes to amend Exchange Rule 124 (Odd-Lot Orders) to modify the way in which Exchange systems price and execute certain types of odd-lot orders. The text of the proposed rule change is available on the Exchange’s Web site (https:// www.nyse.com), at the Exchange’s 31 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. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(5). 32 17 VerDate Aug<31>2005 18:31 Oct 02, 2007 Jkt 211001 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, NYSE 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 This filing is submitted to amend Exchange Rule 124 to change the way in which certain odd-lot orders 5 are priced and executed by Exchange systems. The Exchange proposes that buy and sell odd-lot market orders and odd-lot limit orders marketable upon receipt by Exchange systems (collectively referred to herein as ‘‘marketable odd-lot orders’’) be paired and executed at the price of the next round-lot transaction, with any imbalance of buy or sell marketable odd-lot orders executed at the price of the national best bid or offer (‘‘NBBO’’) 6 pursuant to specific conditions described herein; and under certain circumstances, that nonmarketable odd-lot limit orders be executed at their limit price upon becoming marketable. a. Current Execution of Odd-Lot Orders Currently, odd-lot orders do not enter the Exchange’s auction market but are executed systemically by Exchange systems designated solely for odd-lot orders (the ‘‘odd-lot System’’).7 The odd-lot System executes all odd-lot orders against the specialist as the contra party. Odd-lot market orders are executed in time priority at the price of the next round-lot transaction.8 Buy and sell odd-lot market orders are, in essence, netted against one another and executed; however, since the specialist is buying the same amount that he or 5 Odd-lot orders are orders for a size less than the standard unit (round-lot) of trading, which is 100 shares for most stocks, although some stocks trade in 10 share units. 6 The National best bid or offer is defined by Rule 600 (b)(42) of Regulation NMS under the Act (‘‘Regulation NMS’’), 17 CFR 242.600(b)(42). 7 See Exchange Rule 124(a). 8 See Exchange Rule 124(b)(i). PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 56415 she is selling, there is no economic consequence to the specialist in this type of pairing-off of orders. There is a volume limitation inherent in the execution of odd-lot market orders in that any imbalance of buy or sell oddlot market orders are executed against the specialist, but only up to the size of the round-lot transaction.9 Any odd-lot market orders that do not receive an execution because of the volume limitation are executed, in order of time priority, at the price of the next roundlot transaction.10 An odd-lot market order that is not executed within 30 seconds is executed at the price of the national best bid or offer (‘‘NBBO’’).11 There is no volume limitation for oddlot market orders that receive an execution after 30 seconds have elapsed. Odd-lot market orders to sell short are executed at the price of the next roundlot transaction that follows the entry of the order that is higher than the last different last round-lot price (a ‘‘plus tick’’ or a ‘‘zero plus tick’’). There is no volume limitation for odd-lot market orders to sell short. Odd-lot limit orders to buy or sell are executed at the price of the first roundlot transaction that is at or higher/lower than the limit price of the odd-lot limit order, subject to the volume limitation of the round-lot transaction.12 Odd-lot limit orders are aggregated with odd-lot market orders for purposes of the volume limitation. Odd-lot limit orders eligible for execution are combined with odd-lot market orders in order to determine time priority. Odd-lot limit orders are similarly aggregated with odd-lot market orders for purposes of the netting provision. As with odd-lot market orders, odd-lot limit orders that would otherwise receive a partial execution will be executed in full. There is no 30-second default execution 9 See Exchange Rule 124(b)(i). See also Exchange Rule 124(b)(ii), which provides that any odd-lot market order that would otherwise receive a partial execution will be executed in full. 10 See Exchange Rule 124(b)(iii). 11 Exchange Rule 124(b)(iv) provides that any odd-lot market order that is not executed within 30 seconds shall be executed at the price of the ‘‘adjusted ITS offer’’ or ‘‘adjusted ITS bid’’, as those terms are defined in Exchange Rule 124.60, rather than the NBBO. However, with the elimination of the Intermarket Trading System (‘‘ITS’’) Plan on March 5, 2007, (see Securities Exchange Act Release No. 55397 (March 5, 2007), 72 FR 11066 (March 12, 2007) (File No. 4–208)), the ability to price such odd-lot orders in terms of the ‘‘adjusted ITS’’ bid or offer no longer existed. The Exchange states that, as of March 5, 2007, all odd-lot market orders that remain unexecuted after 30 seconds have been executed at the price of the NBBO, which is in fact the functional equivalent of the adjusted bid or offer. Through this filing, the Exchange, among other things, seeks to remove the concept of ‘‘adjusted ITS bid’’ and ‘‘adjusted ITS offer’’. 12 See Exchange Rule 124(c). E:\FR\FM\03OCN1.SGM 03OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 72, Number 191 (Wednesday, October 3, 2007)]
[Notices]
[Pages 56412-56415]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-19500]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56564; File No. SR-ISE-2007-74]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Granting Accelerated Approval to a Proposed Rule Change, as 
Modified by Amendment No. 1, Relating to an Extension and Expansion of 
the Penny Pilot Program

September 27, 2007.

I. Introduction

    On August 21, 2007, the International Securities Exchange, LLC 
(``ISE'' 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''). On August 22, 2007, the Exchange filed 
Amendment No. 1 to the proposed rule change. The proposed rule change, 
as amended, was published for comment in the Federal Register on August 
29, 2007.\3\ The Commission received one comment letter on the proposed 
rule change.\4\ This order approves the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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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. 56306 (August 22, 
2007), 72 FR 49753.
    \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 ISE, 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. 56151 (July 26, 2007), 72 FR 42452 (August 2, 2007) (SR-
ISE-2007-68). See also Securities Exchange Act Release No. 55161 
(January 24, 2007), 72 FR 4754 (February 1, 2007) (SR-ISE-2006-62) 
(``Original Pilot Program Approval Order'').
---------------------------------------------------------------------------

    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 (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.\8\ The Exchange 
proposes to add twenty-eight more classes from among the most actively-
traded, multiply-listed options classes.\9\
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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.
    \9\ As proposed in its filing, ISE represents that options 
trading in penny increments will not be eligible for split pricing, 
as permitted under ISE Rule 716.
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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, the ISE 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.\10\ In particular, the 
Commission finds that the proposal is consistent with section 6(b)(5) 
of the Act,\11\ 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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    \10\ 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).
    \11\ 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.\12\ 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.\13\ 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.\14\ The exchanges

[[Page 56413]]

have now submitted proposals to extend and further expand the Pilot.
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    \12\ PCX News Release, ``Pacific Exchange to Trade Options in 
Pennies,'' June 28, 2005.
    \13\ Commission Press Release 2006-91, ``SEC Chairman Cox Urges 
Options Exchanges to Start Limited Penny Quoting,'' June 7, 2006.
    \14\ See Securities Exchange Act Release Nos. 55161 (January 24, 
2007), 72 FR 4754 (February 1, 2007) (SR-ISE-2006-62); 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); 55156 (January 23, 2007), 72 FR 4759 (February 1, 
2007) (SR-NYSEArca-2006-73); 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 ISE 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. ISE 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.\15\ 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.\16\ The Commission believes that the proposed rule 
change is designed to continue the narrowing of spreads.
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    \15\ See ISE, Penny Pilot Analysis, May 23, 2007 (``ISE 
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''); NYSE Arca Options, Understanding Economic and 
Capacity Impacts of the Penny Pilot, May 31, 2007 (``NYSE Arca 
Report''); and Phlx, Options Penny Pricing Pilot Report, May 31, 
2007 (``Phlx Report'').
    \16\ 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 ISE'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 timely receipt 
of quote information. The Commission also notes that ISE has adopted 
and will continue to utilize quote mitigation strategies that should 
mitigate the expected increase in quote traffic.\17\
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    \17\ See Securities Exchange Act Release No. 55161 (January 24, 
2007), 72 FR 4754 (February 1, 2007) (SR-ISE-2007-62). Further, the 
Commission notes that the other options exchanges participating in 
the Pilot also have adopted and will continue to utilize quote 
mitigation strategies.
---------------------------------------------------------------------------

    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. ISE'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.\18\ The commenter reported the percentage change in the 
relative trading volume before and after the Pilot for each of the 
thirteen classes.\19\ 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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    \18\ See Citadel Letter, supra note 4.
    \19\ 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.
---------------------------------------------------------------------------

    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.\20\ 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 relative trading volume that occurs 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.
---------------------------------------------------------------------------

    \20\ 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,\21\ 
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.\22\
---------------------------------------------------------------------------

    \21\ All of the thirteen Pilot classes fall into the 500 most 
actively-traded, and nine are within the 100 most actively-traded 
group.
    \22\ 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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[[Page 56414]]

    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 ISE's 
proposal to select additional classes from among the most actively-
traded options has a reasonable basis and is consistent with the 
Act.\23\
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    \23\ 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 ISE to be 
included in the Pilot Program beginning September 28, 2007.
---------------------------------------------------------------------------

    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.\24\ 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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    \24\ See Amex Report, supra note 15, at 6-7; CBOE Report, supra 
note 15, Attachment at pages 5-6; ISE Report, supra note 15, at 17-
20; and NYSE Arca Report, supra note 15, at 15.
---------------------------------------------------------------------------

    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.\25\ 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 the Exchange to include in its reports 
an analysis of the market impact of reducing the minimum price 
increment, particularly on the ability of market 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.
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    \25\ See Amex Report, supra note 15, at 6; BOX Report, supra 
note 15, at 2; CBOE Report, supra note 15, at Attachment page 2; ISE 
Report, supra note 15, at 7-8; NYSE Arca Report, supra note 15, at 
9-10; and Phlx Report, supra note 15, 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,\26\ 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.\27\ 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.
---------------------------------------------------------------------------

    \26\ 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 15, and ISE Report, supra note 15, 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 15, 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 15, at 8.
    \27\ The Commission notes that currently only NYSE Arca makes 
available quotes and orders on its book below the NBBO. See https://
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.\28\ 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 ISE'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.
---------------------------------------------------------------------------

    \28\ See supra, note 23.
---------------------------------------------------------------------------

    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after publication of the 
notice in the Federal Register.\29\ The Commission notes that in this 
filing the ISE is proposing to participate in an industry-wide 
extension and expansion of the Penny Pilot, which is scheduled to begin 
on September 28, 2007. Concurrent with this approval, the Commission 
also is approving proposed rule changes submitted by the other five 
options exchanges to extend and expand the Pilot. Accelerating approval 
of this filing will permit the Exchange to continue its participation 
in the Pilot without interruption.
---------------------------------------------------------------------------

    \29\ The Commission notes that the thirtieth day after 
publication of notice of this filing in the Federal Register is 
September 28, 2007.
---------------------------------------------------------------------------

    Accordingly, the Commission finds good cause, consistent with 
section 19(b)(2) of the Act,\30\ to approve the proposal, as modified 
by Amendment No. 1, on an accelerated basis. For the reasons discussed 
above, the Commission believes that the proposed rule change is 
consistent with the Act.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78s(b)(2).

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[[Page 56415]]

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-ISE-2007-74), as modified by 
Amendment No. 1, be, and hereby is, approved on an accelerated basis, 
for a pilot period, which will end on March 27, 2009.
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    \31\ 15 U.S.C. 78s(b)(2).
    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-19500 Filed 10-2-07; 8:45 am]
BILLING CODE 8011-01-P

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