Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Amending CBOE Rules Relating to the Penny Pilot Program, 27211-27214 [E9-13207]
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Federal Register / Vol. 74, No. 108 / Monday, June 8, 2009 / Notices
fail to comply with Condition 18 of the
Prior Orders.
2. Applicants state that the concerns
that sections 12(d)(1) was designed to
prevent about undue influence,
excessive layering of fees and overly
complex structures, are not present in
the India Portfolio and other passthrough investment vehicles used solely
for purposes of achieving favorable tax
treatment. Applicants represent that the
India Fund is the sole legal and
beneficial owner of the India Portfolio,
thus eliminating any concerns regarding
pyramiding of voting control; the
Advisor and Subadvisor direct the
portfolio management of both the India
Fund and the India Portfolio, which is
a pass-through investment vehicle, thus
eliminating concerns over any undue
influence of the Advisor or Subadvsior;
and there is no layering of fees as a
result of the India Fund operating
through the India Portfolio. Applicants
further represent that any Future Fund
will operate through a wholly-owned
investment vehicle that qualifies for
pass-through tax and accounting
treatment in a manner similar to that of
the India Fund. Applicants believe that
given the absence of section 12(d)(1)
concerns in this structure, it will not
create any additional section 12(d)(1)
concerns if Acquiring Funds are
permitted to acquire shares of the India
Fund and any Future Fund subject to
the terms and conditions of the Prior
12(d)(1) Relief, as amended by this
application.
3. Applicants submit that the
proposed amendment to Condition 18 of
the Prior Orders addresses the concerns
underlying the limits in section 12(d)(1)
of the Act and that the requested
exemption is consistent with the public
interest and the protection of investors.
Applicants state that all representations
contained in the relevant Prior
Applications relating to the operation of
the India Fund will remain in effect and
will apply to any Future Funds.
Section 24(d) of the Act:
4. Applicants seek to amend the Index
Order to delete the relief granted from
section 24(d) of the Act. Applicants
state that the deletion of the exemption
from section 24(d) that was granted in
the Index Order is warranted because
the adoption of the Summary
Prospectus Rule should supplant any
need by a Fund to use a product
description. The deletion of the relief
granted with respect to section 24(d) of
the Act from the Index Order also will
result in the deletion of related
discussion in the Index Applications,
revision of the Index Applications to
delete references to product
descriptions, including in the
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conditions, and the deletion of
condition 6 to the Index Order.
SECURITIES AND EXCHANGE
COMMISSION
Conditions
[Release No. 34–60018; File No. SR–CBOE–
2009–031]
Applicants agree that any Order of the
Commission granting the requested
relief will be subject to the same
conditions as those imposed by the
Prior Orders, except for Condition 18 to
the Prior Orders, which will be
amended as follows:
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of
Proposed Rule Change Amending
CBOE Rules Relating to the Penny
Pilot Program
No Fund will acquire securities of any
investment company or company relying on
Section 3(c)(1) or 3(c)(7) of the Act in excess
of limits contained in Section 12(d)(1)(A) of
the Act, other than the India Portfolio or any
similar wholly-owned subsidiary.
In addition, with respect to the Index
Order, condition 6 will be deleted and
conditions 4 and 7 will be amended as
follows: 7
4. The Web site for each Fund, which will
be publicly accessible at no charge, will
contain the following information, on a per
Share basis, for each Fund: (a) the prior
Business Day’s NAV and the reported closing
price, and a calculation of the premium or
discount of such price against such NAV; and
(b) data in chart format displaying the
frequency distribution of discounts and
premiums of the daily closing price against
the NAV, within appropriate ranges, for each
of the four previous calendar quarters.
7. Each Fund’s Prospectus will clearly
disclose that, for purposes of the Act,
Shares are issued by the Funds and that
the acquisition of Shares by investment
companies is subject to the restrictions
of section 12(d)(1) of the Act, except as
permitted by an exemptive order that
permits registered investment
companies to invest in a Fund beyond
the limits of section 12(d)(1), subject to
certain terms and conditions, including
that the registered investment company
enter into an agreement with the Fund
regarding the terms of the investment.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–13204 Filed 6–5–09; 8:45 am]
BILLING CODE 8010–01–P
7 All representations and conditions contained in
this application and the Prior Applications that
require a Fund to disclose particular information in
the Fund’s Prospectus and/or annual report shall
remain effective with respect to the Fund until the
time that the Fund complies with the disclosure
requirements contained in the Summary Prospectus
Rule.
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June 1, 2009.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on May 28,
2009, the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing to amend
CBOE rules relating to the Penny Pilot
Program. The text of the rule proposal
is available on the Exchange’s Web site
(https://www.cboe.org/legal), at the
Exchange’s Office of the Secretary and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
CBOE has prepared summaries, set forth
in sections A, B, and C below, of the
most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
CBOE proposes to extend and expand
the Penny Pilot Program, which
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
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commenced on January 26, 2007.
Presently, the Penny Pilot Program is in
effect in fifty-eight multiply-listed
option classes, representing
approximately 53% of the national
volume in April 2009.4 For all classes in
the Program except for the QQQQs, the
minimum increment for bids and offers
is 0.01 for all option series below $3
(including LEAPS), and $0.05 for all
option series $3 and above (including
LEAPS). For QQQQs, the minimum
increment is $0.01 for all option series.
The Penny Pilot Program is scheduled
to expire on July 3, 2009.
During the course of the Penny Pilot,
CBOE has thoroughly analyzed the
impact of penny quoting in the Pilot
classes, including in such areas as
average spread, average size, quote
message traffic, and industry volume.
CBOE has submitted several reports to
the SEC describing the impact of the
changes to the minimum increments in
the Pilot classes, and has identified
various trends that have manifested
themselves.5 These trends include: a
significant reduction in liquidity at the
BBO; a decrease in volume in some
classes 6; a dramatic rise in quote traffic;
and a reduction in average spread
width. With respect to quote traffic, five
of seven options exchanges have set alltime peak message rates thus far in
2009, three of which occurred in the
past three weeks.
In an effort to develop a long-term
solution to the issue of penny pricing in
options, last March 2008 CBOE
proposed that the industry adopt a
structure whereby option series of less
than $1 premium value are quoted in
penny increments, and series at $1 or
above quoted in nickel increments.
CBOE has explained the advantages of
its proposal, which include:
• Providing the benefits of penny
quoting and trading in those option
contracts that customers actually trade.
61% of customer contract volume is in
series priced up to $1. In the Penny
4 CBOE’s rules also provide that for so long as
SPDR options (SPY) and options on Diamonds
(DIA) participate in the Penny Pilot Program, the
minimum increments for Mini-SPX Index Options
(XSP) and options on the Dow Jones Industrial
Average (DJX), respectively, are $0.01 for all option
series below $3, and $0.05 for all option series $3
and above. See CBOE Rule 6.42.03.
5 CBOE has submitted five reports analyzing the
Penny Pilot Program. See letters from CBOE’s
President Edward Joyce to Elizabeth King, dated
June 1, 2007, November 1, 2007, March 4, 2008,
September 4, 2008, and March 9, 2009.
6 CBOE recognizes that it is difficult to discern the
extent to which the reduction in volume in some
Pilot classes may be attributable to the Penny Pilot,
as opposed to some combination of the Penny Pilot
and market conditions overall and/or conditions in
a particular security.
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Pilot classes, 52% of customer contract
volume is in series priced up to $1;
• Introducing penny increments in
nearly all listed option classes;
• Reducing the current dime
increment to nickels in those same
classes for series priced $1 and above;
• Helping to reduce the explosion of
quote traffic that would otherwise occur
if the current $3 breakpoint was
maintained as part of a large expansion;
• Providing a simple and easily
understood standard for investors as to
which options are quoted in penny
increments; and
• Providing flexibility in that if it is
determined that the benefits of penny
quoting at a breakpoint higher than $1
outweigh any negatives, modifying the
breakpoint would be fairly easy to
implement.
CBOE’s proposal to reduce the $3
breakpoint to $1 for the Penny Pilot
classes has been endorsed by the Equity
Options Committee of SIFMA, which
has stated that ‘‘retail order flow is far
more likely to concentrate activity in
low premium options as opposed to
those with much larger premium
levels.’’ 7 CBOE reiterated its long-term
solution to the issue of penny pricing in
options in its September 4, 2008, and
March 9, 2009 Penny Pilot Report to the
SEC.
CBOE believed then and continues to
believe that developing a long-term
solution is necessary so that the
exchanges, its members, market data
vendors, and other market participants
can make informed decisions regarding
systems and capacity planning.
Accordingly, CBOE proposes to extend
the Pilot Program through December 31,
2010. CBOE also proposes to
significantly expand Pilot Program to all
equity and ETF option classes, such that
at the end of a brief roll-out period all
equity and ETF option classes would be
included in the Penny Pilot Program.
Moreover, in all Pilot classes, option
series of less than $1 premium value
would be quoted in penny increments,
and series at $1 or above would be
quoted in nickel increments.
Specifically, CBOE proposes the
following 8:
• Extend the existing Penny Pilot
Program until 60 days following SEC
approval of this rule change, at which
time the minimum increment
‘‘breakpoint’’ would be reduced from $3
to $1 in all Penny Pilot classes, such
7 See letter from Melissa MacGregor, Vice
President and Assistant General Counsel, SIFMA, to
Elizabeth King dated March 10, 2008.
8 The proposed roll-out schedule assumes that the
new Linkage will be implemented in the 3rd quarter
of 2009, and that this proposed rule change is
approved on or about July 1, 2009.
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that all option series of less than $1
premium value are quoted in penny
increments with all series $1 and above
quoted in nickel increments. Although
all series in the QQQQ currently are
quoted in penny increments, CBOE
believes that the same $1 breakpoint
standard should apply in the QQQQs as
well.9
• 90 days following SEC approval of
this rule change, an additional forty-two
classes would be added to the Penny
Pilot Program bringing the total number
of classes in the Pilot Program to 100.
These forty-two new classes would be
among the most active, multiply-listed
equity and ETF option classes that are
not currently in the Pilot Program.
• 120 days following SEC approval of
this rule change, an additional 200
option classes would be added to the
Penny Pilot Program bringing the total
number of classes in the Pilot Program
to 300. These 200 new classes would be
among the most active, multiply-listed
equity or ETF option classes that are not
currently in the Pilot Program.
• 150 days following SEC approval of
this rule change, an additional 400
option classes would be added to the
Penny Pilot Program bringing the total
number of classes in the Pilot Program
to 700. These 400 new classes would be
among the most active, multiply-listed
equity or ETF option classes that are not
currently in the Pilot Program.
• 180 days following SEC approval of
this rule change, all remaining equity
and ETF option classes would be added
to the Penny Pilot Program.
The above roll-out schedule
contemplates the launch of the new
Linkage Plan, which is scheduled to
occur in the 3rd quarter of 2009, prior
to any expansion of the Penny Pilot
Program. CBOE believes strongly the
new Linkage Plan should be
implemented before a significant
expansion occurs because intermarket
sweep orders (ISOs) will be available in
the new Linkage Plan, and thus allow
market participants to simultaneously
access better priced quotations across all
options exchanges. The new option
classes to be added to the Pilot Program
would be identified based on national
average daily volume in the six calendar
months prior to the date the classes are
added to the Program.10 CBOE will work
jointly with the SEC to identify the
option classes to be added to the Pilot
Program and to determine the exact
dates the classes will be added, and will
9 The minimum increment breakpoint for XSP
options and DJX options similarly would be
reduced from $3 to $1. See CBOE Rule 6.42.03.
10 CBOE would use volume data from the Options
Clearing Corporation.
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submit proposed rule changes pursuant
to Section (b)(3)(A) of the Exchange Act
announcing the names of the new
classes prior to their being added to the
Pilot Program in each of the phases
mentioned above.11 Based on the
proposed roll-out described above,
CBOE anticipates that all equity and
ETF option classes would be included
in the Penny Pilot Program by early
2010.
CBOE also will submit to the SEC
semi-annual reports analyzing the
Penny Pilot Program for the following
time periods:
• July 1, 2009–December 31, 2009
• January 1, 2010–June 30, 2010
• July 1, 2010–December 31, 2010
CBOE anticipates that its reports will
assess the impact of the changes to the
minimum increments during the
specific time period being analyzed,
including, among other things, effects
on (i) market participants and
customers; (ii) market performance and
quality, such as quoted spreads,
effective spreads, and the displayed size
in the Pilot classes; and (iii) OPRA,
vendor and exchange capacity. CBOE’s
reports will be submitted within one
month following the end of the period
being analyzed.
CBOE believes that extending and
expanding the Penny Pilot Program as
proposed is balanced, responsible, and
reasonable. It will benefit investors by
expanding the Pilot Program in all
equity and ETF option classes over a
relatively short period of time, which
will enable investors to obtain the
benefits of penny quoting and trading in
those option contracts that customers
actually trade. The proposal is balanced
in that it recognizes that the Pilot
Program, while providing certain clear
benefits such as reducing spreads, also
has resulted in a significant reduction in
liquidity at the BBO, a decrease in
volume in some classes, and a
significant rise in quote traffic.
Moreover, CBOE’s plan eliminates
investor confusion as to which options
are quoted in penny increments, and
helps to reduce the growth of quote
traffic.
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2. Statutory Basis
The Exchange believes the rule
proposal is consistent with Section 6(b)
of the Securities Exchange Act of 1934
(‘‘Act’’) and the rule and regulations
under the Act applicable to a national
securities exchange and, in particular,
the requirements of Section 6(b) of the
11 CBOE also intends to issue a Regulatory
Circular, which will be published on its Web site,
identifying these option classes added to the Pilot
Program.
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Act.12 Specifically, the Exchange
believes that the proposed rule change
is consistent with the Section 6(b)(5)
Act 13 requirements that the rules of an
exchange be designed to promote just
and equitable principles of trade, to
prevent fraudulent and manipulative
acts and, in general, to protect investors
and the public interest. The Exchange
believes that expanding the current
Penny Pilot Program as proposed will
enable investors to obtain the benefits of
penny quoting and trading in those
option contracts that customers actually
trade. It will also eliminate investor
confusion as to which options are
quoted in penny increments, and help
to reduce the growth of quote traffic.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposal.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act. In
addition, the Commission seeks
comment on the following issues:
1. The Commission requests comment
generally on the impact on quote
capacity, if any, were the Commission to
approve SR–NYSEArca–2009–44, NYSE
Arca’s proposal to expand the Penny
12 15
13 15
PO 00000
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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27213
Pilot program to include the next 300
most actively traded, multiply listed
options classes over four successive
quarters, in addition to this proposed
rule change.
2. The Commission requests comment
on the impact, if any, to market
participants’ technological systems and
platforms to accommodate the proposed
change in breakpoint at $1.00 applied to
all option classes.
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2009–031 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2009–031. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of the filing will also be available
for inspection and copying at the
principal office of the self-regulatory
organization. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2009–031 and should be submitted on
or before June 29, 2009.
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Federal Register / Vol. 74, No. 108 / Monday, June 8, 2009 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–13207 Filed 6–5–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60012; File No. SR–FINRA–
2008–062]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Adopt FINRA
Rule 2267 (Investor Education and
Protection) in the Consolidated FINRA
Rulebook
May 29, 2009.
I. Introduction
On December 11, 2008, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) (f/k/a the National
Association of Securities Dealers, Inc.
(‘‘NASD’’)) 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 require member
firms, with certain exceptions, to
provide customers with FINRA’s Web
site address and information regarding
FINRA’s BrokerCheck program at least
once every calendar year. The proposed
rule change was published for comment
in the Federal Register on January 2,
2009.3 The Commission received two
comment letters regarding the
proposal.4 On April 28, 2009, FINRA
responded to comments,5 and on April
29, 2009, FINRA filed Amendment No.
1 to the proposal. This order provides
notice of the proposed rule change as
modified by Amendment No. 1 and
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(l).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 59160
(December 23, 2008), 74 FR 152 (‘‘Notice’’).
4 See letter to the Commission from Richard
Sacks, Investors Recovery Service, dated January 6,
2009 (‘‘IRS Letter’’), and letter to Florence E.
Harmon, Acting Secretary, Commission, from John
S. Watts, Senior Vice President & Chief Counsel,
PFS Investments Inc., dated January 26, 2009 (‘‘PFS
Letter’’).
5 See letter to Elizabeth M. Murphy, Secretary,
Commission, from Erika L. Lazar, Senior Attorney,
FINRA, Office of General Counsel, dated April 28,
2009 (‘‘Response to Comments’’).
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1 15
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approves the proposed rule change, as
amended, on an accelerated basis.
II. Description of the Proposal
FINRA proposed to adopt a rule based
on NASD Rule 2280 (Investor Education
and Protection), which requires member
firms, with certain exceptions, to
provide customers with FINRA’s Web
site address and information regarding
FINRA’s BrokerCheck program at least
once every calendar year.
NASD Rule 2280 currently applies to
member firms that carry customer
accounts and hold customer funds or
securities and requires each member
firm to provide its customers with the
following information in writing not
less than once every calendar year: (1)
The ‘‘Public Disclosure Program’’
hotline number; (2) the NASD
Regulation Web site address; and (3) a
statement regarding the availability of
an investor brochure that includes
information describing the ‘‘Public
Disclosure Program.’’
As initially proposed, FINRA Rule
2267 would have applied to all member
firms, with two general exceptions: a
firm that does not have customers, and
an introducing firm that is party to a
carrying agreement where the carrying
member firm complies with the rule.
FINRA stated that FINRA Rule 2267
would be broader in scope than NASD
Rule 2280 and would apply to member
firms that conduct a limited business
with customers, such as mutual fund
distributors and member firms that deal
solely with direct participation
programs (‘‘DPPs’’).6 In Amendment No.
1, FINRA modified its proposal in
response to the comments to permit a
member whose contact with customers
is limited to introducing customer
accounts that will be held at an entity
other than a FINRA member, and
thereafter does not carry customer
accounts or hold customer funds or
securities,7 to furnish a customer with
the information required by the rule at
or before the time of the customer’s
initial purchase, in lieu of once every
calendar year.8
6 These member firms would be required to
comply with the rule and provide the disclosures
at least once every calendar year. To the extent such
firms are parties to a carrying agreement and the
member firm that carries the accounts complies on
their behalf, these firms would be excepted from the
requirements of the proposed rule.
7 E.g., does not provide account statements or
trade confirmations.
8 In addition, the proposed rule would include
references to ‘‘BrokerCheck’’ rather than the ‘‘Public
Disclosure Program;’’ reference the FINRA Web site
address rather than the NASD Regulation Web site
address; and clarify that the information required
under the rule may be provided electronically to
customers.
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FINRA stated in the Notice that it
would announce the implementation
date of the proposed rule change in a
Regulatory Notice to be published no
later than ninety days following
Commission approval.
III. Summary of Comments and
Amendment No. 1
The Commission received two
comment letters on the proposed rule
change.9 One commenter expressed
concern that, without the inclusion of
additional disclosure noting that
information in BrokerCheck may have
been dismissed or expunged, customers
may be mislead into believing a broker
or other financial professional has not
been involved in customer
complaints.10 FINRA responded that it
believed this comment was outside the
scope of the proposal, and also noted
that its Web site describes the contents
of a BrokerCheck report and the type of
information that is not disclosed
through BrokerCheck.11
Another commenter stated that the
proposed FINRA rule would place a
significant burden on member firms,
such as itself, that conduct a limited
business where customer accounts are
introduced to a non-FINRA member
product issuer and have no direct
contact with the customers after the
initial transaction.12 The commenter
stated that these firms do not carry
customer accounts or hold customer
funds or securities after the initial
transaction. The commenter argued that
because these firms do not send
statements or trade confirmations, they
do not have an easy method to provide
information to customers, and a special
annual mailing for the purposes of
complying with the rule as initially
proposed could be burdensome and
substantial.13
FINRA responded that it would
amend the proposal to clarify the
application of Rule 2267.14 Specifically,
FINRA stated it would codify the
interpretive guidance regarding current
NASD Rule 2280, which requires these
firms to provide the requisite
disclosures to customers only at the
time of the initial transaction.15
9 See
supra, note 4.
IRS Letter.
11 See Response to Comments at 2.
12 See PFS Letter, supra, note 4.
13 Id.
14 See Response to Comments at 2.
15 See Response to Comments at 2, citing the
NASD Regulation, Inc. Regulatory and Compliance
Alert (Summer 1999) at 24. See Amendment No. 1
which also made non-substantive changes to the
rule.
10 See
E:\FR\FM\08JNN1.SGM
08JNN1
]]>Agencies
[Federal Register Volume 74, Number 108 (Monday, June 8, 2009)]
[Notices]
[Pages 27211-27214]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-13207]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60018; File No. SR-CBOE-2009-031]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Amending CBOE
Rules Relating to the Penny Pilot Program
June 1, 2009.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on May 28, 2009, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or the ``Exchange'') filed with the Securities
and Exchange Commission (the ``Commission'') the proposed rule change
as described in Items I, II, and III below, which Items have been
prepared by the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend CBOE rules relating to the Penny
Pilot Program. The text of the rule proposal is available on the
Exchange's Web site (https://www.cboe.org/legal), at the Exchange's
Office of the Secretary and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. CBOE has prepared summaries, set
forth in sections A, B, and C below, of the most significant parts of
such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
CBOE proposes to extend and expand the Penny Pilot Program, which
[[Page 27212]]
commenced on January 26, 2007. Presently, the Penny Pilot Program is in
effect in fifty-eight multiply-listed option classes, representing
approximately 53% of the national volume in April 2009.\4\ For all
classes in the Program except for the QQQQs, the minimum increment for
bids and offers is 0.01 for all option series below $3 (including
LEAPS), and $0.05 for all option series $3 and above (including LEAPS).
For QQQQs, the minimum increment is $0.01 for all option series. The
Penny Pilot Program is scheduled to expire on July 3, 2009.
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\4\ CBOE's rules also provide that for so long as SPDR options
(SPY) and options on Diamonds (DIA) participate in the Penny Pilot
Program, the minimum increments for Mini-SPX Index Options (XSP) and
options on the Dow Jones Industrial Average (DJX), respectively, are
$0.01 for all option series below $3, and $0.05 for all option
series $3 and above. See CBOE Rule 6.42.03.
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During the course of the Penny Pilot, CBOE has thoroughly analyzed
the impact of penny quoting in the Pilot classes, including in such
areas as average spread, average size, quote message traffic, and
industry volume. CBOE has submitted several reports to the SEC
describing the impact of the changes to the minimum increments in the
Pilot classes, and has identified various trends that have manifested
themselves.\5\ These trends include: a significant reduction in
liquidity at the BBO; a decrease in volume in some classes \6\; a
dramatic rise in quote traffic; and a reduction in average spread
width. With respect to quote traffic, five of seven options exchanges
have set all-time peak message rates thus far in 2009, three of which
occurred in the past three weeks.
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\5\ CBOE has submitted five reports analyzing the Penny Pilot
Program. See letters from CBOE's President Edward Joyce to Elizabeth
King, dated June 1, 2007, November 1, 2007, March 4, 2008, September
4, 2008, and March 9, 2009.
\6\ CBOE recognizes that it is difficult to discern the extent
to which the reduction in volume in some Pilot classes may be
attributable to the Penny Pilot, as opposed to some combination of
the Penny Pilot and market conditions overall and/or conditions in a
particular security.
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In an effort to develop a long-term solution to the issue of penny
pricing in options, last March 2008 CBOE proposed that the industry
adopt a structure whereby option series of less than $1 premium value
are quoted in penny increments, and series at $1 or above quoted in
nickel increments. CBOE has explained the advantages of its proposal,
which include:
Providing the benefits of penny quoting and trading in
those option contracts that customers actually trade. 61% of customer
contract volume is in series priced up to $1. In the Penny Pilot
classes, 52% of customer contract volume is in series priced up to $1;
Introducing penny increments in nearly all listed option
classes;
Reducing the current dime increment to nickels in those
same classes for series priced $1 and above;
Helping to reduce the explosion of quote traffic that
would otherwise occur if the current $3 breakpoint was maintained as
part of a large expansion;
Providing a simple and easily understood standard for
investors as to which options are quoted in penny increments; and
Providing flexibility in that if it is determined that the
benefits of penny quoting at a breakpoint higher than $1 outweigh any
negatives, modifying the breakpoint would be fairly easy to implement.
CBOE's proposal to reduce the $3 breakpoint to $1 for the Penny
Pilot classes has been endorsed by the Equity Options Committee of
SIFMA, which has stated that ``retail order flow is far more likely to
concentrate activity in low premium options as opposed to those with
much larger premium levels.'' \7\ CBOE reiterated its long-term
solution to the issue of penny pricing in options in its September 4,
2008, and March 9, 2009 Penny Pilot Report to the SEC.
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\7\ See letter from Melissa MacGregor, Vice President and
Assistant General Counsel, SIFMA, to Elizabeth King dated March 10,
2008.
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CBOE believed then and continues to believe that developing a long-
term solution is necessary so that the exchanges, its members, market
data vendors, and other market participants can make informed decisions
regarding systems and capacity planning. Accordingly, CBOE proposes to
extend the Pilot Program through December 31, 2010. CBOE also proposes
to significantly expand Pilot Program to all equity and ETF option
classes, such that at the end of a brief roll-out period all equity and
ETF option classes would be included in the Penny Pilot Program.
Moreover, in all Pilot classes, option series of less than $1 premium
value would be quoted in penny increments, and series at $1 or above
would be quoted in nickel increments. Specifically, CBOE proposes the
following \8\:
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\8\ The proposed roll-out schedule assumes that the new Linkage
will be implemented in the 3rd quarter of 2009, and that this
proposed rule change is approved on or about July 1, 2009.
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Extend the existing Penny Pilot Program until 60 days
following SEC approval of this rule change, at which time the minimum
increment ``breakpoint'' would be reduced from $3 to $1 in all Penny
Pilot classes, such that all option series of less than $1 premium
value are quoted in penny increments with all series $1 and above
quoted in nickel increments. Although all series in the QQQQ currently
are quoted in penny increments, CBOE believes that the same $1
breakpoint standard should apply in the QQQQs as well.\9\
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\9\ The minimum increment breakpoint for XSP options and DJX
options similarly would be reduced from $3 to $1. See CBOE Rule
6.42.03.
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90 days following SEC approval of this rule change, an
additional forty-two classes would be added to the Penny Pilot Program
bringing the total number of classes in the Pilot Program to 100. These
forty-two new classes would be among the most active, multiply-listed
equity and ETF option classes that are not currently in the Pilot
Program.
120 days following SEC approval of this rule change, an
additional 200 option classes would be added to the Penny Pilot Program
bringing the total number of classes in the Pilot Program to 300. These
200 new classes would be among the most active, multiply-listed equity
or ETF option classes that are not currently in the Pilot Program.
150 days following SEC approval of this rule change, an
additional 400 option classes would be added to the Penny Pilot Program
bringing the total number of classes in the Pilot Program to 700. These
400 new classes would be among the most active, multiply-listed equity
or ETF option classes that are not currently in the Pilot Program.
180 days following SEC approval of this rule change, all
remaining equity and ETF option classes would be added to the Penny
Pilot Program.
The above roll-out schedule contemplates the launch of the new
Linkage Plan, which is scheduled to occur in the 3rd quarter of 2009,
prior to any expansion of the Penny Pilot Program. CBOE believes
strongly the new Linkage Plan should be implemented before a
significant expansion occurs because intermarket sweep orders (ISOs)
will be available in the new Linkage Plan, and thus allow market
participants to simultaneously access better priced quotations across
all options exchanges. The new option classes to be added to the Pilot
Program would be identified based on national average daily volume in
the six calendar months prior to the date the classes are added to the
Program.\10\ CBOE will work jointly with the SEC to identify the option
classes to be added to the Pilot Program and to determine the exact
dates the classes will be added, and will
[[Page 27213]]
submit proposed rule changes pursuant to Section (b)(3)(A) of the
Exchange Act announcing the names of the new classes prior to their
being added to the Pilot Program in each of the phases mentioned
above.\11\ Based on the proposed roll-out described above, CBOE
anticipates that all equity and ETF option classes would be included in
the Penny Pilot Program by early 2010.
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\10\ CBOE would use volume data from the Options Clearing
Corporation.
\11\ CBOE also intends to issue a Regulatory Circular, which
will be published on its Web site, identifying these option classes
added to the Pilot Program.
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CBOE also will submit to the SEC semi-annual reports analyzing the
Penny Pilot Program for the following time periods:
July 1, 2009-December 31, 2009
January 1, 2010-June 30, 2010
July 1, 2010-December 31, 2010
CBOE anticipates that its reports will assess the impact of the
changes to the minimum increments during the specific time period being
analyzed, including, among other things, effects on (i) market
participants and customers; (ii) market performance and quality, such
as quoted spreads, effective spreads, and the displayed size in the
Pilot classes; and (iii) OPRA, vendor and exchange capacity. CBOE's
reports will be submitted within one month following the end of the
period being analyzed.
CBOE believes that extending and expanding the Penny Pilot Program
as proposed is balanced, responsible, and reasonable. It will benefit
investors by expanding the Pilot Program in all equity and ETF option
classes over a relatively short period of time, which will enable
investors to obtain the benefits of penny quoting and trading in those
option contracts that customers actually trade. The proposal is
balanced in that it recognizes that the Pilot Program, while providing
certain clear benefits such as reducing spreads, also has resulted in a
significant reduction in liquidity at the BBO, a decrease in volume in
some classes, and a significant rise in quote traffic. Moreover, CBOE's
plan eliminates investor confusion as to which options are quoted in
penny increments, and helps to reduce the growth of quote traffic.
2. Statutory Basis
The Exchange believes the rule proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (``Act'') and the rule and
regulations under the Act applicable to a national securities exchange
and, in particular, the requirements of Section 6(b) of the Act.\12\
Specifically, the Exchange believes that the proposed rule change is
consistent with the Section 6(b)(5) Act \13\ requirements that the
rules of an exchange be designed to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts and,
in general, to protect investors and the public interest. The Exchange
believes that expanding the current Penny Pilot Program as proposed
will enable investors to obtain the benefits of penny quoting and
trading in those option contracts that customers actually trade. It
will also eliminate investor confusion as to which options are quoted
in penny increments, and help to reduce the growth of quote traffic.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposal.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. In addition, the Commission seeks
comment on the following issues:
1. The Commission requests comment generally on the impact on quote
capacity, if any, were the Commission to approve SR-NYSEArca-2009-44,
NYSE Arca's proposal to expand the Penny Pilot program to include the
next 300 most actively traded, multiply listed options classes over
four successive quarters, in addition to this proposed rule change.
2. The Commission requests comment on the impact, if any, to market
participants' technological systems and platforms to accommodate the
proposed change in breakpoint at $1.00 applied to all option classes.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2009-031 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2009-031. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing will also be available for
inspection and copying at the principal office of the self-regulatory
organization. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
CBOE-2009-031 and should be submitted on or before June 29, 2009.
[[Page 27214]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13207 Filed 6-5-09; 8:45 am]
BILLING CODE 8010-01-P
