Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment Nos. 1 and 3 and Order Granting Partial Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 3 Thereto, Amending NYSE Arca Rule 6.72 and Expanding the Penny Pilot Program, 49419-49425 [E9-23374]
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Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Notices
srobinson on DSKHWCL6B1PROD with NOTICES
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 also will be available
for inspection and copying at the
principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly.
All submissions should refer to File
Number SR–NYSEArca–2009–36 and
should be submitted on or before
October 19, 2009.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the thirtieth day after publication for
comment in the Federal Register.
In Amendment No. 1, the Exchange
clarifies that, throughout the rule, the
definition of ‘‘Officer’’ encompasses
only Officers of the Corporation or such
other senior level employee designee of
the Corporation. In addition, in the
context of rulings in Unusual
Circumstances, the Exchange added the
protection of investors and the public
interest as a basis for using a reference
price other than the consolidated last
sale.
In the context of the Numerical
Guidelines, the Exchange also clarifies
that the execution time of the
transaction under review determines
whether the Numerical Guideline
applied is Core Trading Session or
Opening and Late Trading Session. In
addition, the Exchange corrected a
drafting error regarding the sales price at
which certain numerical guidelines are
applicable. The corrected language,
which is reflected in the discussion
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16:33 Sep 25, 2009
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above, now states that the proposed
guidelines for sales greater than $0.00
up to and including $25.00 are 10% for
the Core Trading Session and 20% for
the Opening and Late Trading Sessions,
and the proposed guidelines for sales
greater than $25.00 up to and including
$50.00 are 5% for the Core Trading
Session and 10% for Opening and Late
Trading Sessions.
In addition, as is reflected in the
discussion above, the Exchange clarifies
the percentage range at which volatility
in the S & P 500 Futures would trigger
the Exchange’s ability to double or triple
the applicable Numerical Guidelines.
The Exchange also clarifies that, the
context of appeals, in no case will a CEE
Panel include a person affiliated with a
party to the trade in question.
The changes proposed in Amendment
No. 1, discussed above, seek to clarify
the operation of the proposed rule and
do not differ materially from the
proposal as published in the Federal
Register on May 5, 2009. Therefore, the
Commission finds good cause,
consistent with Section 19(b)(2) of the
Act,10 to approve the proposed rule
change, as modified by Amendment No.
1, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,11 that the
proposed rule change (SR–NYSEArca–
2009–36), as amended, be, and it hereby
is, approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–23358 Filed 9–25–09; 8:45 am]
BILLING CODE 8010–01–P
10 15
U.S.C. 78s(b)(2).
U.S.C. 78s(b)(2).
12 17 CFR 200.30–3(a)(12).
11 15
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49419
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60711; File No. SR–
NYSEArca–2009–44]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of
Amendment Nos. 1 and 3 and Order
Granting Partial Accelerated Approval
of a Proposed Rule Change, as
Modified by Amendment Nos. 1 and 3
Thereto, Amending NYSE Arca Rule
6.72 and Expanding the Penny Pilot
Program
September 23, 2009.
I. Introduction
On May 15, 2009, NYSE Arca, Inc.
(‘‘NYSE Arca’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b-4 thereunder,2 a proposed rule
change to amend its options trading rule
to extend through December 31, 2010
and expand a program to quote certain
options in smaller increments (‘‘Pilot
Program’’ or ‘‘Pilot’’).3 The proposed
rule change was published for comment
in the Federal Register on May 27,
2009.4 The Commission received nine
comment letters in response to the
proposed rule change.5 On August 18,
2009, the Exchange responded to the
comment letters 6 and filed Amendment
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The current pilot is scheduled to expire on
October 31, 2009. See Securities Exchange Act
Release No. 60224 (July 1, 2009), 74 FR 32991 (July
9, 2009).
4 See Securities Exchange Act Release No. 59944
(May 20, 2009), 74 FR 25294 (May 27, 2009)
(‘‘Notice’’).
5 See letter from Stephen Schuler and Daniel
Tierney, Managing Members, Global Electronic
Trading Company, dated June 10, 2009 (‘‘GETCO
Letter’’); letter from Edward J. Joyce, President and
COO, Chicago Board Options Exchange, dated June
12, 2009 (‘‘CBOE Letter’’); letter from Thomas
Wittman, Vice President, The NASDAQ OMX
Group, Inc., dated June 12, 2009 (‘‘Nasdaq Letter’’);
letter from Christopher Nagy, Managing Director
Order Routing Strategy, TD Ameritrade, Inc., dated
June 17, 2009 (‘‘Ameritrade Letter’’); letter from
Thomas F. Price, Managing Director, Securities
Industry and Financial Markets Association, dated
June 17, 2009 (‘‘SIFMA Letter’’); letter from
Anthony J. Saliba, CEO, LiquidPoint LLC, dated
June 17, 2009 (LiquidPoint Letter’’); letter from
Michael J. Simon, Secretary, International
Securities Exchange, LLC, dated June 23, 2009 (‘‘ISE
Letter’’); letter from John Ingrill, Gerard Satur,
Karen Wendell, Managing Directors, UBS Securities
LLC, dated June 30, 2009 (‘‘UBS Letter’’); and letter
from Jerome Johnson, Vice President, Market
Development, BATS Exchange, Inc., dated August
28, 2009 (‘‘BATS Letter’’) (collectively, the
‘‘Comment Letters’’).
6 See letter from Janet M. Kissane, Senior Vice
President—Legal & Corporate Secretary, NYSE
Arca, to Elizabeth M. Murphy, Secretary,
2 17
Continued
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Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Notices
No. 1 to the proposed rule change.7 On
September 21, 2009, the Exchange filed
Amendment No. 2 to the proposed rule
change. On September 22, 2009, the
Exchange withdrew Amendment No. 2
and filed Amendment No. 3. Among
other things, in Amendment No. 3 the
Exchange consented to a bifurcation of
the filing such that the portion of the
proposed rule change proposing to
quote IWM and SPY entirely in pennies
would be subject to further notice and
comment prior to Commission action.8
The Commission is publishing this
notice to solicit comments on the
proposed rule change, as modified by
Amendment Nos. 1 and 3, and
simultaneously is partially approving
the proposed rule change, as modified
by Amendment Nos. 1 and 3, on an
accelerated basis.9
srobinson on DSKHWCL6B1PROD with NOTICES
II. Description of the Proposal
Currently, all seven options
exchanges participate in the Pilot
Program, which is scheduled to expire
on October 31, 2009.10 The Exchange
proposes to extend the time period of
the Pilot Program through December 31,
2010 and expand the Pilot Program.
NYSE Arca proposes to add the next
300 most actively traded, multiply listed
options classes that are not currently
included in the Pilot Program,
excluding options with high
premiums.11 The Exchange proposes to
Commission, dated August 18, 2009 (‘‘NYSE Arca
Response’’).
7 In Amendment No. 1, the Exchange: (i) Clarified
how replacement issues would be selected in the
event that a Pilot class were delisted; (ii) proposed
to begin the phased implementation of the
expansion of the Pilot on September 28, 2009 and
continue over four successive quarters; and (iii)
clarified that under its proposal NYSE Arca would
begin quoting SPY and IWM entirely in pennies on
September 28, 2009. See infra note 17 with respect
to that portion of the proposal to change the quoting
increments for options on SPY and IWM.
8 Also, in Amendment No. 3, the Exchange
clarified the threshold levels for determining when
an options class would not be eligible to participate
in the Pilot due to a high premium. The Exchange
also proposed to begin the phased implementation
of the Pilot on October 26, 2009 and continue over
four successive quarters. The Exchange has
consented to an extension of time for the
Commission to act until October 31, 2009.
9 See infra note 17 and accompanying text.
10 See Securities Exchange Act Release Nos.
55156 (January 23, 2007), 72 FR 4759 (February 21,
2007); 56568 (September 27, 2007), 72 FR 56422
(October 3, 2007); 59628 (March 26, 2009), 74 FR
15025 (April 2, 2009); and 60224 (July 1, 2009) 74
FR 32991 (July 9, 2009).
11 One commenter raised issues with the aspect
of NYSE Arca’s proposal that would exclude
options with high premiums, claiming that the
Exchange’s proposal did not give guidance,
definition or indication of what constitutes a ‘‘high
premium.’’ See CBOE Letter, supra note 5, at 2. In
response to this comment, NYSE Arca clarified in
Amendment No. 3 that a class would be excluded
from the Pilot for having a high premium if at the
time of selection of new classes the underlying
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16:33 Sep 25, 2009
Jkt 217001
phase-in these 300 classes in groups of
75 additional classes each quarter over
four successive quarters on October 26,
2009, January 25, 2009, April 26, 2010
and July 26, 2010.12 The Exchange will
identify the classes to be added each
quarter based on national average daily
volume in the prior six calendar months
immediately preceding their addition to
the Pilot Program, using data compiled
and disseminated by the Options
Clearing Corporation. The Exchange
will announce the classes to be added
to the Pilot Program each quarter to the
Exchange’s membership in a Regulatory
Bulletin and by publishing the
information on its Web site, in addition
to submitting a filing with the
Commission.13
The minimum variation for all classes
to be included in the Pilot, except for
QQQQ, will continue to be $0.01 for all
quotations in option series that are
quoted at less than $3.00 per contract,
and $0.05 for all quotations in option
series that are quoted at $3.00 or greater.
Options on QQQQ will continue to be
quoted in $0.01 increments for all
series. Further, the Exchange proposes
to designate options on SPY (SPDR S&P
500 ETF) and IWM (iShares Russell
2000 Index Fund) as eligible to quote
and trade all options series in one cent
increments, regardless of premium
value.14
The Exchange further proposes that
any option class included in the Pilot
Program that has been delisted may be
replaced on a semi-annual basis by the
next most actively traded, multiply
listed options class that is not yet
included in the Pilot, based on trading
activity in the previous six months.15
The replacements issue(s) would be
added to the Pilot Program on the
second trading day following January 1,
2010 and July 1, 2010.16
The Exchange will submit semiannual reports to the Commission that
will include sample data and analysis of
equity security was priced at $200 per share or
above or the underlying index level was at 200 or
above. The determination of whether a security is
trading above $200 or above a calculated index
value of 200 shall be based on the price at the close
of trading on the Expiration Friday prior to being
added to the Pilot. See supra note 8, and NYSE
Arca Response, supra note 6, at 3–4.
12 See supra note 8.
13 The Exchange has committed to file a proposed
rule change under Section 19(b)(3)(A) of the Act to
identify the option classes to be included each
quarter.
14 See supra note 8 and infra note 17.
15 In Amendment No. 1, the Exchange clarified
that the replacement classes also would exclude
options with high premiums. See supra note 7.
16 The replacement issues will be announced to
the Exchange’s membership in a Regulatory
Bulletin and published by the Exchange on its Web
site.
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information collected from April 1
through September 30, and from
October 1 through March 31, for each
year, for the ten most active and twenty
least active options classes added to the
Pilot Program, in addition to continuing
to provide data concerning the existing
Pilot Program classes. The Exchange
also will identify, for comparison
purposes, a control group consisting of
the ten least active options classes from
the existing Pilot Program classes. The
report will include, but not be limited
to the following: (1) Data and analysis
on the number of quotations generated
for options included in the report; (2) an
assessment of the quotation spreads for
the options included in the report; (3)
an assessment of the impact of the Pilot
Program on the capacity of NYSE Arca’s
automated systems; (4) data reflecting
the size and depth of markets; and (5)
any capacity problems or other
problems that arose related to the
operation of the Pilot Program and how
the Exchange addressed them.
III. Discussion and Findings
After careful review of the proposed
rule change, Amendment Nos. 1 and 3,
the Comment Letters, and the NYSE
Arca Response, the Commission finds
that the proposed rule change, as
amended, except for the portion of the
proposal to quote IWM and SPY entirely
in pennies, is consistent with the
requirements of the Act, and the rules
and regulations thereunder that are
applicable to a national securities
exchange.17 Specifically, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,18 which requires, among other
things, that the rules of a national
securities 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.19
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.20 In June 2006, to
17 The Commission is not at this time approving
the portion of the proposed rule change that would
designate options on IWM and SPY as eligible to
quote all options series in one-cent increments. The
Commission is soliciting further comment on that
portion of the proposed rule change. See infra
Section IV.
18 15 U.S.C. 78f(b)(5).
19 In approving the 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).
20 PCX News Release, ‘‘Pacific Exchange to Trade
Options in Pennies,’’ June 28, 2005.
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facilitate the orderly transition to
quoting a limited number of options in
penny increments, the then Chairman of
the Commission 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
2007.21 The then existing 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.22 The Pilot,
which has since been extended and
expanded, currently includes 63 classes
and is scheduled to expire on October
31, 2009.23 NYSE Arca now proposes to
extend and further expand the Pilot.
The Commission believes that NYSE
Arca’s proposal is consistent with the
Act in large measure because allowing
market participants to quote in smaller
increments has been shown to reduce
spreads, thereby lowering costs to
investors. An analysis of the current
Pilot shows that the reduction in the
minimum quoting increment has
resulted in narrowing the average
quoted spreads in classes included in
the Pilot.24 The reduction in spreads
21 Commission Press Release 2006–91, ‘‘SEC
Chairman Cox Urges Options Exchanges to Start
Limited Penny Quoting,’’ June 7, 2006.
22 See Securities Exchange Act Release Nos.
55154 (January 23, 2007), 72 FR 4743 (February 1,
2007) (SR–CBOE–2006–92); 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); 55161
(January 24, 2007), 72 FR 4754 (February 1, 2007)
(SR–ISE–2006–62); 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).
23 See supra note 3. Although the proposed rule
changes approved by the Commission to implement
and expand the Pilot provide for 65 classes in the
current Pilot Program, the actual number of those
classes still trading is 59.
24 See Memorandum to Heather Seidel, from J.
Daniel Aromi, Office of Economic Analysis
(‘‘OEA’’), ‘‘Volume and Spreads for Pilot and NonPilot Options Classes,’’ dated July 24, 2009 (‘‘OEA
Memo’’). See also Ameritrade Letter, supra note 5,
at 1 (noting the firm’s belief that overall, the Pilot
has brought about tighter trading increments);
GETCO Letter, supra note 5, at 1 (noting as a benefit
of the Pilot the substantial decreases in quoted
spreads); UBS Letter, supra note 5, at 1 (noting that
spreads have narrowed as a result of penny
quoting); and BATS Letter, supra note 5, at 1–2
(noting a reduction in spreads in Pilot classes).
Average spread width reductions for some
options included in the Pilot were less during the
period from approximately August 2008 through
January 2009 than in prior periods. See e.g., CBOE
Penny Pilot Report, dated March 9, 2009 (‘‘CBOE
March Report’’) at 2; CBOE Penny Pilot Report,
dated September 4, 2008 (‘‘CBOE September
Report’’) at 1 to 5; and Report by BOX, BOX Penny
Pilot Report: Penny Pilot Report 5 (‘‘BOX Penny
Pilot Report 5’’) at 7. However, this time frame
covers a period of significant overall market
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16:33 Sep 25, 2009
Jkt 217001
also has led the exchanges to reduce or
eliminate their exchange-sponsored
payment-for-order-flow programs.25 The
Commission believes that the proposed
rule change, which will expand the
Pilot to include 300 of the next most
actively traded, multiply listed classes,
is designed to allow the continuing
narrowing of spreads.
One commenter stated that ‘‘full
access to penny increments provides
investors with more flexibility to
compete and determine the natural
spread for each security
independently.’’ This commenter
further stated that ‘‘penny pricing gives
market participants the flexibility to
trade with spreads at six or eleven cents
wide, as much as it facilitates trading in
one or two cent spreads.’’ 26 This
commenter explained that even if
volatility. The CBOE Volatility Index (‘‘VIX’’) was
well above previous levels through most of this
period. From late September 2008 through January
2009 (and beyond) the VIX was almost always
above 40, peaking at 80 in October and November
2008. See also Report by NYSE Arca, The Options
Penny Pilot, dated August 18, 2009 (‘‘NYSE Arca
Report’’) at 7 to 10 and Report by NYSE Arca,
Reporting Period 5 (‘‘NYSE Arca Report 2’’)
(showing overall greater reductions in volumeweighted average spreads for the period February 1,
2009 through April 30, 2009 as compared to the
period August 1, 2008 through January 31, 2009);
CBOE March Report at 2 and CBOE Penny Pilot
Report, dated July 31, 2009 (‘‘CBOE July Report’’)
at 2 (these reports show that the average spread
width decreased from the period of February 1,
2009 through April 30, 2009, as compared to the
period of August 1, 2008 through January 1, 2009);
and Report by BOX, BOX Penny Pilot Report: Penny
Pilot Report 6 (‘‘BOX Penny Pilot Report 6’’) at 7
(stating that the average bid/ask spread narrowed in
the period February 1, 2009 through April 30, 2009
as compared to the period from August 1, 2008
though January 31, 2009). Further, one exchange
that measured average spreads in non-Pilot classes
during the same time period for which it measured
average spreads for Pilot classes showed that
average spreads in non-Pilot classes also widened.
See Report by ISE, Penny Pilot Analysis 5, dated
May 2009 (‘‘ISE Report’’) at 4. ISE provides
statistics showing volume-weighted spreads for the
classes in each phase of the Pilot, for the 3 months
prior to each group being included in the Pilot, the
first year after inclusion in the Pilot, and the six
months from November 2008 to April 2009, as well
as volume-weighted spread statistics for comparable
classes not included in the Pilot for the same time
periods as used for the classes in phase 3 of the
Pilot. The data shows that the spreads for the nonpenny classes also widened in the time period from
November 2008 to April 2009. See also CBOE
March Report at 2 (stating that the exchange is
aware that average spread width in many non-Pilot
classes widened during the same reporting period
due to the unusual market conditions that existed).
25 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).
26 See BATS Letter, supra note 5, at 1–2.
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49421
spreads in a Pilot class increase, quoting
in pennies mitigates the increase. For
example, the commenter noted that
CBOE’s March Report showed that for
the period August 1, 2008 through
January 31, 2009, the average spread in
OIH options increased from $0.13 to
$0.19. The commenter pointed out that
if this class were not quoting in pennies,
the $0.06 increase in the spread could
have been a $0.10 increase.
Several commenters expressed
concern about the impact of NYSE
Arca’s proposal on displayed size that
will be available at the best bid and offer
in the additional classes to be included
in the Pilot, and the impact that a
decrease in displayed size would have
on the market quality.27 In particular,
several commenters expressed concern
that decreased liquidity in Pilot classes
has made, and will continue to make, it
harder for market participants to
execute orders of large size.28 They
argue that decreased liquidity in Pilot
classes is causing market participants to
seek liquidity from off-exchange venues,
such as the OTC market or off-exchange
dark pools, which results in less
transparent markets.29 Several
commenters also expressed concerns
with the potential impact of increased
quotation traffic on costs to exchanges
and other market participants to process
and store the additional quotations, and
on the ability of market systems to
effectively handle increased quotation
traffic if NYSE Arca’s proposal were
approved.30
These commenters generally believe
that to mitigate any concerns about the
impact of decreased displayed size and
increased quotation traffic from the
Pilot, classes included in the Pilot
Program should have a $1, rather than
$3, breakpoint.31 These commenters
generally believe that a $1 breakpoint
would appropriately balance the
benefits of narrower spreads for an
expanded number of options against the
strain on systems capacity and
increased costs due to increased
quotation traffic and reduced liquidity
at the national best bid and offer, by
concentrating the benefits where
27 See, e.g., CBOE Letter, supra note 5, at 2;
LiquidPoint Letter, supra note 5, at 4; SIFMA Letter,
supra note 5, at 4–5; and UBS Letter, supra note 5,
at 1.
28 See, e.g., SIFMA Letter, supra note 5, at 4; and
UBS Letter, supra note 5, at 1.
29 See ISE Letter, supra note 5, at 3–4; and SIFMA
Letter, supra note 5, at 4.
30 See, e.g., CBOE Letter, supra note 5, at 2; ISE
Letter, supra note 5, at 5; and SIFMA Letter, supra
note 5, at 4.
31 See, e.g., CBOE Letter, supra note 5, at 4;
LiquidPoint Letter, supra note 5, at 3–4; SIFMA
Letter, supra note 5, at 2–3; and UBS Letter, supra
note 5, at 1.
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srobinson on DSKHWCL6B1PROD with NOTICES
customers trade the most and provide
the most liquidity.32
The Commission continues to believe
that the impact of the Pilot on displayed
size, as well as on non-displayed depthof-book, and the impact of decreased
size on market and execution quality, is
an area that requires careful analysis as
the Pilot continues. The Commission
further recognizes that the options
exchanges have consistently shown in
their reports that there has been a
reduction in the displayed size available
in the Pilot classes. However, the
Commission does not believe that the
decrease in displayed size that
accompanies smaller increments and
narrower spreads means that NYSE
Arca’s proposal to expand the Pilot is
not consistent with the Act. A decrease
in displayed size available at the best
bid or offer may have a greater effect on
the ability of market participants to
execute large-sized orders as compared
to smaller-sized orders, given the
smaller size that would be available at
that best price. The Commission does
not believe that the data to date shows
that retail customers have been
adversely affected by the reduction in
size at the inside price.33
Moreover, the Commission anticipates
that market participants with large sized
orders will adjust their trading strategies
to accommodate smaller displayed size
in additional classes quoting in
pennies.34 Importantly, the Commission
notes that the new Options Order
Protection and Locked/Crossed Market
Plan (‘‘Linkage Plan’’) provides for the
use of intermarket sweep orders
(‘‘ISOs’’), which will allow market
participants to more efficiently access
liquidity at multiple price levels across
32 See, e.g., LiquidPoint Letter, supra note 5, at 4;
SIFMA Letter, supra note 5, at 1–2; and UBS Letter,
supra note 5, at 1–2.
33 See, e.g., BOX Penny Pilot Report 6, supra note
24, at 6 (stating that the quantity at the top of the
BOX book was sufficient to satisfy the average trade
size in the Pilot classes); CBOE July Report, supra
note 24, at 2, 4 and 6 (showing the change in quoted
size in Pilot classes); ISE Report, supra note 24, at
5 (showing the change in volume weighted size at
the ISE’s best bid or best offer in Pilot classes);
Nasdaq OMX Phlx, Options Penny Pilot Expansion
Report 4, dated February 27, 2009, at 3 and 6
(showing the change in quoted size at the NBBO in
Pilot Classes); NYSE Arca Report, supra note 24, at
3–5 (showing that 100 percent of customer and firm
orders up to 100 contracts in the Pilot classes were
filled during the periods February 1, 2008 through
July 31, 2008 and February 1, 2009 through April
30, 2009); and NYSE Arca Report, supra note 24,
at 3 (showing that 100% of customer orders up to
50 contracts in the Pilot classes were filled during
the period August 1, 2008 to January 31, 2009, and
94% of all customer orders in the Pilot classes were
filled during the same period).
34 See NYSE Arca Response, supra note 6, at 5
(stating that the current mechanisms for sourcing
block-sized liquidity will continue to grow and
evolve to meet the demands of users).
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exchanges.35 Several commenters
acknowledged the anticipated benefits
of the new Linkage Plan, especially for
options quoted in pennies, and
requested that any expansion of the
Pilot Program be contingent on the
implementation of the new options
linkage plan.36 In response to these
comments, NYSE Arca amended its
proposed rule change to modify the
phased roll-out of the additional 300
classes to begin following
implementation of the Linkage Plan on
August 31, 2009.37 The Commission
agrees with commenters that the ability
of market participants to use ISOs to
access liquidity across exchanges and at
different price levels will help to
address concerns that a decrease in
displayed size at the BBO negatively
impacts the ability to execute large sized
orders.38
In addition, one commenter notes a
decrease in average daily volume in the
Pilot classes as a negative effect of the
Pilot.39 The Commission believes that
the impact of smaller increments on
trading volume is one of the more
difficult aspects of the Pilot to assess.
The bid-ask spread is only one factor
that influences volume. Other factors
that impact options 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
events. The Commission does not
35 See Securities Exchange Act Release No. 60405
(July 30, 2009), 74 FR 39362 (August 6, 2009) (File
No. 4–546) (order approving Linkage Plan). The
Linkage Plan was implemented on August 31, 2009.
The Commission encourages the options
exchanges to consider measures that would
facilitate access to depth of book quotations. The
Commission notes that currently several exchanges
make available quotations and orders on their
respective books below their best bid and offer. The
Commission anticipates that to the extent display
of this information proves to be valuable to the
options market as a whole, other exchanges may
choose to make this information available as well.
36 See CBOE Letter, supra note 5, at 3; and UBS
Letter, supra note 5, at 2.
37 See supra note 7. In Amendment No. 3, the
Exchange proposed to begin the phased
implementation on October 26, 2009. See supra
note 8.
38 Several commenters noted that the introduction
of ISOs and improvements in order routing
technology anticipated as part of the new linkage
plan would provide an improved trading
environment for the expansion of penny quoting
and permit market participants to simultaneously
access better priced quotations across all options
exchanges. See GETCO Letter, supra note 5, at 4
and UBS Letter, supra note 5, at 2. See also NYSE
Arca Response, supra note 6, at 5 (stating that the
soon-to-be implemented ISO will allow block-sized
liquidity to be sourced at prices inferior to the
NBBO and let it trade, offering institutional
investors the certainty of both trade and price that
they need and desire).
39 See SIFMA Letter, supra note 5, at 4 (citing to
CBOE March Report, supra note 24).
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believe that exchange reports show a
clear change in trading volume, and the
Commission’s Office of Economic
Analysis looked at the change in average
contract volume for classes included in
the Pilot and a sample of classes not
included in the Pilot, over two time
periods, finding that volume increased
for the Pilot classes as compared to the
control group of non-Pilot classes (the
difference for one time period was
statistically significant).40 Thus, based
on the data viewed to date, the
Commission cannot conclude that the
Pilot has had an adverse impact on
volume in the Pilot securities.
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 (‘‘OPRA’’), and the
Commission did not receive any reports
of disruptions in the dissemination of
pricing information as a result of
quotation capacity restraints.41 While
the Commission anticipates that NYSE
Arca’s proposed expansion of the Pilot
Program will contribute to further
increases in quotation message traffic,
the Commission believes that NYSE
Arca’s proposal is sufficiently limited
such that it is unlikely to increase
quotation message traffic beyond the
capacity of market participants’ systems
and disrupt the timely receipt of quote
information. NYSE Arca has proposed
to roll out the additional 300 classes
over time, in groups of 75 classes each
quarter beginning on October 26, 2009.
The Commission further notes that a
June 2, 2009 sustained message traffic
peak of 852,350 messages per second
reported by OPRA42 is still well below
40 Memorandum from J. Daniel Aromi, OEA, to
Heather Seidel, Assistant Director, Division of
Trading and Markets, Commission, dated August
14, 2009 (‘‘OEA Memo 2’’) (looking at the change
in volume from August to September 2007 to April
to May 2008, and from August to September 2007
to May to June 2009).
41 One commenter states that although the
exchange reports have shown that quotation traffic
has increased significantly, the quotation volume
has not resulted in significant problems for
exchanges or market participants. See UBS Letter,
supra note 5, at 1. Another commenter noted that
the risks associated with OPRA’s capacity being
overwhelmed appear to be mitigated. See GETCO
Letter, supra note 5, at 3. Another commenter notes
that market participants will continue to make the
investment in technology that results in more
efficient markets and states that many of the
exchanges have doubled the number of physical
network connections between themselves and
OPRA as a result. See BATS Letter, supra note 5,
at 2.
42 See NYSE Arca Report, supra note 24, at 11
(noting a sustained five second peak of 852,350
messages per second as reported by OPRA on June
2, 2009, and noting OPRA’s current output capacity
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OPRA’s current messages per second
capacity limit of 2,050,000.43 Moreover,
NYSE Arca has adopted and will
continue to utilize quote mitigation
strategies that should continue to
mitigate the expected increase in
quotation traffic.44
As noted above, NYSE Arca has
proposed to expand the current Pilot
Program to the 300 next most actively
traded, multiply listed options classes,
and to continue the existing $3
breakpoint for classes included in the
Pilot (with the exception of options on
QQQQ, IWM, and SPY).45 The
Commission believes that NYSE Arca’s
proposal is consistent with the Act. The
Commission believes that the proposed
rule change is designed to continue the
narrowing of spreads in options
included in the Pilot. NYSE Arca’s
proposal will provide the opportunity
for reduced spreads where a significant
amount of trading occurs, thus
maximizing the economic benefits of the
Pilot while minimizing the impact of
increased quotation traffic.46 Further,
of 2,050,000 messages per second, which is
scheduled to increase to over 3,000,000 messages
per second in January 2010).
43 See NYSE Arca Response, supra note 6, at 6
(stating that ‘‘there has been no outcry from vendors
or firms in response to quote traffic projections
through mid-year 2011, as published by [OPRA]’’).
44 See Securities Exchange Act Release No. 56157
(July 27, 2007), 72 FR 42459 (August 2, 2007) (SR–
NYSEArca-2007–71) (notice and immediate
effectiveness of a proposed rule change to
implement the Exchange’s quote mitigation
strategy); and NYSE Arca Response, supra note 6,
at 6 (representing that the Exchange will retain and
continue to employ its quotation mitigation
strategy).
45 One commenter argues that NYSE Arca’s
proposal is confusing to investors because it will
provide for 355 classes to be quoted in pennies and
nickels, three classes to be quoted in all pennies,
and the rest of the classes to be quoted in nickels
and dimes (see CBOE Letter, supra note 5, at 2),
while another commenter states its belief that a
single break point for all classes will provide
consistency for the industry and investors (see
LiquidPoint Letter, supra note 5, at 3). The
Commission does not believe that NYSE Arca’s
proposal will result in increased confusion. The
Commission notes that the proposal will continue
the same breakpoint as the existing Pilot, and thus
changes to the structure of the Pilot will be
minimal. See Ameritrade Letter, supra note 5, at 3
(noting that the current Pilot program carries a
$3.00 breakpoint and thus changes to the pilot
securities would be minimal, thus reducing any
investor confusion related to the expansion of the
Pilot).
46 One commenter that supports retaining the $3
breakpoint noted that the majority of its customers’
trades occur at or below the $3 breakpoint. This
commenter believes that a $3 breakpoint is in the
best interest of retail investors. See Ameritrade
Letter, supra note 5, at 2–3 (stating that in April
2009, 71% of its customers’ trades and 89% of its
customers’ volume was in series priced up to $3,
and that in May 2009, 74% of its customers’ trades
and 88% of its customers’ volume was in series
priced up to $3). Another commenter that supports
quoting in one-cent increments in all series in all
options classes included in the Pilot believes that
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the Commission believes that the
proposal will provide an opportunity for
increased transparency in the options
markets, by allowing market
participants to display their trading
interest in one-cent increments in the
consolidated quotation stream.
One commenter stated its belief that
NYSE Arca’s proposal, which would be
expanded to the next most-active,
multiply-traded 300 classes, rather than
all classes, does not provide a stringent
process to renew names that will be
eliminated from the Pilot due to
delisting, merger or other
circumstances, and that the proposal in
this regard would represent an ongoing
administration that would be costly to
the commenter.47 The Commission
notes that NYSE Arca’s proposal
explicitly includes a process for
replacing, on a semi-annual basis, any
Pilot class that has been delisted with
the next most actively traded, multiply
listed class that is not already included
in the Pilot, based on trading activity in
the previous six months.48 While there
may be other approaches to address
Pilot classes that have been delisted,
none have been submitted to the
Commission for its consideration. The
Commission believes that NYSE Arca’s
proposal to replace delisted classes from
the Pilot is reasonable and consistent
with the Act.49
doing so would make the benefits of penny pricing
available to more options. See GETCO Letter, supra
note 5, at 3. Further, the Commission’s Office of
Economic Analysis estimates that, under NYSE
Arca’s proposal, approximately 70% of options
contract volume would be quoted in one-cent
increments. See OEA Memo 2, supra note 39.
One commenter noted that if the Pilot were rolled
back, as is proposed by several of the commenters,
this would eliminate much of the benefit
experienced by the options markets and customers
due to the Pilot. See GETCO Letter, supra note 5,
at 3. Another commenter similarly stated that a
rollback of the Pilot would be ‘‘unfortunate’’ given
the benefits from the Pilot that participants have
realized and recommended that the Pilot move
forward. See BATS Letter, supra note 5, at 2.
47 See Ameritrade Letter, supra note 5, at 3 (also
noting its belief that the proposal would lead to
investor confusion as it would not be representative
of all classes).
48 See Notice, supra note 4, at 4.
49 One commenter believes the incidence of
locked markets in Pilot classes has increased since
the introduction of quoting in pennies. In addition,
this commenter believes that an expansion of the
Pilot could exacerbate the friction that it believes
exists between competing payment models among
the exchanges. The commenter believes that this
issue could be mitigated if the Commission adopts
the Linkage Plan. See Ameritrade Letter, supra note
5, at 2. The Commission notes that it approved the
Linkage Plan on July 30, 2009. See Securities
Exchange Act Release No. 60405, supra note 34.
The commenter also urges the Commission to
consider expanding the provisions of Rule 610 of
Regulation NMS to options trading. See Ameritrade
Letter, supra note 5, at 2. The Commission staff is
currently considering the issue of access and access
fees in the context of its ongoing consideration of
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49423
The Commission has published for
comment proposed rule changes from
CBOE and ISE that propose alternative
approaches to expanding the Pilot.50 In
recognition of these other proposals,
several commenters express the view
that uniformity is necessary for an
expansion of the Pilot Program.51 These
commenters argue that approval of
multiple plans permitting exchanges to
adopt different breakpoints would
create confusion,52 and that a uniform
approach is necessary to assure that
there is a fair and orderly national
market system.53 Several commenters
state that adopting different penny pilot
rules would cause technological and
implementation problems for all
participants in the National Market
System, and that varied breakpoints will
impact order entry, routing, quoting and
compliance systems for each venue.54
While the Commission agrees that a
uniform approach may be preferable,
the Commission must analyze each
exchange’s proposed rule change on its
own merits for consistency with the Act.
As discussed above, the Commission
has analyzed NYSE Arca’s proposal and
finds that it is consistent with the Act.
In this case, the Commission does not
believe the choice of other exchanges to
propose different quoting increments, or
to not expand the current Pilot, makes
NYSE Arca’s proposed rule change
inconsistent with the Act. The
Commission notes, however, that if an
options exchange chooses not to permit
quoting in one-cent increments in a
particular option at the same time as
another exchange, it would nevertheless
remain obligated to comply with the
provisions of the Linkage Plan, as well
as its own rules, to avoid trading at
prices worse than those offered by other
exchanges, including prices in pennies.
a petition for rulemaking requesting that the
Commission impose a cap of $.20 on certain
transaction fees. See Letter from John C. Nagel,
Managing Director & Deputy General Counsel,
Citadel, to Nancy M. Morris, Secretary,
Commission, dated July 15, 2008.
50 See Securities Exchange Act Release Nos.
60018 (June 1, 2009), 74 FR 27211 (June 8, 2009)
and 60146 (June 19, 2009), 74 FR 30346 (June 25,
2009).
51 See, e.g., ISE Letter, supra note 5, at 1 and 3;
Nasdaq Letter, supra note 5; SIFMA Letter, supra
note 5, at 5–6; and UBS Letter, supra note 5, at 2.
52 See, e.g., CBOE Letter, supra note 5, at 4;
LiquidPoint Letter, supra note 5, at 2; and UBS
Letter, supra note 5, at 2.
53 See ISE Letter, supra note 5, at 1; and
LiquidPoint Letter, supra note 5, at 2.
54 See LiquidPoint, supra note 5, at 2–3; and
Nasdaq Letter, supra note 5, at 2. Another
commenter further states that multiple plans would
subject members and ultimately investors to the
elevated costs of excessive systems modifications
and personnel training activities. See SIFMA Letter,
supra note 5, at 6.
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The continued operation and phased
expansion of the Pilot Program will
provide further valuable information to
the exchanges, the Commission, and
others about the impact of penny
quoting in the options market. In
particular, extending and expanding the
Pilot Program as proposed by NYSE
Arca will allow further analysis of the
impact of penny quoting in the Pilot
classes over a longer period of time on,
among other things: (1) Spreads; (2)
peak quotation rates; (3) quotation
message traffic; (4) displayed size; (5)
‘‘depth of book’’ liquidity; and (6)
market structure. NYSE Arca has
committed to provide the Commission
with periodic reports, which will
analyze the impact of the expanded
Pilot Program. The Commission expects
the Exchange to include statistical
information relating to these factors in
its periodic reports.
IV. Partial Accelerated Approval
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Act,55 for partially approving the
proposed rule change,56 as modified by
Amendment Nos. 1 and 3 thereto, prior
to the 30th day after the date of
publication in the Federal Register. In
its proposed rule change, the Exchange
proposed that any option class included
in the Pilot Program that has been
delisted be replaced on a semi-annual
basis by the next most actively traded,
multiply listed options class that is not
yet included in the Pilot, based on
trading activity in the previous six
months. In Amendment No. 1, the
Exchange provided clarification that the
Exchange will employ the same
parameters to prospective replacement
issues as approved and applicable under
the Pilot Program, including the
exclusion of high-priced underlying
securities and indexes. In Amendment
No. 3, the Exchange clarified that the
threshold for ‘‘high priced’’ designation
is $200 per share or a calculated index
value of 200, at the time of selecting
new issues to be included in the Pilot.
The Exchange also represented that the
threshold and the Exchange’s approach
for excluding high priced underlying
securities is consistent with the
Exchange’s prior process in determining
issues to be included in the Pilot. The
Exchange stated that the determination
of whether a security is trading above
$200 or above a calculated index value
of 200 shall be based on the price at the
close of trading on the Expiration Friday
prior to being added to the Pilot. These
changes clarify the operation of the
55 15
U.S.C. 78s(b)(2).
supra 8 and supra note 9.
56 See
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proposal and do not differ materially
from the proposal as noticed in the
Federal Register. Also, in response to
commenters, in Amendment No. 1 the
Exchange proposes to delay the start of
the phased implementation of the
expansion of the Pilot from July 28,
2009 to September 28, 2009. In
Amendment No. 3 the Exchange
proposed to begin the phased
implementation on October 26, 2009.
The proposed change to the
implementation date is responsive to
concerns expressed by commenters.
Accordingly, the Commission finds that
good cause exists to approve the
proposed rule change, as modified by
Amendment Nos. 1 and 3, on an
accelerated basis.57
V. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment Nos.
1 and 3, including whether Amendment
Nos. 1 and 3 are consistent with the Act.
The Commission also is soliciting
additional comment on NYSE Arca’s
proposal to quote two classes entirely in
pennies, SPY and IWM, in addition to
QQQQs. In response to the initial notice
of this proposal,58 the Commission
received several comment letters with
respect to the portion of the proposal
that would allow quoting of all series of
options on IWM and SPY in one-cent
increments. One commenter supported
NYSE Arca’s proposal to eliminate a
breakpoint for options on these two
exchange-traded funds, as a way to
expand the benefits of penny quoting to
more options,59 while two other
commenters did not support this aspect
of NYSE Arca’s proposal and question
NYSE Arca’s basis for the proposal.60 In
particular, one commenter did not find
persuasive NYSE Arca’s rationale that
because IWM and SPY have more series
trading at premiums between $3 and
$10, the $3 breakpoint should be
eliminated, noting that only 11% of
IWM’s national average daily volume
and 18% of SPY’s national average daily
volume is in series with premiums
greater than $3.61
57 In its proposed rule change, the Exchange
proposed to quote SPY and IWM entirely in
pennies. In Amendment No. 1, the Exchange stated
that this proposed change to the minimum quoting
increment in these classes would take place on
September 28, 2009. The Commission notes,
however, that it is not approving this aspect of the
proposal in this order.
58 See Notice, supra note 4.
59 See GETCO Letter, supra note 5, at 2–3.
60 See CBOE Letter, supra note 5, at 2 to 3, and
SIFMA Letter, supra note 5, at 5.
61 See CBOE Letter, supra note 5, at 3. This
commenter further noted that the average spread
width in series with a premium $3 or greater is
$0.27 for SPY and $0.25 for IWM. Id.
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The Commission’s Office of Economic
Analysis estimated that for a four month
period earlier this year, approximately
40.9 million contracts for SPY and
approximately 4.5 million contracts for
IWM traded at premia of $3 or greater,
as compared to approximately 2.7
million contracts for QQQQ that traded
at premia of $3 or greater.62 The
Commission specifically requests
comment on these findings.
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–NYSEArca–2009–44 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–NYSEArca–2009–44. 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 such filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
62 See OEA Memo 2, supra note 40 (measuring
from February 2, 2009 to May 27, 2009). These
numbers represent approximately 29% of contract
volume for SPY and 18% of contract volume for
IWM.
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submissions should refer to File No.
SR–NYSEArca-2009–44 and should be
submitted on or before October 19,
2009.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,63 that the
proposed rule change (SR–NYSEArca–
2009–44) as modified by Amendment
Nos. 1 and 3 thereto, be, and hereby is,
partially approved on an accelerated
basis, as discussed above.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.64
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–23374 Filed 9–25–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60701; File No. SR–FINRA–
2009–014]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change To Adopt
FINRA Rule 2150 (Improper Use of
Customers’ Securities or Funds;
Prohibition Against Guarantees and
Sharing in Accounts) in the
Consolidated FINRA Rulebook
September 21, 2009.
I. Introduction
On March 24, 2009, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’ 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 as
part of the process of developing a new
consolidated rulebook (the
‘‘Consolidated FINRA Rulebook’’).3
FINRA proposed to adopt NASD Rules
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63 15
U.S.C. 78s(b)(2).
64 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The current FINRA rulebook consists of (1)
FINRA Rules; (2) NASD Rules; and (3) rules
incorporated from NYSE (‘‘Incorporated NYSE
Rules’’) (together, the NASD Rules and Incorporated
NYSE Rules are referred to as the ‘‘Transitional
Rulebook’’). While the NASD Rules generally apply
to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that
are also members of the NYSE (‘‘Dual Members’’).
The FINRA Rules apply to all FINRA members,
unless such rules have a more limited application
by their terms. For more information about the
rulebook consolidation process, see FINRA
Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
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16:33 Sep 25, 2009
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2330(a), 2330(e) and 2330(f) as FINRA
Rules 2150(a), 2150(b) and 2150(c),
respectively, in the Consolidated FINRA
Rulebook, with certain changes as
described below.4 Proposed FINRA Rule
2150 also would take into account
certain provisions of NYSE Rule 352. In
addition, proposed FINRA Rule 2150
includes a ‘‘Supplementary Material’’
section that contains certain
clarifications and codifications of
existing staff guidance. FINRA further
proposed to delete NYSE Rule 352 (with
the exception of paragraphs (e), (f) and
(g)) 5 from the Transitional Rulebook.
The proposed rule change was
published for public comment in the
Federal Register on June 24, 2009.6 The
Commission received no comment
letters regarding proposed rule change.
This order approves the proposed rule
change.
II. Description of the Proposal
FINRA proposed to adopt certain
paragraphs, as specified below, of NASD
Rule 2330 (Customers’ Securities or
Funds) as FINRA Rule 2150 (Improper
Use of Customers’ Securities or Funds;
Prohibition Against Guarantees and
Sharing in Accounts) in the
Consolidated FINRA Rulebook taking
into account certain provisions of
Incorporated NYSE Rule 352
(Guarantees, Sharing in Accounts, and
Loan Arrangements) 7 and to delete
NYSE Rule 352, with the exception of
NYSE Rules 352(e) (Limitations on
Borrowing From or Lending to
Customers), 352(f) (Loan Procedures)
and 352(g).
The proposed rule change would
renumber NASD Rule 2330(a) (Improper
Use) as FINRA Rule 2150(a) (Improper
Use), NASD Rule 2330(e) (Prohibition
Against Guarantees) as FINRA Rule
2150(b) (Prohibition Against
Guarantees) and NASD Rule 2330(f)
(Sharing in Accounts; Extent
Permissible) as FINRA Rule 2150(c)
4 Other
provisions that set forth certain financial
and operational requirements, including, NASD
Rules 2330(b) (General Provisions), 2330(c)
(Authorization to Lend), 2330(d) (Segregation and
Identification of Securities) and Interpretive
Material 2330 (Segregation of Customers’ Securities)
would remain in the Transitional Rulebook to be
addressed as part of a later phase of the
consolidation process.
5 NYSE Rules 352(e), 352(f) and 352(g) govern
borrowing from or lending to customers. These
provisions generally are equivalent to the
provisions of NASD Rule 2370 (Borrowing From or
Lending to Customers). NASD Rule 2370 and the
corresponding NYSE provisions would remain in
the Transitional Rulebook to be addressed as part
of a later phase of the rulebook consolidation
process.
6 Securities Exchange Act Release No. 60135
(June 18, 2009), 74 FR 30198 (‘‘Notice’’).
7 For convenience, Incorporated NYSE Rule 352
is hereinafter referred to as ‘‘NYSE Rule 352.’’
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49425
(Sharing in Accounts; Extent
Permissible) in the consolidated FINRA
rulebook. The proposed rule change also
would add a ‘‘Supplementary Material’’
section to proposed FINRA Rule 2150
that contains certain clarifications and
codifications of existing staff guidance.
A. Improper Use of Customers’
Securities or Funds (Proposed FINRA
Rule 2150(a))
NASD Rule 2330(a) prohibits
members and associated persons from
making improper use of a customer’s
securities or funds. The improper use of
customer securities or funds threatens
the fundamental relationship between a
broker and a customer and undermines
the integrity of the securities industry.
FINRA proposed to adopt NASD Rule
2330(a) as FINRA Rule 2150(a) in the
Consolidated FINRA Rulebook without
changes.
B. Prohibition Against Guarantees
(Proposed FINRA Rule 2150(b))
NASD Rule 2330(e) prohibits
members and their associated persons
from guaranteeing a customer against
loss in connection with any securities
transaction or in any securities account
of the customer. The reason for the
prohibition is that such guarantees
create the expectation that the customer
is insulated from market risk intrinsic in
securities ownership and may induce
the customer to engage in a securities
transaction that is not otherwise
appropriate for the customer.
FINRA proposed to adopt NASD Rule
2330(e) as FINRA Rule 2150(b) in the
Consolidated FINRA Rulebook without
changes and delete NYSE Rule 352(a)
(Prohibitions Against Guarantees)
because its provisions are substantially
similar to proposed FINRA Rule
2150(b).
C. Sharing in Accounts (Proposed
FINRA Rule 2150(c))
NASD Rule 2330(f) prohibits members
and associated persons from sharing in
the profits or losses in a customer’s
account except under certain limited
conditions specified in the Rule.
FINRA proposed to adopt NASD Rule
2330(f) as FINRA Rule 2150(c) in the
Consolidated FINRA Rulebook, with
only minor changes.
FINRA proposed to delete NYSE
Rules 352(b), (c) and (d) as they are
substantially similar to proposed FINRA
Rule 2150(c) or are otherwise
incorporated as part of the
supplementary material to proposed
FINRA Rule 2150.
E:\FR\FM\28SEN1.SGM
28SEN1
]]>Agencies
[Federal Register Volume 74, Number 186 (Monday, September 28, 2009)]
[Notices]
[Pages 49419-49425]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-23374]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60711; File No. SR-NYSEArca-2009-44]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment Nos. 1 and 3 and Order Granting Partial Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and
3 Thereto, Amending NYSE Arca Rule 6.72 and Expanding the Penny Pilot
Program
September 23, 2009.
I. Introduction
On May 15, 2009, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend its options trading rule to extend through December 31, 2010 and
expand a program to quote certain options in smaller increments
(``Pilot Program'' or ``Pilot'').\3\ The proposed rule change was
published for comment in the Federal Register on May 27, 2009.\4\ The
Commission received nine comment letters in response to the proposed
rule change.\5\ On August 18, 2009, the Exchange responded to the
comment letters \6\ and filed Amendment
[[Page 49420]]
No. 1 to the proposed rule change.\7\ On September 21, 2009, the
Exchange filed Amendment No. 2 to the proposed rule change. On
September 22, 2009, the Exchange withdrew Amendment No. 2 and filed
Amendment No. 3. Among other things, in Amendment No. 3 the Exchange
consented to a bifurcation of the filing such that the portion of the
proposed rule change proposing to quote IWM and SPY entirely in pennies
would be subject to further notice and comment prior to Commission
action.\8\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as modified by Amendment Nos. 1 and 3, and
simultaneously is partially approving the proposed rule change, as
modified by Amendment Nos. 1 and 3, on an accelerated basis.\9\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The current pilot is scheduled to expire on October 31,
2009. See Securities Exchange Act Release No. 60224 (July 1, 2009),
74 FR 32991 (July 9, 2009).
\4\ See Securities Exchange Act Release No. 59944 (May 20,
2009), 74 FR 25294 (May 27, 2009) (``Notice'').
\5\ See letter from Stephen Schuler and Daniel Tierney, Managing
Members, Global Electronic Trading Company, dated June 10, 2009
(``GETCO Letter''); letter from Edward J. Joyce, President and COO,
Chicago Board Options Exchange, dated June 12, 2009 (``CBOE
Letter''); letter from Thomas Wittman, Vice President, The NASDAQ
OMX Group, Inc., dated June 12, 2009 (``Nasdaq Letter''); letter
from Christopher Nagy, Managing Director Order Routing Strategy, TD
Ameritrade, Inc., dated June 17, 2009 (``Ameritrade Letter'');
letter from Thomas F. Price, Managing Director, Securities Industry
and Financial Markets Association, dated June 17, 2009 (``SIFMA
Letter''); letter from Anthony J. Saliba, CEO, LiquidPoint LLC,
dated June 17, 2009 (LiquidPoint Letter''); letter from Michael J.
Simon, Secretary, International Securities Exchange, LLC, dated June
23, 2009 (``ISE Letter''); letter from John Ingrill, Gerard Satur,
Karen Wendell, Managing Directors, UBS Securities LLC, dated June
30, 2009 (``UBS Letter''); and letter from Jerome Johnson, Vice
President, Market Development, BATS Exchange, Inc., dated August 28,
2009 (``BATS Letter'') (collectively, the ``Comment Letters'').
\6\ See letter from Janet M. Kissane, Senior Vice President--
Legal & Corporate Secretary, NYSE Arca, to Elizabeth M. Murphy,
Secretary, Commission, dated August 18, 2009 (``NYSE Arca
Response'').
\7\ In Amendment No. 1, the Exchange: (i) Clarified how
replacement issues would be selected in the event that a Pilot class
were delisted; (ii) proposed to begin the phased implementation of
the expansion of the Pilot on September 28, 2009 and continue over
four successive quarters; and (iii) clarified that under its
proposal NYSE Arca would begin quoting SPY and IWM entirely in
pennies on September 28, 2009. See infra note 17 with respect to
that portion of the proposal to change the quoting increments for
options on SPY and IWM.
\8\ Also, in Amendment No. 3, the Exchange clarified the
threshold levels for determining when an options class would not be
eligible to participate in the Pilot due to a high premium. The
Exchange also proposed to begin the phased implementation of the
Pilot on October 26, 2009 and continue over four successive
quarters. The Exchange has consented to an extension of time for the
Commission to act until October 31, 2009.
\9\ See infra note 17 and accompanying text.
---------------------------------------------------------------------------
II. Description of the Proposal
Currently, all seven options exchanges participate in the Pilot
Program, which is scheduled to expire on October 31, 2009.\10\ The
Exchange proposes to extend the time period of the Pilot Program
through December 31, 2010 and expand the Pilot Program.
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release Nos. 55156 (January 23,
2007), 72 FR 4759 (February 21, 2007); 56568 (September 27, 2007),
72 FR 56422 (October 3, 2007); 59628 (March 26, 2009), 74 FR 15025
(April 2, 2009); and 60224 (July 1, 2009) 74 FR 32991 (July 9,
2009).
---------------------------------------------------------------------------
NYSE Arca proposes to add the next 300 most actively traded,
multiply listed options classes that are not currently included in the
Pilot Program, excluding options with high premiums.\11\ The Exchange
proposes to phase-in these 300 classes in groups of 75 additional
classes each quarter over four successive quarters on October 26, 2009,
January 25, 2009, April 26, 2010 and July 26, 2010.\12\ The Exchange
will identify the classes to be added each quarter based on national
average daily volume in the prior six calendar months immediately
preceding their addition to the Pilot Program, using data compiled and
disseminated by the Options Clearing Corporation. The Exchange will
announce the classes to be added to the Pilot Program each quarter to
the Exchange's membership in a Regulatory Bulletin and by publishing
the information on its Web site, in addition to submitting a filing
with the Commission.\13\
---------------------------------------------------------------------------
\11\ One commenter raised issues with the aspect of NYSE Arca's
proposal that would exclude options with high premiums, claiming
that the Exchange's proposal did not give guidance, definition or
indication of what constitutes a ``high premium.'' See CBOE Letter,
supra note 5, at 2. In response to this comment, NYSE Arca clarified
in Amendment No. 3 that a class would be excluded from the Pilot for
having a high premium if at the time of selection of new classes the
underlying equity security was priced at $200 per share or above or
the underlying index level was at 200 or above. The determination of
whether a security is trading above $200 or above a calculated index
value of 200 shall be based on the price at the close of trading on
the Expiration Friday prior to being added to the Pilot. See supra
note 8, and NYSE Arca Response, supra note 6, at 3-4.
\12\ See supra note 8.
\13\ The Exchange has committed to file a proposed rule change
under Section 19(b)(3)(A) of the Act to identify the option classes
to be included each quarter.
---------------------------------------------------------------------------
The minimum variation for all classes to be included in the Pilot,
except for QQQQ, will continue to be $0.01 for all quotations in option
series that are quoted at less than $3.00 per contract, and $0.05 for
all quotations in option series that are quoted at $3.00 or greater.
Options on QQQQ will continue to be quoted in $0.01 increments for all
series. Further, the Exchange proposes to designate options on SPY
(SPDR S&P 500 ETF) and IWM (iShares Russell 2000 Index Fund) as
eligible to quote and trade all options series in one cent increments,
regardless of premium value.\14\
---------------------------------------------------------------------------
\14\ See supra note 8 and infra note 17.
---------------------------------------------------------------------------
The Exchange further proposes that any option class included in the
Pilot Program that has been delisted may be replaced on a semi-annual
basis by the next most actively traded, multiply listed options class
that is not yet included in the Pilot, based on trading activity in the
previous six months.\15\ The replacements issue(s) would be added to
the Pilot Program on the second trading day following January 1, 2010
and July 1, 2010.\16\
---------------------------------------------------------------------------
\15\ In Amendment No. 1, the Exchange clarified that the
replacement classes also would exclude options with high premiums.
See supra note 7.
\16\ The replacement issues will be announced to the Exchange's
membership in a Regulatory Bulletin and published by the Exchange on
its Web site.
---------------------------------------------------------------------------
The Exchange will submit semi-annual reports to the Commission that
will include sample data and analysis of information collected from
April 1 through September 30, and from October 1 through March 31, for
each year, for the ten most active and twenty least active options
classes added to the Pilot Program, in addition to continuing to
provide data concerning the existing Pilot Program classes. The
Exchange also will identify, for comparison purposes, a control group
consisting of the ten least active options classes from the existing
Pilot Program classes. The report will include, but not be limited to
the following: (1) Data and analysis on the number of quotations
generated for options included in the report; (2) an assessment of the
quotation spreads for the options included in the report; (3) an
assessment of the impact of the Pilot Program on the capacity of NYSE
Arca's automated systems; (4) data reflecting the size and depth of
markets; and (5) any capacity problems or other problems that arose
related to the operation of the Pilot Program and how the Exchange
addressed them.
III. Discussion and Findings
After careful review of the proposed rule change, Amendment Nos. 1
and 3, the Comment Letters, and the NYSE Arca Response, the Commission
finds that the proposed rule change, as amended, except for the portion
of the proposal to quote IWM and SPY entirely in pennies, is consistent
with the requirements of the Act, and the rules and regulations
thereunder that are applicable to a national securities exchange.\17\
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\18\ which requires, among other things,
that the rules of a national securities 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.\19\
---------------------------------------------------------------------------
\17\ The Commission is not at this time approving the portion of
the proposed rule change that would designate options on IWM and SPY
as eligible to quote all options series in one-cent increments. The
Commission is soliciting further comment on that portion of the
proposed rule change. See infra Section IV.
\18\ 15 U.S.C. 78f(b)(5).
\19\ In approving the 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).
---------------------------------------------------------------------------
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.\20\ In June 2006, to
[[Page 49421]]
facilitate the orderly transition to quoting a limited number of
options in penny increments, the then Chairman of the Commission 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.\21\ The then
existing 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.\22\ The Pilot, which has since been extended and expanded,
currently includes 63 classes and is scheduled to expire on October 31,
2009.\23\ NYSE Arca now proposes to extend and further expand the
Pilot.
---------------------------------------------------------------------------
\20\ PCX News Release, ``Pacific Exchange to Trade Options in
Pennies,'' June 28, 2005.
\21\ Commission Press Release 2006-91, ``SEC Chairman Cox Urges
Options Exchanges to Start Limited Penny Quoting,'' June 7, 2006.
\22\ See Securities Exchange Act Release Nos. 55154 (January 23,
2007), 72 FR 4743 (February 1, 2007) (SR-CBOE-2006-92); 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); 55161 (January 24, 2007), 72 FR 4754 (February 1, 2007)
(SR-ISE-2006-62); 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).
\23\ See supra note 3. Although the proposed rule changes
approved by the Commission to implement and expand the Pilot provide
for 65 classes in the current Pilot Program, the actual number of
those classes still trading is 59.
---------------------------------------------------------------------------
The Commission believes that NYSE Arca's proposal is consistent
with the Act in large measure because allowing market participants to
quote in smaller increments has been shown to reduce spreads, thereby
lowering costs to investors. An analysis of the current Pilot shows
that the reduction in the minimum quoting increment has resulted in
narrowing the average quoted spreads in classes included in the
Pilot.\24\ The reduction in spreads also has led the exchanges to
reduce or eliminate their exchange-sponsored payment-for-order-flow
programs.\25\ The Commission believes that the proposed rule change,
which will expand the Pilot to include 300 of the next most actively
traded, multiply listed classes, is designed to allow the continuing
narrowing of spreads.
---------------------------------------------------------------------------
\24\ See Memorandum to Heather Seidel, from J. Daniel Aromi,
Office of Economic Analysis (``OEA''), ``Volume and Spreads for
Pilot and Non-Pilot Options Classes,'' dated July 24, 2009 (``OEA
Memo''). See also Ameritrade Letter, supra note 5, at 1 (noting the
firm's belief that overall, the Pilot has brought about tighter
trading increments); GETCO Letter, supra note 5, at 1 (noting as a
benefit of the Pilot the substantial decreases in quoted spreads);
UBS Letter, supra note 5, at 1 (noting that spreads have narrowed as
a result of penny quoting); and BATS Letter, supra note 5, at 1-2
(noting a reduction in spreads in Pilot classes).
Average spread width reductions for some options included in
the Pilot were less during the period from approximately August 2008
through January 2009 than in prior periods. See e.g., CBOE Penny
Pilot Report, dated March 9, 2009 (``CBOE March Report'') at 2; CBOE
Penny Pilot Report, dated September 4, 2008 (``CBOE September
Report'') at 1 to 5; and Report by BOX, BOX Penny Pilot Report:
Penny Pilot Report 5 (``BOX Penny Pilot Report 5'') at 7. However,
this time frame covers a period of significant overall market
volatility. The CBOE Volatility Index (``VIX'') was well above
previous levels through most of this period. From late September
2008 through January 2009 (and beyond) the VIX was almost always
above 40, peaking at 80 in October and November 2008. See also
Report by NYSE Arca, The Options Penny Pilot, dated August 18, 2009
(``NYSE Arca Report'') at 7 to 10 and Report by NYSE Arca, Reporting
Period 5 (``NYSE Arca Report 2'') (showing overall greater
reductions in volume-weighted average spreads for the period
February 1, 2009 through April 30, 2009 as compared to the period
August 1, 2008 through January 31, 2009); CBOE March Report at 2 and
CBOE Penny Pilot Report, dated July 31, 2009 (``CBOE July Report'')
at 2 (these reports show that the average spread width decreased
from the period of February 1, 2009 through April 30, 2009, as
compared to the period of August 1, 2008 through January 1, 2009);
and Report by BOX, BOX Penny Pilot Report: Penny Pilot Report 6
(``BOX Penny Pilot Report 6'') at 7 (stating that the average bid/
ask spread narrowed in the period February 1, 2009 through April 30,
2009 as compared to the period from August 1, 2008 though January
31, 2009). Further, one exchange that measured average spreads in
non-Pilot classes during the same time period for which it measured
average spreads for Pilot classes showed that average spreads in
non-Pilot classes also widened. See Report by ISE, Penny Pilot
Analysis 5, dated May 2009 (``ISE Report'') at 4. ISE provides
statistics showing volume-weighted spreads for the classes in each
phase of the Pilot, for the 3 months prior to each group being
included in the Pilot, the first year after inclusion in the Pilot,
and the six months from November 2008 to April 2009, as well as
volume-weighted spread statistics for comparable classes not
included in the Pilot for the same time periods as used for the
classes in phase 3 of the Pilot. The data shows that the spreads for
the non-penny classes also widened in the time period from November
2008 to April 2009. See also CBOE March Report at 2 (stating that
the exchange is aware that average spread width in many non-Pilot
classes widened during the same reporting period due to the unusual
market conditions that existed).
\25\ 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).
---------------------------------------------------------------------------
One commenter stated that ``full access to penny increments
provides investors with more flexibility to compete and determine the
natural spread for each security independently.'' This commenter
further stated that ``penny pricing gives market participants the
flexibility to trade with spreads at six or eleven cents wide, as much
as it facilitates trading in one or two cent spreads.'' \26\ This
commenter explained that even if spreads in a Pilot class increase,
quoting in pennies mitigates the increase. For example, the commenter
noted that CBOE's March Report showed that for the period August 1,
2008 through January 31, 2009, the average spread in OIH options
increased from $0.13 to $0.19. The commenter pointed out that if this
class were not quoting in pennies, the $0.06 increase in the spread
could have been a $0.10 increase.
---------------------------------------------------------------------------
\26\ See BATS Letter, supra note 5, at 1-2.
---------------------------------------------------------------------------
Several commenters expressed concern about the impact of NYSE
Arca's proposal on displayed size that will be available at the best
bid and offer in the additional classes to be included in the Pilot,
and the impact that a decrease in displayed size would have on the
market quality.\27\ In particular, several commenters expressed concern
that decreased liquidity in Pilot classes has made, and will continue
to make, it harder for market participants to execute orders of large
size.\28\ They argue that decreased liquidity in Pilot classes is
causing market participants to seek liquidity from off-exchange venues,
such as the OTC market or off-exchange dark pools, which results in
less transparent markets.\29\ Several commenters also expressed
concerns with the potential impact of increased quotation traffic on
costs to exchanges and other market participants to process and store
the additional quotations, and on the ability of market systems to
effectively handle increased quotation traffic if NYSE Arca's proposal
were approved.\30\
---------------------------------------------------------------------------
\27\ See, e.g., CBOE Letter, supra note 5, at 2; LiquidPoint
Letter, supra note 5, at 4; SIFMA Letter, supra note 5, at 4-5; and
UBS Letter, supra note 5, at 1.
\28\ See, e.g., SIFMA Letter, supra note 5, at 4; and UBS
Letter, supra note 5, at 1.
\29\ See ISE Letter, supra note 5, at 3-4; and SIFMA Letter,
supra note 5, at 4.
\30\ See, e.g., CBOE Letter, supra note 5, at 2; ISE Letter,
supra note 5, at 5; and SIFMA Letter, supra note 5, at 4.
---------------------------------------------------------------------------
These commenters generally believe that to mitigate any concerns
about the impact of decreased displayed size and increased quotation
traffic from the Pilot, classes included in the Pilot Program should
have a $1, rather than $3, breakpoint.\31\ These commenters generally
believe that a $1 breakpoint would appropriately balance the benefits
of narrower spreads for an expanded number of options against the
strain on systems capacity and increased costs due to increased
quotation traffic and reduced liquidity at the national best bid and
offer, by concentrating the benefits where
[[Page 49422]]
customers trade the most and provide the most liquidity.\32\
---------------------------------------------------------------------------
\31\ See, e.g., CBOE Letter, supra note 5, at 4; LiquidPoint
Letter, supra note 5, at 3-4; SIFMA Letter, supra note 5, at 2-3;
and UBS Letter, supra note 5, at 1.
\32\ See, e.g., LiquidPoint Letter, supra note 5, at 4; SIFMA
Letter, supra note 5, at 1-2; and UBS Letter, supra note 5, at 1-2.
---------------------------------------------------------------------------
The Commission continues to believe that the impact of the Pilot on
displayed size, as well as on non-displayed depth-of-book, and the
impact of decreased size on market and execution quality, is an area
that requires careful analysis as the Pilot continues. The Commission
further recognizes that the options exchanges have consistently shown
in their reports that there has been a reduction in the displayed size
available in the Pilot classes. However, the Commission does not
believe that the decrease in displayed size that accompanies smaller
increments and narrower spreads means that NYSE Arca's proposal to
expand the Pilot is not consistent with the Act. A decrease in
displayed size available at the best bid or offer may have a greater
effect on the ability of market participants to execute large-sized
orders as compared to smaller-sized orders, given the smaller size that
would be available at that best price. The Commission does not believe
that the data to date shows that retail customers have been adversely
affected by the reduction in size at the inside price.\33\
---------------------------------------------------------------------------
\33\ See, e.g., BOX Penny Pilot Report 6, supra note 24, at 6
(stating that the quantity at the top of the BOX book was sufficient
to satisfy the average trade size in the Pilot classes); CBOE July
Report, supra note 24, at 2, 4 and 6 (showing the change in quoted
size in Pilot classes); ISE Report, supra note 24, at 5 (showing the
change in volume weighted size at the ISE's best bid or best offer
in Pilot classes); Nasdaq OMX Phlx, Options Penny Pilot Expansion
Report 4, dated February 27, 2009, at 3 and 6 (showing the change in
quoted size at the NBBO in Pilot Classes); NYSE Arca Report, supra
note 24, at 3-5 (showing that 100 percent of customer and firm
orders up to 100 contracts in the Pilot classes were filled during
the periods February 1, 2008 through July 31, 2008 and February 1,
2009 through April 30, 2009); and NYSE Arca Report, supra note 24,
at 3 (showing that 100% of customer orders up to 50 contracts in the
Pilot classes were filled during the period August 1, 2008 to
January 31, 2009, and 94% of all customer orders in the Pilot
classes were filled during the same period).
---------------------------------------------------------------------------
Moreover, the Commission anticipates that market participants with
large sized orders will adjust their trading strategies to accommodate
smaller displayed size in additional classes quoting in pennies.\34\
Importantly, the Commission notes that the new Options Order Protection
and Locked/Crossed Market Plan (``Linkage Plan'') provides for the use
of intermarket sweep orders (``ISOs''), which will allow market
participants to more efficiently access liquidity at multiple price
levels across exchanges.\35\ Several commenters acknowledged the
anticipated benefits of the new Linkage Plan, especially for options
quoted in pennies, and requested that any expansion of the Pilot
Program be contingent on the implementation of the new options linkage
plan.\36\ In response to these comments, NYSE Arca amended its proposed
rule change to modify the phased roll-out of the additional 300 classes
to begin following implementation of the Linkage Plan on August 31,
2009.\37\ The Commission agrees with commenters that the ability of
market participants to use ISOs to access liquidity across exchanges
and at different price levels will help to address concerns that a
decrease in displayed size at the BBO negatively impacts the ability to
execute large sized orders.\38\
---------------------------------------------------------------------------
\34\ See NYSE Arca Response, supra note 6, at 5 (stating that
the current mechanisms for sourcing block-sized liquidity will
continue to grow and evolve to meet the demands of users).
\35\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) (order
approving Linkage Plan). The Linkage Plan was implemented on August
31, 2009.
The Commission encourages the options exchanges to consider
measures that would facilitate access to depth of book quotations.
The Commission notes that currently several exchanges make available
quotations and orders on their respective books below their best bid
and offer. The Commission anticipates that to the extent display of
this information proves to be valuable to the options market as a
whole, other exchanges may choose to make this information available
as well.
\36\ See CBOE Letter, supra note 5, at 3; and UBS Letter, supra
note 5, at 2.
\37\ See supra note 7. In Amendment No. 3, the Exchange proposed
to begin the phased implementation on October 26, 2009. See supra
note 8.
\38\ Several commenters noted that the introduction of ISOs and
improvements in order routing technology anticipated as part of the
new linkage plan would provide an improved trading environment for
the expansion of penny quoting and permit market participants to
simultaneously access better priced quotations across all options
exchanges. See GETCO Letter, supra note 5, at 4 and UBS Letter,
supra note 5, at 2. See also NYSE Arca Response, supra note 6, at 5
(stating that the soon-to-be implemented ISO will allow block-sized
liquidity to be sourced at prices inferior to the NBBO and let it
trade, offering institutional investors the certainty of both trade
and price that they need and desire).
---------------------------------------------------------------------------
In addition, one commenter notes a decrease in average daily volume
in the Pilot classes as a negative effect of the Pilot.\39\ The
Commission believes that the impact of smaller increments on trading
volume is one of the more difficult aspects of the Pilot to assess. The
bid-ask spread is only one factor that influences volume. Other factors
that impact options 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 events. The
Commission does not believe that exchange reports show a clear change
in trading volume, and the Commission's Office of Economic Analysis
looked at the change in average contract volume for classes included in
the Pilot and a sample of classes not included in the Pilot, over two
time periods, finding that volume increased for the Pilot classes as
compared to the control group of non-Pilot classes (the difference for
one time period was statistically significant).\40\ Thus, based on the
data viewed to date, the Commission cannot conclude that the Pilot has
had an adverse impact on volume in the Pilot securities.
---------------------------------------------------------------------------
\39\ See SIFMA Letter, supra note 5, at 4 (citing to CBOE March
Report, supra note 24).
\40\ Memorandum from J. Daniel Aromi, OEA, to Heather Seidel,
Assistant Director, Division of Trading and Markets, Commission,
dated August 14, 2009 (``OEA Memo 2'') (looking at the change in
volume from August to September 2007 to April to May 2008, and from
August to September 2007 to May to June 2009).
---------------------------------------------------------------------------
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
(``OPRA''), and the Commission did not receive any reports of
disruptions in the dissemination of pricing information as a result of
quotation capacity restraints.\41\ While the Commission anticipates
that NYSE Arca's proposed expansion of the Pilot Program will
contribute to further increases in quotation message traffic, the
Commission believes that NYSE Arca's proposal is sufficiently limited
such that it is unlikely to increase quotation message traffic beyond
the capacity of market participants' systems and disrupt the timely
receipt of quote information. NYSE Arca has proposed to roll out the
additional 300 classes over time, in groups of 75 classes each quarter
beginning on October 26, 2009. The Commission further notes that a June
2, 2009 sustained message traffic peak of 852,350 messages per second
reported by OPRA\42\ is still well below
[[Page 49423]]
OPRA's current messages per second capacity limit of 2,050,000.\43\
Moreover, NYSE Arca has adopted and will continue to utilize quote
mitigation strategies that should continue to mitigate the expected
increase in quotation traffic.\44\
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\41\ One commenter states that although the exchange reports
have shown that quotation traffic has increased significantly, the
quotation volume has not resulted in significant problems for
exchanges or market participants. See UBS Letter, supra note 5, at
1. Another commenter noted that the risks associated with OPRA's
capacity being overwhelmed appear to be mitigated. See GETCO Letter,
supra note 5, at 3. Another commenter notes that market participants
will continue to make the investment in technology that results in
more efficient markets and states that many of the exchanges have
doubled the number of physical network connections between
themselves and OPRA as a result. See BATS Letter, supra note 5, at
2.
\42\ See NYSE Arca Report, supra note 24, at 11 (noting a
sustained five second peak of 852,350 messages per second as
reported by OPRA on June 2, 2009, and noting OPRA's current output
capacity of 2,050,000 messages per second, which is scheduled to
increase to over 3,000,000 messages per second in January 2010).
\43\ See NYSE Arca Response, supra note 6, at 6 (stating that
``there has been no outcry from vendors or firms in response to
quote traffic projections through mid-year 2011, as published by
[OPRA]'').
\44\ See Securities Exchange Act Release No. 56157 (July 27,
2007), 72 FR 42459 (August 2, 2007) (SR-NYSEArca-2007-71) (notice
and immediate effectiveness of a proposed rule change to implement
the Exchange's quote mitigation strategy); and NYSE Arca Response,
supra note 6, at 6 (representing that the Exchange will retain and
continue to employ its quotation mitigation strategy).
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As noted above, NYSE Arca has proposed to expand the current Pilot
Program to the 300 next most actively traded, multiply listed options
classes, and to continue the existing $3 breakpoint for classes
included in the Pilot (with the exception of options on QQQQ, IWM, and
SPY).\45\ The Commission believes that NYSE Arca's proposal is
consistent with the Act. The Commission believes that the proposed rule
change is designed to continue the narrowing of spreads in options
included in the Pilot. NYSE Arca's proposal will provide the
opportunity for reduced spreads where a significant amount of trading
occurs, thus maximizing the economic benefits of the Pilot while
minimizing the impact of increased quotation traffic.\46\ Further, the
Commission believes that the proposal will provide an opportunity for
increased transparency in the options markets, by allowing market
participants to display their trading interest in one-cent increments
in the consolidated quotation stream.
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\45\ One commenter argues that NYSE Arca's proposal is confusing
to investors because it will provide for 355 classes to be quoted in
pennies and nickels, three classes to be quoted in all pennies, and
the rest of the classes to be quoted in nickels and dimes (see CBOE
Letter, supra note 5, at 2), while another commenter states its
belief that a single break point for all classes will provide
consistency for the industry and investors (see LiquidPoint Letter,
supra note 5, at 3). The Commission does not believe that NYSE
Arca's proposal will result in increased confusion. The Commission
notes that the proposal will continue the same breakpoint as the
existing Pilot, and thus changes to the structure of the Pilot will
be minimal. See Ameritrade Letter, supra note 5, at 3 (noting that
the current Pilot program carries a $3.00 breakpoint and thus
changes to the pilot securities would be minimal, thus reducing any
investor confusion related to the expansion of the Pilot).
\46\ One commenter that supports retaining the $3 breakpoint
noted that the majority of its customers' trades occur at or below
the $3 breakpoint. This commenter believes that a $3 breakpoint is
in the best interest of retail investors. See Ameritrade Letter,
supra note 5, at 2-3 (stating that in April 2009, 71% of its
customers' trades and 89% of its customers' volume was in series
priced up to $3, and that in May 2009, 74% of its customers' trades
and 88% of its customers' volume was in series priced up to $3).
Another commenter that supports quoting in one-cent increments in
all series in all options classes included in the Pilot believes
that doing so would make the benefits of penny pricing available to
more options. See GETCO Letter, supra note 5, at 3. Further, the
Commission's Office of Economic Analysis estimates that, under NYSE
Arca's proposal, approximately 70% of options contract volume would
be quoted in one-cent increments. See OEA Memo 2, supra note 39.
One commenter noted that if the Pilot were rolled back, as is
proposed by several of the commenters, this would eliminate much of
the benefit experienced by the options markets and customers due to
the Pilot. See GETCO Letter, supra note 5, at 3. Another commenter
similarly stated that a rollback of the Pilot would be
``unfortunate'' given the benefits from the Pilot that participants
have realized and recommended that the Pilot move forward. See BATS
Letter, supra note 5, at 2.
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One commenter stated its belief that NYSE Arca's proposal, which
would be expanded to the next most-active, multiply-traded 300 classes,
rather than all classes, does not provide a stringent process to renew
names that will be eliminated from the Pilot due to delisting, merger
or other circumstances, and that the proposal in this regard would
represent an ongoing administration that would be costly to the
commenter.\47\ The Commission notes that NYSE Arca's proposal
explicitly includes a process for replacing, on a semi-annual basis,
any Pilot class that has been delisted with the next most actively
traded, multiply listed class that is not already included in the
Pilot, based on trading activity in the previous six months.\48\ While
there may be other approaches to address Pilot classes that have been
delisted, none have been submitted to the Commission for its
consideration. The Commission believes that NYSE Arca's proposal to
replace delisted classes from the Pilot is reasonable and consistent
with the Act.\49\
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\47\ See Ameritrade Letter, supra note 5, at 3 (also noting its
belief that the proposal would lead to investor confusion as it
would not be representative of all classes).
\48\ See Notice, supra note 4, at 4.
\49\ One commenter believes the incidence of locked markets in
Pilot classes has increased since the introduction of quoting in
pennies. In addition, this commenter believes that an expansion of
the Pilot could exacerbate the friction that it believes exists
between competing payment models among the exchanges. The commenter
believes that this issue could be mitigated if the Commission adopts
the Linkage Plan. See Ameritrade Letter, supra note 5, at 2. The
Commission notes that it approved the Linkage Plan on July 30, 2009.
See Securities Exchange Act Release No. 60405, supra note 34. The
commenter also urges the Commission to consider expanding the
provisions of Rule 610 of Regulation NMS to options trading. See
Ameritrade Letter, supra note 5, at 2. The Commission staff is
currently considering the issue of access and access fees in the
context of its ongoing consideration of a petition for rulemaking
requesting that the Commission impose a cap of $.20 on certain
transaction fees. See Letter from John C. Nagel, Managing Director &
Deputy General Counsel, Citadel, to Nancy M. Morris, Secretary,
Commission, dated July 15, 2008.
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The Commission has published for comment proposed rule changes from
CBOE and ISE that propose alternative approaches to expanding the
Pilot.\50\ In recognition of these other proposals, several commenters
express the view that uniformity is necessary for an expansion of the
Pilot Program.\51\ These commenters argue that approval of multiple
plans permitting exchanges to adopt different breakpoints would create
confusion,\52\ and that a uniform approach is necessary to assure that
there is a fair and orderly national market system.\53\ Several
commenters state that adopting different penny pilot rules would cause
technological and implementation problems for all participants in the
National Market System, and that varied breakpoints will impact order
entry, routing, quoting and compliance systems for each venue.\54\
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\50\ See Securities Exchange Act Release Nos. 60018 (June 1,
2009), 74 FR 27211 (June 8, 2009) and 60146 (June 19, 2009), 74 FR
30346 (June 25, 2009).
\51\ See, e.g., ISE Letter, supra note 5, at 1 and 3; Nasdaq
Letter, supra note 5; SIFMA Letter, supra note 5, at 5-6; and UBS
Letter, supra note 5, at 2.
\52\ See, e.g., CBOE Letter, supra note 5, at 4; LiquidPoint
Letter, supra note 5, at 2; and UBS Letter, supra note 5, at 2.
\53\ See ISE Letter, supra note 5, at 1; and LiquidPoint Letter,
supra note 5, at 2.
\54\ See LiquidPoint, supra note 5, at 2-3; and Nasdaq Letter,
supra note 5, at 2. Another commenter further states that multiple
plans would subject members and ultimately investors to the elevated
costs of excessive systems modifications and personnel training
activities. See SIFMA Letter, supra note 5, at 6.
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While the Commission agrees that a uniform approach may be
preferable, the Commission must analyze each exchange's proposed rule
change on its own merits for consistency with the Act. As discussed
above, the Commission has analyzed NYSE Arca's proposal and finds that
it is consistent with the Act. In this case, the Commission does not
believe the choice of other exchanges to propose different quoting
increments, or to not expand the current Pilot, makes NYSE Arca's
proposed rule change inconsistent with the Act. The Commission notes,
however, that if an options exchange chooses not to permit quoting in
one-cent increments in a particular option at the same time as another
exchange, it would nevertheless remain obligated to comply with the
provisions of the Linkage Plan, as well as its own rules, to avoid
trading at prices worse than those offered by other exchanges,
including prices in pennies.
[[Page 49424]]
The continued operation and phased expansion of the Pilot Program
will provide further valuable information to the exchanges, the
Commission, and others about the impact of penny quoting in the options
market. In particular, extending and expanding the Pilot Program as
proposed by NYSE Arca will allow further analysis of the impact of
penny quoting in the Pilot classes over a longer period of time on,
among other things: (1) Spreads; (2) peak quotation rates; (3)
quotation message traffic; (4) displayed size; (5) ``depth of book''
liquidity; and (6) market structure. NYSE Arca has committed to provide
the Commission with periodic reports, which will analyze the impact of
the expanded Pilot Program. The Commission expects the Exchange to
include statistical information relating to these factors in its
periodic reports.
IV. Partial Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\55\ for partially approving the proposed rule change,\56\ as
modified by Amendment Nos. 1 and 3 thereto, prior to the 30th day after
the date of publication in the Federal Register. In its proposed rule
change, the Exchange proposed that any option class included in the
Pilot Program that has been delisted be replaced on a semi-annual basis
by the next most actively traded, multiply listed options class that is
not yet included in the Pilot, based on trading activity in the
previous six months. In Amendment No. 1, the Exchange provided
clarification that the Exchange will employ the same parameters to
prospective replacement issues as approved and applicable under the
Pilot Program, including the exclusion of high-priced underlying
securities and indexes. In Amendment No. 3, the Exchange clarified that
the threshold for ``high priced'' designation is $200 per share or a
calculated index value of 200, at the time of selecting new issues to
be included in the Pilot. The Exchange also represented that the
threshold and the Exchange's approach for excluding high priced
underlying securities is consistent with the Exchange's prior process
in determining issues to be included in the Pilot. The Exchange stated
that the determination of whether a security is trading above $200 or
above a calculated index value of 200 shall be based on the price at
the close of trading on the Expiration Friday prior to being added to
the Pilot. These changes clarify the operation of the proposal and do
not differ materially from the proposal as noticed in the Federal
Register. Also, in response to commenters, in Amendment No. 1 the
Exchange proposes to delay the start of the phased implementation of
the expansion of the Pilot from July 28, 2009 to September 28, 2009. In
Amendment No. 3 the Exchange proposed to begin the phased
implementation on October 26, 2009. The proposed change to the
implementation date is responsive to concerns expressed by commenters.
Accordingly, the Commission finds that good cause exists to approve the
proposed rule change, as modified by Amendment Nos. 1 and 3, on an
accelerated basis.\57\
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\55\ 15 U.S.C. 78s(b)(2).
\56\ See supra 8 and supra note 9.
\57\ In its proposed rule change, the Exchange proposed to quote
SPY and IWM entirely in pennies. In Amendment No. 1, the Exchange
stated that this proposed change to the minimum quoting increment in
these classes would take place on September 28, 2009. The Commission
notes, however, that it is not approving this aspect of the proposal
in this order.
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V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 1 and 3, including whether
Amendment Nos. 1 and 3 are consistent with the Act.
The Commission also is soliciting additional comment on NYSE Arca's
proposal to quote two classes entirely in pennies, SPY and IWM, in
addition to QQQQs. In response to the initial notice of this
proposal,\58\ the Commission received several comment letters with
respect to the portion of the proposal that would allow quoting of all
series of options on IWM and SPY in one-cent increments. One commenter
supported NYSE Arca's proposal to eliminate a breakpoint for options on
these two exchange-traded funds, as a way to expand the benefits of
penny quoting to more options,\59\ while two other commenters did not
support this aspect of NYSE Arca's proposal and question NYSE Arca's
basis for the proposal.\60\ In particular, one commenter did not find
persuasive NYSE Arca's rationale that because IWM and SPY have more
series trading at premiums between $3 and $10, the $3 breakpoint should
be eliminated, noting that only 11% of IWM's national average daily
volume and 18% of SPY's national average daily volume is in series with
premiums greater than $3.\61\
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\58\ See Notice, supra note 4.
\59\ See GETCO Letter, supra note 5, at 2-3.
\60\ See CBOE Letter, supra note 5, at 2 to 3, and SIFMA Letter,
supra note 5, at 5.
\61\ See CBOE Letter, supra note 5, at 3. This commenter further
noted that the average spread width in series with a premium $3 or
greater is $0.27 for SPY and $0.25 for IWM. Id.
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The Commission's Office of Economic Analysis estimated that for a
four month period earlier this year, approximately 40.9 million
contracts for SPY and approximately 4.5 million contracts for IWM
traded at premia of $3 or greater, as compared to approximately 2.7
million contracts for QQQQ that traded at premia of $3 or greater.\62\
The Commission specifically requests comment on these findings.
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\62\ See OEA Memo 2, supra note 40 (measuring from February 2,
2009 to May 27, 2009). These numbers represent approximately 29% of
contract volume for SPY and 18% of contract volume for IWM.
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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-NYSEArca-2009-44 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-NYSEArca-2009-44. 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 such filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
[[Page 49425]]
submissions should refer to File No. SR-NYSEArca-2009-44 and should be
submitted on or before October 19, 2009.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\63\ that the proposed rule change (SR-NYSEArca-2009-44) as
modified by Amendment Nos. 1 and 3 thereto, be, and hereby is,
partially approved on an accelerated basis, as discussed above.
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\63\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\64\
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\64\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23374 Filed 9-25-09; 8:45 am]
BILLING CODE 8010-01-P
