Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of a Proposed Rule Change Amending Rule 6.72 To Make Permanent the Penny Trading Program for Options, 55312-55316 [2013-21928]
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Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Notices
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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
offices 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–CBOE–
2013–085, and should be submitted on
or before October 1, 2013.
proposed rule change as described in
Items I, II and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Kevin M. O’Neill,
Deputy Secretary.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70317; File No. SR–
NYSEArca–2013–42]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of a
Proposed Rule Change Amending Rule
6.72 To Make Permanent the Penny
Trading Program for Options
sroberts on DSK5SPTVN1PROD with NOTICES
September 4, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
20, 2013, NYSE Arca, Inc. (the
‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant parts of such
statements.
1. Purpose
The purpose of this filing is to amend
Rule 6.72 to make permanent the penny
trading program in options (the
‘‘Program’’), which was approved on a
limited pilot basis on January 23, 2007
(the ‘‘Penny Pilot’’ or, the ‘‘Pilot’’), and
has been expanded and extended
numerous times since.3
[FR Doc. 2013–21931 Filed 9–9–13; 8:45 am]
10 17
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 6.72 to make permanent the penny
trading program for options. The text of
the proposed rule change is available on
the Exchange’s Web site at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
3 Exchange Act Release No. 55156 (January 23,
2007) 72 FR 4759 (February 1, 2007) (NYSEArca–
2006–73); Release No. 56150 (July 26, 2007) 72 FR
42460 (August 2, 2007) (NYSEArca–2007–56);
Release No. 56568 (September 27, 2007) 72 FR
56422 (October 3, 2007) (NYSEArca–2007–88);
Release No. 59628 (March 26, 2009) 74 FR 15025
(NYSEArca–2009–26); Release No. 60224 (July 1,
2009) 74 FR 32991 (July 9, 2009) (NYSEArca–2009–
61); Release No. 60711 (September 23, 2009) 74 FR
49419 (September 28, 2009) (NYSEArca–2009–44);
Release No. 61061 (November 24, 2009) 74 FR
62857 (December 1, 2009) (NYSEArca–2009–44);
Release No. 63376 (November 24, 2010) 75 FR
75527 (December 3, 2010) (NYSEArca–2010–104);
Release No. 65977 (December 15, 2011) 76 FR
79234 (NYSEArca–2011–93); Release No. 67307
(June 28, 2012) 77 FR 40110 (July 6, 2012)
(NYSEArca–2012–65); Release No. 68426
(December 13, 2012) 77 FR 75224 (December 19,
2012) (NYSEArca–2012–135); Release No. 69106
(March 11, 2013) 78 FR 16552 (March 15, 2013)
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NYSE Arca, having demonstrated the
benefits of options trading in pennies
for customers through numerous
studies, proposes to make the Program
permanent, but on a reduced level.
NYSE Arca proposes that the Program
be limited to the 150 most active
multiply listed options classes.
Analysis of the Current Program
Under the Penny Pilot, the Program is
currently available for 363 listed options
classes. NYSE Arca conducted an
analysis of penny trading in options to
determine the effectiveness of the Penny
Pilot within the full range of the Pilot
issues. Since the Pilot was expanded
over the time period of November 2009
to August 2010, the Exchange reviewed
data from the last two full calendar
years.
The Exchange determined that, while
the overall Pilot was of great benefit to
Customers and provide [sic] greater
opportunities to all market participants,
the benefits have been concentrated in
the 150 most active Penny Pilot issues
(the ‘‘Top 150’’), and that the Pilot
issues outside of the Top 150 (the
‘‘Bottom 203’’) 4 not only failed to reap
a benefit from penny trading, but
resulted in more technology overhead
costs to provide for capacity and speed
for quote activity, and lagged the overall
market in volume and in various
performance statistics. As part of its
analysis, the Exchange reviewed quoteto-volume ratios for the Top 150, the
Bottom 203, and the Top 200 non-Penny
Pilot issues.5
The Exchange found the following:
QUOTE TO VOLUME RATIO
[January to October 2012]
Segment
Top 50 Penny Pilot Issues .........
Top 150 Penny Pilot Issues .......
Top 200 Non Penny Issues ........
Bottom 203 .................................
Quote/
Contract
176
216
514
589
to
to
to
to
1.
1.
1.
1.
The Exchange believes that the quoteto-volume ratios demonstrate that the
(NYSEArca–2013–22); Release No. 69790 (June 18,
2013) 78 FR 37853 (June 24, 2013) (NYSE Arca–
2013–59).
4 For purposes of consistency, the study was
conducted on issues that were in the Penny Pilot
as of the end of 2012 and added to the Pilot no later
than January 2011, thus excluding 9 issues. One
other issue was excluded due to extenuating
circumstances of the underlying. The total number
of issues studied was 353. For a more detailed
discussion on methodology, see NYSE U.S. Options
Report on Penny Trading in Options 2012, attached
as Exhibit 3 to the proposing Rule change.
5 Study period was January through October,
2012. The time frame was chosen to allow for a year
over year comparison period in which the Penny
Pilot was completely rolled out to 363 issues.
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reduced minimum price variation
(‘‘MPV’’) applicable to issues in the
Penny Pilot provides significant
efficiencies in the most active names,
but provides a great deal of unnecessary
quote traffic in the less active issues.
Indeed, the non-Penny Pilot issues
studied were 12.7% more efficient than
the Bottom 203.
The Exchange also found that trading
volume in Penny Pilot issues is almost
all concentrated in the Top 150. In 2011,
89.1% of Penny Pilot volume was in the
Top 150, and continued at a rate of
90.8% for 2012.
From 2011 to 2012, trading volumes
in the Top 150 declined 11.6%, whereas
the Bottom 203 declined 26.9%. Given
a year-over-year decline in options
industry volume of 12.2%, the Bottom
203 underperformed the industry by
14.7%.
The Exchange anticipates that there
may be some investor concern regarding
a widening of the minimum price
variation in some issues. But the
Exchange believes that such concerns
are offset by the significant widths and
lack of liquidity of market spreads in
lower tier Penny Pilot issues as well as
the availability of mechanisms for price
improvement in today’s modern options
industry. First, notwithstanding the
smaller MPV for Penny Pilot issues, it
has not contributed to market spreads
less than $0.05 in most Penny Pilot
issues. For example, in April 2012, the
average NBBO spread in the Top 10
most active Penny Pilot issues was
$0.25, while the spread in the 20 least
active Penny Pilot issues was $0.60.
And, despite the wider spread, the
average size at the NBBO in the less
active names is often less than 25
contracts. The Exchange believes that an
MPV of $0.05 or higher for an issue with
a $0.60 spread is not an unreasonable
ratio.
Second, if a market participant is
interested in an execution in a penny
increment, such opportunities are
available with certain price
improvement mechanisms. For
example, the Price Improvement Period
(‘‘PIP’’) 6 of the BOX Options Exchange
LLC (‘‘BOX’’) auction process provides
an opportunity for penny incremented
price improvement for series with a
$0.05 MPV. From December 2012 to
February 2013, 69.2% of the contracts
submitted to the PIP in series with a
$0.05 MPV received price improvement,
while only 17.4% of the contracts
submitted to the PIP in $0.01 series
were price improved.7 With a number of
exchanges now offering auction price
improvement mechanisms, Customers
wishing to trade an order within the
NBBO in an increment finer than $0.05
and for size greater than the average
NBBO may do so through competitive
mechanisms.
The Exchange considers that given the
existing quote width in most Penny
Pilot series, a change in MPV resulting
from reducing the number of issues
available for penny trading will be
unlikely to have any material impact on
spread widths.
6 See BOX Rule 7150 Price Improvement Period
(‘‘PIP).
7 See https://boxexchange.com/regulatorycirculars/pilot-reports/.
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Proposal for a Permanent Program
NYSE Arca proposes the Penny Pilot
for Options be approved as a permanent
program, but on a smaller scale. The
Exchange proposes reducing the number
of issues in the Program to the 150 most
active issues currently in the Program
effective the monthly expiration three
months following approval of this filing.
The Exchange does not propose to
change any aspects of the structure of
the Program other than the number of
underlying issues in the Program and
certain details regarding the processes
for adding and removing options on
certain issues that are subject to the
Program. All options contracts in QQQ
(PowerShares QQQ TrustSM, Series 1),
SPY (SPDR S&P 500 ETF) and IWM
(iShares Russell 2000 Index Fund) will
continue to quote in $0.01 increments;
all other options contracts in the
Program trading under $3 will continue
to quote in $0.01 increments, and all
other option contracts in the Program
trading at or above $3 will trade in $0.05
increments. NYSE Arca makes this
proposal for a reduced Program based
on the numerous previously published
studies of the Pilot. Through these
studies, the options industry has
extensive understanding of the benefits
to Customers of the Pilot and the
burdens on quote traffic and capacity
caused by the Pilot. Over the life of the
Pilot, the Exchange has studied quote
traffic with an expectation that quote
traffic would increase because of more
quoting price points, but also with the
expectation that the increased quote
traffic would provide increased trading
activity. The Exchange believes that the
Pilot, as a whole, has largely met these
expectations. However, our study has
shown that the anticipated benefits have
been concentrated in the Top 150
issues. Further, our study shows that
quote traffic in the lower tier issues has
increased significantly without a
corresponding increase in volume.
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Previous Pilot reports did not identify
the disparity as they did not examine
the Quote to Trade ratio at various
volume levels and tiers. While the
Exchange proposes permanent approval
on terms different from the Pilot, it does
so after analysis of the Pilot (as outlined
in the Report) following the increase in
issues in the Pilot starting in the fall of
2009.
NYSE Arca notes that a reduced
program does not need to be continued
as a Pilot, as the various markets and
market participants have already
studied the Program at roughly that
level on a Pilot basis in 2009 and 2010
during expansion of the Pilot. The
Exchange and other markets all studied
the Pilot at various levels throughout
the Pilot, and consistently found that as
an overall program, the Pilot was of
benefit to Customers and had a minimal
impact on the industry. Further study of
the program on a Pilot basis would not
reveal anything not already available.
While the Quote to Trade ratio was not
studied under the original Pilot Reports,
the recent NYSE U.S. Options Report
looked closely at the Quote to Trade
ratio by volume group; a Pilot study of
the Top 150 would retrace what was
already studied in the Report. The
previous Reports looked at quote traffic
from an overall perspective, with the
expectation that quote traffic would
increase but be offset by a benefit to the
investing public because of narrowed
spreads and more price points. Overall,
that is still true. The attached Report,
however, is the first to look at the
benefit of the added quote traffic by
comparing the number of quotes per
trade. The study found a robust volume
of trades for a given quote level in the
most active issues, but an exorbitant
number of quotes per trade in the lower
volume Pilot issues, indeed at a rate far
higher than in non-Pilot issues.
In adopting a reduction to the
Program, the Exchange does not believe
further statistical analysis is needed
and, accordingly, does not feel that a
reduced Program should continue on a
pilot basis. An additional pilot with a
reduced number of issues would not
reveal additional information or nuance.
The attached Report looked at quote
traffic over a significant time period,
and found consistent behavior over
time. Upon approval of this filing, an
issue would remain in the Program if it
qualified based on volume even if the
price was over $200 per share, but,
consistent with current practice under
the Pilot, an issue must be trading under
$200 per share to be added to the
Program. An issue would not be
removed from the Program based on
price, but only on failure to stay in the
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150 most actively traded issues. Issues
to be removed following approval will
convert back to trading in standard
increments of $0.05 and $0.10, but
effective on the Monday following the
third monthly expiration following
approval, to give investors and traders
time to prepare for the larger quoting
increment.
Starting in January 2014, the
Exchange also proposes an annual
review of issues that are in the Program,
so that the Program generally includes
the 150 most active options issues. After
each annual review, issues that are no
longer in the 150 most active issues but
are still among the 200 most active will
continue in the Program, while issues
that are removed will be replaced by
issues that have become among the 150
most active and also priced below $200
per share. The replacement issues will
be ranked based on trading activity in
the preceding six full calendar months,8
and added, based on ranking and
available space in the Program, on the
first business day following January
expiration. The reason for the limited
removal from the Program is to reduce
confusion if an issue is still active but
is no longer in the 150 most active
issues. The Program will thus have no
more than 150 issues except for the
period when issues to be removed are
still trading in a penny increment. By
remaining in the program, investors and
traders will experience a continuity in
trading practices. Issues that fall below
the 200 most actives will be converted
back to trading in standard increments
of $0.05 and $0.10, but not until the first
business day after April expiration, to
give investors and traders time to
prepare for the larger quoting increment.
The Exchange finds it necessary to have
these steps to insure an orderly
transition of an issue out of the program.
Announcements of issues to be added
and to be phased out will be made at the
end of the first full week of each year
via Trader Update bulletin.9
An Exchange review of the most
actively traded options issues over the
last three years shows that
approximately 30 issues each year fall
out of the 150 most actives, with
approximately 10 of those 30 falling out
of the 200 most active. Of the issues that
fall in the range of 151st to 200th most
active, there is a meaningful chance that
they will again be in the 150 most
active.10 By reducing the movement out
8 The preceding six full calendar months for the
annual review will be July 1 through December 31.
9 As under the current Rule, the Exchange will
continue to publish such bulletins on its Web site.
10 In 2011, 10 issues previously in the top 150 in
2010 fell into the 151–200th segment. Of these 10
issues, 6 were ranked in the top 150 symbols in
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of the Program for issues which are still
relatively active, investor confusion will
be reduced.
Under the Pilot, issues that were no
longer trading or where the options
class had been delisted were only
replaced once all existing series had
expired or been delisted. This often had
the effect of a defunct issue taking a slot
in the program for an extended period
of time because of LEAP series. For
instance, an issue that went bankrupt in
the Fall of 2008, just shortly after the
listing of January 2011 LEAPs, remained
in the program for over two years (until
the January 2011 LEAP expired). With
the proposed changes to the
administration of a permanent program,
and with the ability to remove issues
from the Program, the Exchange
proposes that issues that will not be
adding any more series be removed from
the active list of Program issues, so that
they may be replaced with options
issues that have become among the most
active, and thus are available for trading
in the finer increment.
NYSE Arca proposes that issues that
are no longer available for listing new
series because of delisting of the options
class, or because they have been
identified by OCC as no longer eligible
for opening customer transactions will
be removed from the list of active issues
under the Program, and will be replaced
in the Program at the beginning of the
next quarter. Under certain
circumstances, OCC notifies the
exchanges that it will no longer permit
new positions to be opened. NYSE Arca
proposes this standard because when
these events occur, the issues are set to
prohibit Customer transactions that
open a position. As a result, the activity
level decreases such that it would be
incapable of remaining in the Top 150
due to volume. However, any remaining
series will continue to trade under the
Program until they expire.
When adding new issues to replace an
options class participating in the
Program being removed because of
being delisted or because they have
been identified by OCC as ineligible for
opening Customer transactions, the
Exchange will use trading activity for
the previous six full calendar months to
determine the Top 150 issues based on
trading volume.11 Replacement issues
for issues that have been disqualified
2012, 3 fell past the 200th rank and would be
removed from the Program, and 1 remained in the
151–200th segment. In 2012, 12 issues previously
in the top 150 in 2011 fell into the 151–200th
segment. Of these 12 issues, 6 were ranked in the
top 150 in 2013, 5 fell below the 200th rank, and
1 remained in the 151–200th segment.
11 For instance, a quarterly review in October
would use the preceding six full calendar months
from April 1 through September 30.
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will be placed in the Program on the
first business day following the first
monthly expiration of each calendar
quarter. Because the new issues are
added at least ten business days into the
month, rather than the second day of the
month as is done under the Pilot, the
Exchange will use the most recent six
full calendar months. The new issues
will be announced in a Trader Update
bulletin that is disseminated no later
than the Friday before Expiration week.
Any series in the issues that are being
replaced (because of delisting or
because they are ineligible for opening
Customer transactions) will continue to
trade under the Program until they
expire. When an issue is being delisted
or identified as ineligible for opening
Customer transactions, the Exchange
does not add any new series, and the
existing series are generally set to
‘‘closing only’’, that is, set to not permit
a Customer to open or extend a position.
For issues that are no longer active
enough to remain in the Program (i.e.,
no longer in the 200 most active
following annual review), they will
trade in nickel and dime increments
effective after three monthly
expirations, and the Exchange will
announce via Trader Update bulletin at
least one month in advance if orders for
such issues in the Consolidated Book
will be cancelled or if they will be
converted to Price Improving Orders as
described in Rule 6.62(s). Thus the
Program may have more than 150
issues, and for those being removed
from the Program, there will be
sufficient notice to market participants
that series in an issue will convert to
nickel and dime quoting.
Lastly, the Program will also apply to
any option classes that are selected by
other securities exchanges that employ
a similar program that provides for
quoting and trading in penny
increments under their respective rules.
The Rule will be effective the first
business day after monthly expiration
three months following approval.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Securities Exchange Act of 1934
(the ‘‘Act’’),12 in general, and furthers
the objectives of Section 6(b)(5) of the
Act,13 in particular, in that it is designed
to prevent fraudulent and manipulative
acts and practices, 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
12 15
13 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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general, to protect investors and the
public interest. In particular, the
proposed rule change would provide
OTP Holders and market participants
with a permanent program for penny
trading in options that will provide the
greatest benefit to investors while
minimizing the burden that a finer
trading increment places on quote
traffic.
Further, NYSE Arca notes that trading
in penny increments has been
demonstrated to remove impediments to
trading in the national market system by
providing a smaller pricing increment,
but only in the Top 150 issues. The
various reports, especially the NYSE
U.S. Options Report on Penny Trading
in Options 2012, show that the benefits
to investors are overwhelmingly in the
Top 150 issues, and that little additional
benefit accrues in the Bottom 200.
Because of this differential in benefit
because of activity level, the Exchange
believes that initially limiting the
Program to 150 issues, and in
subsequent years by not removing an
issue that is still among the 200 most
active multiply listed, the Program will
be the appropriate size.
By providing sufficient notice of the
changes to the Program, investor
confusion will be greatly reduced.
Those issues that will be delisted or
because of the underlying security no
longer being a covered security, will
continue to trade under the Program
until all the series have expired. Those
issues that no longer qualify as being in
the 150 most active issues (or the 200
most active issues after the annual
review) will not convert to nickel and
dime increment quoting until three
monthly expirations have passed, to
give investors sufficient time to prepare.
These transition times and the provision
to not oust issues that are no longer in
the 150 most active but still actively
traded will reduce investor confusion.
NYSE Arca believes the Commission
now has an opportunity to perfect the
mechanism of a free and open market by
making the Program permanent.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Since the
proposal will reduce industry quote
traffic, it promotes price and quote size
competition while easing the burden of
repeated quote updates that provide
little economic benefit.
There would be an extreme burden
placed on the competitiveness of NYSE
Arca if the proposed rule change is
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approved while other exchanges do not
reduce the number of issues trading in
penny increments. The Program,
therefore, will also apply to any option
classes that are selected by other
securities exchanges that employ a
similar penny trading program under
their respective rules.
The Exchange would, however,
recommend to the Commission, at the
time of other exchange’s filings to
extend their Pilot or to make the
program permanent, to have other
markets demonstrate the benefit of not
reducing the Program to 150 issues,
given the burden on quote traffic by a
broader program and the lack of market
quality demonstrated by the widened
spreads and lack of liquidity in the
current Pilot. While the Exchange found
the level of quote traffic acceptable in
previous studies, it was only under the
new study that the Exchange looked at
the Quote to Trade ratio of differing
volume tranches. It was only on doing
so that it was revealed that the
anticipated benefits of the Pilot were not
being realized consistently in lower
volume issues.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act. The
Commission requests comments, in
particular, on the following aspects of
the proposed rule change:
1. The Commission has previously
noted that allowing market participants
to quote in smaller increments has been
shown to reduce spreads in options
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55315
classes included in the Penny Pilot
Program, thereby lowering costs to
investors.14 The Commission has also
recognized that the options exchanges
have previously shown in their pilot
reports that there has been a reduction
in the displayed size available in the
Pilot classes.15 The current Penny Pilot
Program allows penny quoting and
trading in 363 options classes. What are
the benefits or harms to investors that
might result from reducing the number
of options classes to a number less than
the current 363 options classes in a
permanent penny program? Specifically,
what are the benefits or harms to
investors that might result from
reducing the number of options classes
in a permanent penny program to the
150 most actively traded multiply listed
options classes, as proposed?
2. What are commenters’ views on
NYSE Arca’s proposal to limit the
proposed permanent penny program to
the 150 most actively traded multiply
listed options classes based on trading
activity in the previous six months?
Please explain.
a. If you agree with basing inclusion
on the most actively traded multiply
listed options classes, what are your
views on NYSE Arca’s proposal to
include the 150 most actively traded
multiply listed options classes? Please
explain.
b. If you believe that inclusion of
options classes in the proposed
permanent penny program should be
based on different criteria, what criteria,
and why?
3. What are commenters’ views on
NYSE Arca’s proposal to use the
previous six months of trading activity
to determine the 150 most actively
traded multiply listed options classes?
Please explain. Should this timeframe
be extended or shortened? Why or why
not? If so, by how many days or months,
and why?
4. NYSE Arca proposes that once an
issue is in the proposed permanent
penny program, the issue will remain in
the proposed permanent penny program
until it is no longer among the 200 most
actively traded issues based on an
annual review. Upon falling below the
200 most actively traded issues, an issue
will be removed from the proposed
permanent penny program. What are
commenters’ views on the proposal’s
process to remove an options class from
the proposed permanent penny program
that falls below the 200 most actively
traded issues? Please explain.
14 See Securities Exchange Act Release No. 60711
(September 23, 2009) 74 FR 49419, 49421
(September 28, 2009) (NYSEArca–2009–44).
15 Id. at 49422.
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Federal Register / Vol. 78, No. 175 / Tuesday, September 10, 2013 / Notices
5. Do commenters have any concerns
about how an option class might trade
between the time notice has been given
that the option class will be removed
from the proposed permanent penny
program and the time options in that
class begin trading in standard
increments? Please explain.
6. What are commenters’ views on
NYSE Arca’s proposal to conduct a
review on an annual basis? Please
explain. Should such a review interval
be more or less frequent? Please explain.
7. Do commenters believe that the use
of the two proposed market activity
levels (150 most actively traded listed
options classes and 200 most actively
traded issues) would cause confusion
among market participants? Why or why
not? Do you believe the use of the two
proposed market activity levels would
provide an appropriate mechanism to
transition options classes in and out of
the proposed permanent penny
program? Why or why not?
8. NYSE Arca proposes to replace any
options classes participating in the
Program that have been delisted, or are
identified by OCC as ineligible for
opening Customer transactions, with the
next most actively traded multiply
listed options classes that are not yet
included in the Program, based on
trading activity in the previous six full
calendar months. NYSE Arca proposes
that any series in a class overlying the
issues that are being replaced would
continue to trade under the proposed
permanent penny program until they
expire. The replacement issue would be
added to the proposed permanent penny
program at the beginning of the next
quarter. What are commenters’ views on
NYSE Arca’s process to replace options
classes that have been delisted or are
identified by OCC as ineligible for
opening Customer transactions? Please
explain.
9. What are commenters’ views on
whether the minimum quoting
increment should be the same or
different across all exchanges trading
the same option? What are the
advantages and disadvantages to
adopting a uniform permanent penny
program as compared to exchange
specific permanent penny programs?
Please be specific.
10. Commenters are requested to
provide empirical data and other factual
support for their views, if possible.
Comments may be submitted by any
of the following methods:
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2013–42 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–2013–42. This
file number should be included on the
subject line if email 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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 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–2013–42 and should be
submitted on or before October 1, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–21928 Filed 9–9–13; 8:45 am]
BILLING CODE 8011–01–P
VerDate Mar<15>2010
16:10 Sep 09, 2013
Jkt 229001
[Release No. 34–70314; File No. SR–CBOE–
2013–084]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Fees
Schedule
September 4, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
22, 2013, Chicago Board Options
Exchange, Incorporated (the ‘‘Exchange’’
or ‘‘CBOE’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
Fees Schedule. The text of the proposed
rule change is available on the
Exchange’s Web site (https://
www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Footnote 10 of the Fees Schedule to
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
SECURITIES AND EXCHANGE
COMMISSION
1 15
16 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00080
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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]]>Agencies
[Federal Register Volume 78, Number 175 (Tuesday, September 10, 2013)]
[Notices]
[Pages 55312-55316]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-21928]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70317; File No. SR-NYSEArca-2013-42]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of a Proposed Rule Change Amending Rule 6.72 To Make Permanent the
Penny Trading Program for Options
September 4, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 20, 2013, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 6.72 to make permanent the
penny trading program for options. The text of the proposed rule change
is available on the Exchange's Web site at www.nyse.com, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to amend Rule 6.72 to make permanent
the penny trading program in options (the ``Program''), which was
approved on a limited pilot basis on January 23, 2007 (the ``Penny
Pilot'' or, the ``Pilot''), and has been expanded and extended numerous
times since.\3\
---------------------------------------------------------------------------
\3\ Exchange Act Release No. 55156 (January 23, 2007) 72 FR 4759
(February 1, 2007) (NYSEArca-2006-73); Release No. 56150 (July 26,
2007) 72 FR 42460 (August 2, 2007) (NYSEArca-2007-56); Release No.
56568 (September 27, 2007) 72 FR 56422 (October 3, 2007) (NYSEArca-
2007-88); Release No. 59628 (March 26, 2009) 74 FR 15025 (NYSEArca-
2009-26); Release No. 60224 (July 1, 2009) 74 FR 32991 (July 9,
2009) (NYSEArca-2009-61); Release No. 60711 (September 23, 2009) 74
FR 49419 (September 28, 2009) (NYSEArca-2009-44); Release No. 61061
(November 24, 2009) 74 FR 62857 (December 1, 2009) (NYSEArca-2009-
44); Release No. 63376 (November 24, 2010) 75 FR 75527 (December 3,
2010) (NYSEArca-2010-104); Release No. 65977 (December 15, 2011) 76
FR 79234 (NYSEArca-2011-93); Release No. 67307 (June 28, 2012) 77 FR
40110 (July 6, 2012) (NYSEArca-2012-65); Release No. 68426 (December
13, 2012) 77 FR 75224 (December 19, 2012) (NYSEArca-2012-135);
Release No. 69106 (March 11, 2013) 78 FR 16552 (March 15, 2013)
(NYSEArca-2013-22); Release No. 69790 (June 18, 2013) 78 FR 37853
(June 24, 2013) (NYSE Arca-2013-59).
---------------------------------------------------------------------------
NYSE Arca, having demonstrated the benefits of options trading in
pennies for customers through numerous studies, proposes to make the
Program permanent, but on a reduced level. NYSE Arca proposes that the
Program be limited to the 150 most active multiply listed options
classes.
Analysis of the Current Program
Under the Penny Pilot, the Program is currently available for 363
listed options classes. NYSE Arca conducted an analysis of penny
trading in options to determine the effectiveness of the Penny Pilot
within the full range of the Pilot issues. Since the Pilot was expanded
over the time period of November 2009 to August 2010, the Exchange
reviewed data from the last two full calendar years.
The Exchange determined that, while the overall Pilot was of great
benefit to Customers and provide [sic] greater opportunities to all
market participants, the benefits have been concentrated in the 150
most active Penny Pilot issues (the ``Top 150''), and that the Pilot
issues outside of the Top 150 (the ``Bottom 203'') \4\ not only failed
to reap a benefit from penny trading, but resulted in more technology
overhead costs to provide for capacity and speed for quote activity,
and lagged the overall market in volume and in various performance
statistics. As part of its analysis, the Exchange reviewed quote-to-
volume ratios for the Top 150, the Bottom 203, and the Top 200 non-
Penny Pilot issues.\5\
---------------------------------------------------------------------------
\4\ For purposes of consistency, the study was conducted on
issues that were in the Penny Pilot as of the end of 2012 and added
to the Pilot no later than January 2011, thus excluding 9 issues.
One other issue was excluded due to extenuating circumstances of the
underlying. The total number of issues studied was 353. For a more
detailed discussion on methodology, see NYSE U.S. Options Report on
Penny Trading in Options 2012, attached as Exhibit 3 to the
proposing Rule change.
\5\ Study period was January through October, 2012. The time
frame was chosen to allow for a year over year comparison period in
which the Penny Pilot was completely rolled out to 363 issues.
---------------------------------------------------------------------------
The Exchange found the following:
Quote to Volume Ratio
[January to October 2012]
------------------------------------------------------------------------
Segment Quote/Contract
------------------------------------------------------------------------
Top 50 Penny Pilot Issues.................. 176 to 1.
Top 150 Penny Pilot Issues................. 216 to 1.
Top 200 Non Penny Issues................... 514 to 1.
Bottom 203................................. 589 to 1.
------------------------------------------------------------------------
The Exchange believes that the quote-to-volume ratios demonstrate
that the
[[Page 55313]]
reduced minimum price variation (``MPV'') applicable to issues in the
Penny Pilot provides significant efficiencies in the most active names,
but provides a great deal of unnecessary quote traffic in the less
active issues. Indeed, the non-Penny Pilot issues studied were 12.7%
more efficient than the Bottom 203.
The Exchange also found that trading volume in Penny Pilot issues
is almost all concentrated in the Top 150. In 2011, 89.1% of Penny
Pilot volume was in the Top 150, and continued at a rate of 90.8% for
2012.
From 2011 to 2012, trading volumes in the Top 150 declined 11.6%,
whereas the Bottom 203 declined 26.9%. Given a year-over-year decline
in options industry volume of 12.2%, the Bottom 203 underperformed the
industry by 14.7%.
The Exchange anticipates that there may be some investor concern
regarding a widening of the minimum price variation in some issues. But
the Exchange believes that such concerns are offset by the significant
widths and lack of liquidity of market spreads in lower tier Penny
Pilot issues as well as the availability of mechanisms for price
improvement in today's modern options industry. First, notwithstanding
the smaller MPV for Penny Pilot issues, it has not contributed to
market spreads less than $0.05 in most Penny Pilot issues. For example,
in April 2012, the average NBBO spread in the Top 10 most active Penny
Pilot issues was $0.25, while the spread in the 20 least active Penny
Pilot issues was $0.60. And, despite the wider spread, the average size
at the NBBO in the less active names is often less than 25 contracts.
The Exchange believes that an MPV of $0.05 or higher for an issue with
a $0.60 spread is not an unreasonable ratio.
Second, if a market participant is interested in an execution in a
penny increment, such opportunities are available with certain price
improvement mechanisms. For example, the Price Improvement Period
(``PIP'') \6\ of the BOX Options Exchange LLC (``BOX'') auction process
provides an opportunity for penny incremented price improvement for
series with a $0.05 MPV. From December 2012 to February 2013, 69.2% of
the contracts submitted to the PIP in series with a $0.05 MPV received
price improvement, while only 17.4% of the contracts submitted to the
PIP in $0.01 series were price improved.\7\ With a number of exchanges
now offering auction price improvement mechanisms, Customers wishing to
trade an order within the NBBO in an increment finer than $0.05 and for
size greater than the average NBBO may do so through competitive
mechanisms.
---------------------------------------------------------------------------
\6\ See BOX Rule 7150 Price Improvement Period (``PIP).
\7\ See https://boxexchange.com/regulatory-circulars/pilot-reports/.
---------------------------------------------------------------------------
The Exchange considers that given the existing quote width in most
Penny Pilot series, a change in MPV resulting from reducing the number
of issues available for penny trading will be unlikely to have any
material impact on spread widths.
Proposal for a Permanent Program
NYSE Arca proposes the Penny Pilot for Options be approved as a
permanent program, but on a smaller scale. The Exchange proposes
reducing the number of issues in the Program to the 150 most active
issues currently in the Program effective the monthly expiration three
months following approval of this filing. The Exchange does not propose
to change any aspects of the structure of the Program other than the
number of underlying issues in the Program and certain details
regarding the processes for adding and removing options on certain
issues that are subject to the Program. All options contracts in QQQ
(PowerShares QQQ TrustSM, Series 1), SPY (SPDR S&P 500 ETF) and IWM
(iShares Russell 2000 Index Fund) will continue to quote in $0.01
increments; all other options contracts in the Program trading under $3
will continue to quote in $0.01 increments, and all other option
contracts in the Program trading at or above $3 will trade in $0.05
increments. NYSE Arca makes this proposal for a reduced Program based
on the numerous previously published studies of the Pilot. Through
these studies, the options industry has extensive understanding of the
benefits to Customers of the Pilot and the burdens on quote traffic and
capacity caused by the Pilot. Over the life of the Pilot, the Exchange
has studied quote traffic with an expectation that quote traffic would
increase because of more quoting price points, but also with the
expectation that the increased quote traffic would provide increased
trading activity. The Exchange believes that the Pilot, as a whole, has
largely met these expectations. However, our study has shown that the
anticipated benefits have been concentrated in the Top 150 issues.
Further, our study shows that quote traffic in the lower tier issues
has increased significantly without a corresponding increase in volume.
Previous Pilot reports did not identify the disparity as they did not
examine the Quote to Trade ratio at various volume levels and tiers.
While the Exchange proposes permanent approval on terms different from
the Pilot, it does so after analysis of the Pilot (as outlined in the
Report) following the increase in issues in the Pilot starting in the
fall of 2009.
NYSE Arca notes that a reduced program does not need to be
continued as a Pilot, as the various markets and market participants
have already studied the Program at roughly that level on a Pilot basis
in 2009 and 2010 during expansion of the Pilot. The Exchange and other
markets all studied the Pilot at various levels throughout the Pilot,
and consistently found that as an overall program, the Pilot was of
benefit to Customers and had a minimal impact on the industry. Further
study of the program on a Pilot basis would not reveal anything not
already available. While the Quote to Trade ratio was not studied under
the original Pilot Reports, the recent NYSE U.S. Options Report looked
closely at the Quote to Trade ratio by volume group; a Pilot study of
the Top 150 would retrace what was already studied in the Report. The
previous Reports looked at quote traffic from an overall perspective,
with the expectation that quote traffic would increase but be offset by
a benefit to the investing public because of narrowed spreads and more
price points. Overall, that is still true. The attached Report,
however, is the first to look at the benefit of the added quote traffic
by comparing the number of quotes per trade. The study found a robust
volume of trades for a given quote level in the most active issues, but
an exorbitant number of quotes per trade in the lower volume Pilot
issues, indeed at a rate far higher than in non-Pilot issues.
In adopting a reduction to the Program, the Exchange does not
believe further statistical analysis is needed and, accordingly, does
not feel that a reduced Program should continue on a pilot basis. An
additional pilot with a reduced number of issues would not reveal
additional information or nuance. The attached Report looked at quote
traffic over a significant time period, and found consistent behavior
over time. Upon approval of this filing, an issue would remain in the
Program if it qualified based on volume even if the price was over $200
per share, but, consistent with current practice under the Pilot, an
issue must be trading under $200 per share to be added to the Program.
An issue would not be removed from the Program based on price, but only
on failure to stay in the
[[Page 55314]]
150 most actively traded issues. Issues to be removed following
approval will convert back to trading in standard increments of $0.05
and $0.10, but effective on the Monday following the third monthly
expiration following approval, to give investors and traders time to
prepare for the larger quoting increment.
Starting in January 2014, the Exchange also proposes an annual
review of issues that are in the Program, so that the Program generally
includes the 150 most active options issues. After each annual review,
issues that are no longer in the 150 most active issues but are still
among the 200 most active will continue in the Program, while issues
that are removed will be replaced by issues that have become among the
150 most active and also priced below $200 per share. The replacement
issues will be ranked based on trading activity in the preceding six
full calendar months,\8\ and added, based on ranking and available
space in the Program, on the first business day following January
expiration. The reason for the limited removal from the Program is to
reduce confusion if an issue is still active but is no longer in the
150 most active issues. The Program will thus have no more than 150
issues except for the period when issues to be removed are still
trading in a penny increment. By remaining in the program, investors
and traders will experience a continuity in trading practices. Issues
that fall below the 200 most actives will be converted back to trading
in standard increments of $0.05 and $0.10, but not until the first
business day after April expiration, to give investors and traders time
to prepare for the larger quoting increment. The Exchange finds it
necessary to have these steps to insure an orderly transition of an
issue out of the program. Announcements of issues to be added and to be
phased out will be made at the end of the first full week of each year
via Trader Update bulletin.\9\
---------------------------------------------------------------------------
\8\ The preceding six full calendar months for the annual review
will be July 1 through December 31.
\9\ As under the current Rule, the Exchange will continue to
publish such bulletins on its Web site.
---------------------------------------------------------------------------
An Exchange review of the most actively traded options issues over
the last three years shows that approximately 30 issues each year fall
out of the 150 most actives, with approximately 10 of those 30 falling
out of the 200 most active. Of the issues that fall in the range of
151st to 200th most active, there is a meaningful chance that they will
again be in the 150 most active.\10\ By reducing the movement out of
the Program for issues which are still relatively active, investor
confusion will be reduced.
---------------------------------------------------------------------------
\10\ In 2011, 10 issues previously in the top 150 in 2010 fell
into the 151-200th segment. Of these 10 issues, 6 were ranked in the
top 150 symbols in 2012, 3 fell past the 200th rank and would be
removed from the Program, and 1 remained in the 151-200th segment.
In 2012, 12 issues previously in the top 150 in 2011 fell into the
151-200th segment. Of these 12 issues, 6 were ranked in the top 150
in 2013, 5 fell below the 200th rank, and 1 remained in the 151-
200th segment.
---------------------------------------------------------------------------
Under the Pilot, issues that were no longer trading or where the
options class had been delisted were only replaced once all existing
series had expired or been delisted. This often had the effect of a
defunct issue taking a slot in the program for an extended period of
time because of LEAP series. For instance, an issue that went bankrupt
in the Fall of 2008, just shortly after the listing of January 2011
LEAPs, remained in the program for over two years (until the January
2011 LEAP expired). With the proposed changes to the administration of
a permanent program, and with the ability to remove issues from the
Program, the Exchange proposes that issues that will not be adding any
more series be removed from the active list of Program issues, so that
they may be replaced with options issues that have become among the
most active, and thus are available for trading in the finer increment.
NYSE Arca proposes that issues that are no longer available for
listing new series because of delisting of the options class, or
because they have been identified by OCC as no longer eligible for
opening customer transactions will be removed from the list of active
issues under the Program, and will be replaced in the Program at the
beginning of the next quarter. Under certain circumstances, OCC
notifies the exchanges that it will no longer permit new positions to
be opened. NYSE Arca proposes this standard because when these events
occur, the issues are set to prohibit Customer transactions that open a
position. As a result, the activity level decreases such that it would
be incapable of remaining in the Top 150 due to volume. However, any
remaining series will continue to trade under the Program until they
expire.
When adding new issues to replace an options class participating in
the Program being removed because of being delisted or because they
have been identified by OCC as ineligible for opening Customer
transactions, the Exchange will use trading activity for the previous
six full calendar months to determine the Top 150 issues based on
trading volume.\11\ Replacement issues for issues that have been
disqualified will be placed in the Program on the first business day
following the first monthly expiration of each calendar quarter.
Because the new issues are added at least ten business days into the
month, rather than the second day of the month as is done under the
Pilot, the Exchange will use the most recent six full calendar months.
The new issues will be announced in a Trader Update bulletin that is
disseminated no later than the Friday before Expiration week. Any
series in the issues that are being replaced (because of delisting or
because they are ineligible for opening Customer transactions) will
continue to trade under the Program until they expire. When an issue is
being delisted or identified as ineligible for opening Customer
transactions, the Exchange does not add any new series, and the
existing series are generally set to ``closing only'', that is, set to
not permit a Customer to open or extend a position.
---------------------------------------------------------------------------
\11\ For instance, a quarterly review in October would use the
preceding six full calendar months from April 1 through September
30.
---------------------------------------------------------------------------
For issues that are no longer active enough to remain in the
Program (i.e., no longer in the 200 most active following annual
review), they will trade in nickel and dime increments effective after
three monthly expirations, and the Exchange will announce via Trader
Update bulletin at least one month in advance if orders for such issues
in the Consolidated Book will be cancelled or if they will be converted
to Price Improving Orders as described in Rule 6.62(s). Thus the
Program may have more than 150 issues, and for those being removed from
the Program, there will be sufficient notice to market participants
that series in an issue will convert to nickel and dime quoting.
Lastly, the Program will also apply to any option classes that are
selected by other securities exchanges that employ a similar program
that provides for quoting and trading in penny increments under their
respective rules.
The Rule will be effective the first business day after monthly
expiration three months following approval.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act''),\12\ in
general, and furthers the objectives of Section 6(b)(5) of the Act,\13\
in particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, 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
[[Page 55315]]
general, to protect investors and the public interest. In particular,
the proposed rule change would provide OTP Holders and market
participants with a permanent program for penny trading in options that
will provide the greatest benefit to investors while minimizing the
burden that a finer trading increment places on quote traffic.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Further, NYSE Arca notes that trading in penny increments has been
demonstrated to remove impediments to trading in the national market
system by providing a smaller pricing increment, but only in the Top
150 issues. The various reports, especially the NYSE U.S. Options
Report on Penny Trading in Options 2012, show that the benefits to
investors are overwhelmingly in the Top 150 issues, and that little
additional benefit accrues in the Bottom 200. Because of this
differential in benefit because of activity level, the Exchange
believes that initially limiting the Program to 150 issues, and in
subsequent years by not removing an issue that is still among the 200
most active multiply listed, the Program will be the appropriate size.
By providing sufficient notice of the changes to the Program,
investor confusion will be greatly reduced. Those issues that will be
delisted or because of the underlying security no longer being a
covered security, will continue to trade under the Program until all
the series have expired. Those issues that no longer qualify as being
in the 150 most active issues (or the 200 most active issues after the
annual review) will not convert to nickel and dime increment quoting
until three monthly expirations have passed, to give investors
sufficient time to prepare. These transition times and the provision to
not oust issues that are no longer in the 150 most active but still
actively traded will reduce investor confusion.
NYSE Arca believes the Commission now has an opportunity to perfect
the mechanism of a free and open market by making the Program
permanent.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Since the proposal will
reduce industry quote traffic, it promotes price and quote size
competition while easing the burden of repeated quote updates that
provide little economic benefit.
There would be an extreme burden placed on the competitiveness of
NYSE Arca if the proposed rule change is approved while other exchanges
do not reduce the number of issues trading in penny increments. The
Program, therefore, will also apply to any option classes that are
selected by other securities exchanges that employ a similar penny
trading program under their respective rules.
The Exchange would, however, recommend to the Commission, at the
time of other exchange's filings to extend their Pilot or to make the
program permanent, to have other markets demonstrate the benefit of not
reducing the Program to 150 issues, given the burden on quote traffic
by a broader program and the lack of market quality demonstrated by the
widened spreads and lack of liquidity in the current Pilot. While the
Exchange found the level of quote traffic acceptable in previous
studies, it was only under the new study that the Exchange looked at
the Quote to Trade ratio of differing volume tranches. It was only on
doing so that it was revealed that the anticipated benefits of the
Pilot were not being realized consistently in lower volume issues.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. The Commission requests comments, in
particular, on the following aspects of the proposed rule change:
1. The Commission has previously noted that allowing market
participants to quote in smaller increments has been shown to reduce
spreads in options classes included in the Penny Pilot Program, thereby
lowering costs to investors.\14\ The Commission has also recognized
that the options exchanges have previously shown in their pilot reports
that there has been a reduction in the displayed size available in the
Pilot classes.\15\ The current Penny Pilot Program allows penny quoting
and trading in 363 options classes. What are the benefits or harms to
investors that might result from reducing the number of options classes
to a number less than the current 363 options classes in a permanent
penny program? Specifically, what are the benefits or harms to
investors that might result from reducing the number of options classes
in a permanent penny program to the 150 most actively traded multiply
listed options classes, as proposed?
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\14\ See Securities Exchange Act Release No. 60711 (September
23, 2009) 74 FR 49419, 49421 (September 28, 2009) (NYSEArca-2009-
44).
\15\ Id. at 49422.
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2. What are commenters' views on NYSE Arca's proposal to limit the
proposed permanent penny program to the 150 most actively traded
multiply listed options classes based on trading activity in the
previous six months? Please explain.
a. If you agree with basing inclusion on the most actively traded
multiply listed options classes, what are your views on NYSE Arca's
proposal to include the 150 most actively traded multiply listed
options classes? Please explain.
b. If you believe that inclusion of options classes in the proposed
permanent penny program should be based on different criteria, what
criteria, and why?
3. What are commenters' views on NYSE Arca's proposal to use the
previous six months of trading activity to determine the 150 most
actively traded multiply listed options classes? Please explain. Should
this timeframe be extended or shortened? Why or why not? If so, by how
many days or months, and why?
4. NYSE Arca proposes that once an issue is in the proposed
permanent penny program, the issue will remain in the proposed
permanent penny program until it is no longer among the 200 most
actively traded issues based on an annual review. Upon falling below
the 200 most actively traded issues, an issue will be removed from the
proposed permanent penny program. What are commenters' views on the
proposal's process to remove an options class from the proposed
permanent penny program that falls below the 200 most actively traded
issues? Please explain.
[[Page 55316]]
5. Do commenters have any concerns about how an option class might
trade between the time notice has been given that the option class will
be removed from the proposed permanent penny program and the time
options in that class begin trading in standard increments? Please
explain.
6. What are commenters' views on NYSE Arca's proposal to conduct a
review on an annual basis? Please explain. Should such a review
interval be more or less frequent? Please explain.
7. Do commenters believe that the use of the two proposed market
activity levels (150 most actively traded listed options classes and
200 most actively traded issues) would cause confusion among market
participants? Why or why not? Do you believe the use of the two
proposed market activity levels would provide an appropriate mechanism
to transition options classes in and out of the proposed permanent
penny program? Why or why not?
8. NYSE Arca proposes to replace any options classes participating
in the Program that have been delisted, or are identified by OCC as
ineligible for opening Customer transactions, with the next most
actively traded multiply listed options classes that are not yet
included in the Program, based on trading activity in the previous six
full calendar months. NYSE Arca proposes that any series in a class
overlying the issues that are being replaced would continue to trade
under the proposed permanent penny program until they expire. The
replacement issue would be added to the proposed permanent penny
program at the beginning of the next quarter. What are commenters'
views on NYSE Arca's process to replace options classes that have been
delisted or are identified by OCC as ineligible for opening Customer
transactions? Please explain.
9. What are commenters' views on whether the minimum quoting
increment should be the same or different across all exchanges trading
the same option? What are the advantages and disadvantages to adopting
a uniform permanent penny program as compared to exchange specific
permanent penny programs? Please be specific.
10. Commenters are requested to provide empirical data and other
factual support for their views, if possible.
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 email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2013-42 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-2013-42. This
file number should be included on the subject line if email 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 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-2013-42 and should
be submitted on or before October 1, 2013.
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\16\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-21928 Filed 9-9-13; 8:45 am]
BILLING CODE 8011-01-P
