

[Federal Register: October 18, 2006 (Volume 71, Number 201)]
[Notices]               
[Page 61525-61528]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc06-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54590; File No. SR-NYSEArca-2006-73]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To Create a Penny Pilot Program for Options 
Trading

October 12, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 61526]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 10, 2006, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been substantially prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NYSE Arca proposes to: (i) Clarify the language in NYSE Arca Rule 
6.72; (ii) add a reference to a six month penny pilot in options 
classes in certain issues approved by the Commission (``Pilot 
Program''); and (iii) provide for an approved quote mitigation 
exception to NYSE Arca Rule 6.86. The text of the proposed rule is 
available on NYSE Arca's Web site at http://www.nysearca.com, 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
    NYSE Arca Rule 6.72(a) sets forth the trading increments for option 
contracts quoted on the Exchange. Currently, the minimum price 
variation (``MPV'') for option series that are quoted under $3.00 per 
contract is $0.05 and the MPV for option series that are quoted at 
$3.00 per contract or greater is $0.10. The Exchange is proposing to: 
(i) Clarify the language in NYSE Arca Rule 6.72; and (ii) add a 
reference to a six month penny pilot in options traded on a limited 
number of classes approved by the Commission.
    The Exchange proposes to clarify existing language in NYSE Arca 
Rule 6.72 to continue a $0.05 MPV for quoting in all options series 
trading at less than $3.00, and $0.10 MVP for quoting in all options 
series trading at $3.00 or more, except those included in the Pilot 
Program described below.
Pilot Program
    The Exchange proposes to provide for a penny MPV in options 
contracts in certain classes approved by the Commission. The Exchange 
believes that migrating to penny pricing in these classes will create 
tighter markets and thus reduce the overall cost of trading in options 
for investors. Despite the overall benefits provided to investors in 
migrating to penny pricing, the Exchange believes it is critical to 
introduce pennies in a measured approach that will not exacerbate the 
existing quote capacity limitations that currently exist.
    The Exchange proposes that options classes in the following issues 
be approved for inclusion in a Penny Pilot:

QQQQ: Nasdaq-100 Index Tracking Stock
IWM: iShares Russell 2000 Index Fund
SMH: Semiconductor Holdrs Trust
GE: General Electric Company
AMD: Advanced Micro Devices, Inc.
MSFT: Microsoft Corporation
INTC: Intel Corporation
CAT: Caterpillar Inc.
WFMI: Whole Foods Market, Inc.
TXN: Texas Instruments Incorporated
GLG: Glamis Gold Ltd.
FLEX: Flextronics International Ltd.
SUNW: Sun Microsystems, Inc.

    Under the proposed Pilot Program, the Exchange will allow trading 
and quoting in increments of $0.01 for all options on the QQQQ, and 
will allow trading and quoting in pennies for series in all other Pilot 
classes approved by the Commission that are trading below $3.00. Pilot 
classes with series trading at or above $3.00 would have a $0.05 
quoting MPV. The Exchange anticipates the Commission will approve 
options classes in issues with a contrasting range of trading activity 
so that the Exchange and the industry may better understand the effects 
of the Pilot Program. The Exchange intends to include any option 
approved as eligible for the Pilot Program for penny trading and 
quoting. The Exchange believes the Commission should approve a variety 
of option classes for inclusion in a pilot broad enough to encompass 
differing quote and trade activity levels.
    The Exchange will continue to abide by the existing Options Linkage 
Plan (``Linkage'') as described in NYSE Arca Rules 6.93 and 6.94 with 
respect to linkage operation and order protection. If the Exchange 
receives an order through Linkage in a Pilot Program series from 
another exchange not quoting and trading in pennies, the Exchange will 
fill the incoming order at a penny incremented price, as long as the 
execution price is equal to or better than the reference price of the 
Linkage order. In the event of a trade through by another Linkage 
Participant Market of a customer order in a Pilot Program issue that 
has been denominated and disseminated to the Options Price Reporting 
Authority (``OPRA'') in a penny increment, the Exchange will assign a 
reference price on an outbound Satisfaction order in the penny 
incremented price of the customer order. The Exchange believes that a 
Linkage Participant market that receives a Satisfaction order in a 
penny increment should be permitted to fill the Satisfaction order at 
its reference price; regardless of the actual MPV permitted at the 
recipient exchange. If a Participating Market is not capable of 
processing and reporting a transaction in a penny increment, the 
Exchange believes that it is consistent with the intent of the Linkage 
plan that the receiving market should fill the Satisfaction order at 
the next best MPV allowed in that series on the receiving exchange. The 
Exchange would accept an execution report at that price, and fill the 
customer order that had been traded through at the price received on 
the Satisfaction order.
    As is widely acknowledged, the options industry is facing 
significant capacity issues related to excessive quoting rates. Peak 
quote rates \3\ through April 2006 as reported by OPRA, the processor 
that disseminates quote and trade data for the options industry, have 
increased to 7 times the 2003 peak quote rates. In the last year, peak 
rates have more than doubled. In order to limit the capacity impact of 
migrating to penny trading, the Exchange proposes to limit the pilot to 
options on QQQQ and other issues approved by the Commission. This will 
allow the Exchange to carefully study the impact and assess the outcome 
of penny trading on data traffic. Further, in conjunction with the 
pilot, the Exchange proposes a strategy to mitigate the volume of data 
being processed and disseminated by OPRA.
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    \3\ Peak quote rates are measured in messages per second over a 
1 minute period.
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    Sixty days prior to the expiration of the Pilot Program, the 
Exchange agrees to submit a report to the Commission that includes: (i) 
Data and written

[[Page 61527]]

analysis on the number of quotations generated for options selected for 
the Pilot Program; (ii) an assessment of the quotation spreads for the 
options selected for the Pilot Program; (iii) an assessment of the 
impact of the Pilot Program on the capacity of the NYSE Arca's 
automated systems; (iv) any capacity problems or other problems that 
arose related to the operation of the Pilot Program and how the NYSE 
Arca addressed them; and (v) an assessment of trade through complaints 
that were sent by the NYSE Arca during the operation of the Pilot 
Program and how they were addressed. The report will study data 
produced in the first three months of the Pilot Program.
Quote Mitigation Strategy
    NYSE Arca Rule 6.86 describes the obligations of the Exchange to 
collect, process and make available to quotation vendors the best bid 
and best offer for each option series that is a reported security. The 
Exchange proposes an exception to making quotes available to quotation 
vendors as part of an approved quote mitigation plan. The quote 
mitigation strategy proposed by the Exchange is intended to reduce the 
number of quotations generated by NYSE Arca for all option issues 
traded at NYSE Arca, not just issues included in the Pilot Program. 
NYSE Arca plans to reduce the number of quote messages it sends to OPRA 
by only submitting quote messages for ``active'' options series. Active 
options series are defined as the following: (i) The series has traded 
on any options exchange in the previous 14 calendar days; or, (ii) the 
series is solely listed on NYSE Arca; or (iii) the series has been 
trading ten days or less; or, (iv) the Exchange has an order in the 
series. For any options series that falls into one of the 
aforementioned categories, NYSE Arca will submit quotes to OPRA as it 
currently does. For any options series that falls outside of the above 
categories, NYSE Arca will still accept quotes from OTP Holders in 
these series; however, such quotes will not be disseminated to OPRA.
    In addition, there are certain instances when a series would become 
active intraday. Such instances include: (i) The series trades at any 
options exchange; (ii) NYSE Arca receives an order in the series; or 
(iii) NYSE Arca receives a request for quote from a customer in that 
series. When one of the above circumstances exists, NYSE Arca would 
immediately begin disseminating quotes to OPRA in that particular 
series and would continue doing so until that series fell outside of 
the active series definition. If the series does not trade, and there 
are no orders in the series the next day, the series would no longer be 
considered active. Further, because NYSE Arca will continue to collect 
quotes from OTP Holders in inactive series, upon receiving an order in 
an inactive series, the Exchange will either execute that order against 
any marketable quotes in the trading system, or will link that order to 
the away market displaying the NBBO in that series. Accordingly, OTP 
Holders' orders will not be disadvantaged and will still have an 
opportunity to execute at the best price in such inactive series.
    Based upon studies conducted by the Exchange, it appears less than 
25% of the industry's available options series trade each day. In 
addition, on NYSE Arca on any given day, 75% of the trading volume 
occurs in options on 200 underlying securities out of a possible 2,000 
underlying securities that have listed options contracts listed on NYSE 
Arca. Accordingly, the Exchange felt it was prudent to analyze the 
quoting behavior in such inactive series. Based upon the analysis, the 
Exchange determined that it was possible to reduce quote traffic by 20-
30% by limiting quote dissemination to solely active series as 
described above. As a result, the Exchange believes its proposed data 
mitigation strategy will have a significant effect on reducing quote 
traffic and addressing the current capacity problems facing the 
industry.
2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with section 6(b) of the Act,\4\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\5\ in particular, in that it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principals of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be approved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NYSEArca-2006-73 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NYSEArca-2006-73. 
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 (http://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

[[Page 61528]]

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 Section, Station Place, 100 F Street, NE., Washington, DC 
20549-1090. Copies of such filing also will be available for inspection 
and copying at the principal office of NYSE Arca. 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-2006-73 and should be submitted 
on or before November 8, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-17317 Filed 10-17-06; 8:45 am]

BILLING CODE 8011-01-P
