

[Federal Register: February 1, 2007 (Volume 72, Number 21)]
[Notices]               
[Page 4741]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01fe07-95]                         


[[Page 4741]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55155; File No. SR-BSE-2006-49]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Granting Approval To Proposed Rule Change as Modified by Amendment No. 
1 Thereto, To Implement a Pilot Program To Quote Options in Pennies

 January 23, 2007.

I. Introduction

    On November 17, 2006, the Boston Stock Exchange, Inc. (``BSE'' 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 the Boston Options Exchange (``BOX'') 
Rules to permit certain option classes to be quoted in pennies on a 
pilot basis. The proposed rule change was published for comment in the 
Federal Register on November 27, 2006.\3\ The Commission received no 
comment letters on the proposed rule change. On January 5, 2007, the 
Exchange filed Amendment No. 1 to the proposed rule change.\4\ This 
order approves the proposed rule change as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 54789 (November 20, 
2006), 71 FR 68654.
    \4\ Amendment No. 1 proposed to replace Glamis Gold, which was 
delisted, with Agilent Tech, Inc. in the list of options classes 
permitted to be quoted in pennies. Amendment No. 1 is technical in 
nature, and the Commission is not publishing Amendment No. 1 for 
public comment.
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II. Description of the Proposal

    BOX proposes to amend its rules to permit certain option classes to 
be quoted in pennies during a six-month pilot (``Penny Pilot 
Program''), which would commence on January 26, 2007. Specifically, the 
Exchange proposes to amend Section 6 (``Minimum Trading Increments'') 
and to add a new section, Section 33, (``Penny Pilot Program'') to 
Chapter V (``Doing Business on BOX'') of the BOX Rules.
    Currently, all six options exchanges, including BOX, quote options 
in nickel and dime increments. The minimum price variation for 
quotations in options series that are quoted at less than $3 per 
contract is $0.05 and the minimum price variation for quotations in 
options series that are quoted at $3 per contract or greater is $0.10. 
Under the Penny Pilot Program, beginning on January 26, 2007, market 
participants would be able to begin quoting in penny increments in 
certain series of option classes.
    The Penny Pilot Program would include the following thirteen 
options: Ishares Russell 2000 (IWM); NASDAQ-100 Index Tracking Stock 
(QQQQ); SemiConductor Holders Trust (SMH); General Electric Company 
(GE); Advanced Micro Devices, Inc. (AMD), (Microsoft Corporation 
(MSFT); Intel Corporation (INTC); Caterpillar, Inc. (CAT); Whole Foods 
Market, Inc. (WFMI); Texas Instruments, Inc. (TXN); Flextronics 
International Ltd. (FLEX); Sun Microsystems, Inc. (SUNW); and Agilent 
Technologies, Inc. (A).
    The minimum price variation for all classes included in the Penny 
Pilot Program, except for the QQQQs, would be $0.01 for all quotations 
in option series that are quoted at less than $3 per contract and $0.05 
for all quotations in option series that are quoted at $3 per contract 
or greater. The QQQQs would be quoted in $0.01 increments for all 
options series.
    BOX commits to deliver a report to the Commission during the fourth 
month of the pilot, which would be composed of data from the first 
three months of trading. The report would analyze the impact of penny 
pricing on market quality and options system capacity.

III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\5\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\6\ which requires, among other things, that 
the rules of an exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \5\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the implementation of a limited six-
month Penny Pilot Program by BOX and the five other options exchanges 
will provide valuable information to the exchanges, the Commission and 
others about the impact of penny quoting in the options market. In 
particular, the Penny Pilot Program will allow analysis of the impact 
of penny quoting on: (1) Spreads; (2) transaction costs; (3) payment 
for order flow; and (4) quote message traffic.
    The Commission believes that the thirteen options classes to be 
included in the penny pilot program represent a diverse group of 
options classes with varied trading characteristics. This diversity 
should facilitate analyses by the Commission, the options exchanges and 
others. The Commission also believes that the Penny Pilot Program is 
sufficiently limited that it is unlikely to increase quote message 
traffic beyond the capacity of market participants' systems and disrupt 
the timely receipt of quote information.
    Nevertheless, because the Commission expects that the Penny Pilot 
Program will increase quote message traffic, the Commission has already 
approved the Exchange's proposal to reduce the number of quotations it 
disseminates.\7\
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    \7\ BOX submitted its proposed quote mitigation strategy in SR-
BSE-2006-48. See Securities Exchange Act Release No. 55073 (January 
9, 2007), 72 FR 2047 (January 17, 2006).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-BSE-2006-49), as modified by 
Amendment No. 1, be, and hereby is, approved on a six-month pilot 
basis, which will commence on January 26, 2007.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-1592 Filed 1-31-07; 8:45 am]

BILLING CODE 8011-01-P
