
[Federal Register: June 25, 2009 (Volume 74, Number 121)]
[Notices]               
[Page 30346-30349]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25jn09-89]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60146; File No. SR-ISE-2009-32]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Relating to the Penny 
Pilot Program

June 19, 2009.
    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 June 11, 2009, the International Securities Exchange, LLC 
(``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (the ``SEC'' or the ``Commission'') the proposed rule change 
as described in Items I, II, and III below, which items have been 
prepared by the self-regulatory organization. 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

    The ISE proposes to amend its rules relating to a pilot program to 
quote and to trade certain options in pennies. The text of the proposed 
rule change is as follows, with deletions in [brackets] and additions 
in italics:

Rule 710. Minimum Trading Increments

    (a) The Board may establish minimum trading increments for options 
traded on the Exchange. Such changes by the Board will be designated as 
a stated policy, practice, or interpretation with respect to the 
administration of this Rule 710 within the meaning of subparagraph 
(3)(A) of Section 19(b) of the Exchange Act and will be filed with the 
SEC as a rule change for effectiveness upon filing. Until such time as 
the Board makes a change in the increments, the following principles 
shall apply:
    (1) if the options contract is trading at less than $3.00 per 
option, $.05; and
    (2) if the options contract is trading at $3.00 per option or 
higher, $.10.
    (b) Minimum trading increments for dealings in options contracts 
other than those specified in paragraph (a) may be fixed by the 
Exchange from time to time for options contracts of a particular 
series.

[[Page 30347]]

    (c) Notwithstanding the above, the Exchange may trade in the 
minimum variation of the primary market in the underlying security.

Supplementary Material to Rule 710

    .01 Notwithstanding any other provision of this Rule 710, the 
Exchange will operate a pilot program to permit options classes to be 
quoted and traded in: [increments as low as $.01.]
    (a) $.01 increments if the options contract is trading at less than 
$1.00 per option;
    (b) $.05 increments if the options contract is trading between 
$1.00 and $3.00 per option; and
    (c) $.10 increments if the options contract is trading at higher 
than $3.00 per option.
    The Exchange will specify which options trade in such pilot, and in 
what increments, in Regulatory Information Circulars filed with the 
Commission pursuant to Rule 19b-4 under the Exchange Act and 
distributed to Members.
    .02 No Change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self regulatory organization 
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
    On January 24, 2007, the SEC approved ISE's rule filing, SR-ISE-
2006-62, which initiated a pilot program to quote and to trade certain 
options in penny increments (the ``Penny Pilot Program'').\3\ Under the 
Penny Pilot Program, the minimum price variation for all participating 
options classes, except for the Nasdaq-100 Index Tracking Stock 
(``QQQQ''), is $0.01 for all quotations in options series that are 
quoted at less than $3 per contract and $0.05 for all quotations in 
options series that are quoted at $3 per contract or greater. The QQQQs 
are quoted in $0.01 increments for all options series. Through 
subsequent expansions, the Penny Pilot now consists of 63 underlying 
securities.\4\ The Penny Pilot Program is scheduled to expire on July 
3, 2009. ISE now proposes to extend the Penny Pilot Program through 
December 31, 2010.
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    \3\ See Securities Exchange Act Release No. 55161 (January 24, 
2007), 72 FR 4754 (February 1, 2007) (the ``Initial Filing''). The 
Penny Pilot Program was subsequently extended for an additional two 
month period, until September 27, 2007. See Securities Exchange Act 
Release No. 56151 (July 26, 2007), 72 FR 42452 (August 2, 2007).
    \4\ See Securities Exchange Act Release Nos. 56564 (September 
27, 2007), 72 FR 56412 (October 3, 2007) and 57508 (March 17, 2008), 
73 FR 15243 (March 21, 2008).
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    The Exchange also proposes to expand the number of issues included 
in the Penny Pilot Program to include the top 300 most actively traded 
multiply listed options classes that are not currently a part of the 
Penny Pilot Program. ISE is prepared to further expand the Penny Pilot 
Program to all ISE listed symbols at the end of the proposed extension, 
subject to the performance of the expanded pilot, as proposed by this 
rule change.
    Under this proposal, these additional classes will be determined 
based on their national average daily volume over a six month period 
immediately preceding their inclusion in the Penny Pilot Program.\5\ 
The Exchange notes that it will submit proposed rule changes pursuant 
to Rule 19b-4 under the Exchange Act announcing the names of the 
options classes selected to participate in the Penny Pilot Program.\6\ 
The Exchange represents that after the addition of the 300 options 
classes, as proposed under this rule change, it has the necessary 
system capacity to support the listing of additional series under the 
Penny Pilot Program.
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    \5\ The Exchange will not include options classes in which the 
issuer of the underlying security is subject to an announced merger 
or is in the process of being acquired by another company, or if the 
issuer is in bankruptcy. For purposes of assessing national average 
daily volume, the Exchange will use data compiled and disseminated 
by the Options Clearing Corporation.
    \6\ ISE will also issue a Regulatory Information Circular, which 
will be published on its Web site, identifying the options classes 
added to the Penny Pilot Program.
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    The Exchange proposes to extend the existing Penny Pilot Program 
until October 1, 2009 and then phase in the additional classes to the 
Penny Pilot Program over four successive quarters. Specifically, the 
Exchange proposes to add 35 classes in October 2009 and in January 2010 
followed by an additional 115 classes both in April 2010 and in July 
2010, each group to be effective for trading on the Monday ten days 
after Expiration Friday. Thus, the quarterly additions would be 
effective on October 26, 2009; January 25, 2010; April 26, 2010; and 
July 26, 2010.\7\ The above roll-out schedule contemplates the launch 
of the new Linkage Plan, which is scheduled to occur on August 31, 
2009. ISE believes that the new Linkage Plan should be implemented 
before the current Penny Pilot Program is expanded because intermarket 
sweep orders (ISOs) will be available in the new Linkage Plan, which 
will allow market participants to access simultaneously better priced 
quotations across all options exchanges.
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    \7\ For purposes of identifying the issues to be added per 
quarter, the Exchange shall use data from the prior six calendar 
months immediately preceding the implementation month. For example, 
the quarterly additions to be added on October 26, 2009 shall be 
determined using data from the sixth month period ending September 
30, 2009.
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    During the course of the Penny Pilot Program, ISE has thoroughly 
analyzed the impact of trading options in penny increments. ISE has 
also submitted reports to the SEC describing its findings. For the most 
part, the Penny Pilot Program has continued without any operational 
issues. The quoted spread tightened in the year following introduction 
of pennies, but widened for phase 1 and 2 symbols in the past six 
months. The size available at the BBO, however, has decreased 
significantly since the start of the Penny Pilot Program, while trading 
volume has increased.
    Despite the increase in the number of quotes that is in large part 
attributed to the Penny Pilot Program, ISE is supportive of an expanded 
Penny Pilot Program but one that is measured. Quoting options in penny 
increments also significantly increases quotation traffic and imposes 
significant costs on exchanges, market makers and other market 
participants. Thus, ISE believes that a focused expansion where there 
would be the most benefit is the responsible and prudent way to 
proceed. Accordingly, ISE proposes to expand the Penny Pilot Program by 
adopting three ``breakpoints,'' as follows:
     $0.01 increments for options contracts trading at less 
than $1.00 per option;
     $0.05 increments for options contracts trading between 
$1.00 and $3.00 per option; and
     $0.10 increments for options contracts trading higher than 
$3.00 per option.
    ISE believes an expansion with these tiers will allow the industry 
to manage the large number of quotes generated in high-priced series 
that have little, if any, trading volume, and which thus far have been 
excluded from the Penny Pilot

[[Page 30348]]

Program due to their high quotation rates. If these options were 
migrated to pennies indiscriminately, the number of quotes sent to OPRA 
for these series would double. By retaining these tiers, ISE believes 
that the number of quotes generated by high priced series will be 
manageable and adequate liquidity will be maintained in higher priced 
option series. ISE's proposal would also apply to the QQQQs, which are 
currently quoted in $0.01 increments for all options series.
    The Penny Pilot Program generally has been beneficial to retail 
investors and ISE believes its proposal would preserve the benefits of 
penny trading for lower-priced, more retail-oriented contracts. 
Institutional investors, on the other hand, have been disadvantaged 
with the lack of liquidity at the inside in the classes that are 
currently in the pilot and the Exchange believes its proposal will 
serve to increase the displayed liquidity for options trading above 
$1.00.
    As proposed in the Initial Filing, ISE represents that options 
trading in penny increments will not be eligible for split pricing, as 
permitted under ISE Rule 716. In the Initial Filing, the Exchange also 
made references to quote mitigation strategies that are currently in 
place and proposed to apply them to the Penny Pilot Program. The 
Exchange proposes to continue applying those quote mitigation 
strategies during the extension of the Penny Pilot Program, as 
contemplated by this rule filing. Specifically, as proposed in Rule 
804, ISE will continue to utilize a holdback timer that delays 
quotation updates for up to, but not longer than, one second. The 
Exchange's monitoring and delisting policies, as proposed in the 
Initial Filing, shall also continue to apply.
    The Exchange agrees to submit semi-annual reports to the Commission 
analyzing the Penny Pilot Program for the following time periods:
     July 1, 2009-December 31, 2009.
     January 1, 2010-June 30, 2010.
     July 1, 2010-December 31, 2010.
    The Exchange anticipates its report will analyze the impact of 
penny pricing on market quality and options system capacity. The 
Exchange will submit the report within one month following the end of 
the period being analyzed.
    ISE believes in a measured extension and expansion of the Penny 
Pilot Program. A properly thought out plan will serve to benefit public 
customers by providing them with penny quoting and trading in a greater 
number of actively traded securities. While an expansion of the Penny 
Pilot Program will lead to greater quotation traffic and confront 
exchanges with systems capacity issues, the Exchange believes that the 
benefits of the Penny Pilot Program outweigh these costs.
2. Statutory Basis
    The basis under the Securities Exchange Act of 1934 (the ``Exchange 
Act'') for this proposed rule change is found in Section 6(b)(5), in 
that the proposed rule change is designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanisms 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest. In particular, the 
proposed rule change allows for a measured expansion of the Penny Pilot 
Program for the benefit of market participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. In addition, the Commission seeks 
comment on the following issues:
    1. The Commission requests comment specifically on the extent and 
cost of the impact, if any, to market participants' technological 
systems and platforms to accommodate ISE's proposed change in 
breakpoints for option classes included in the Penny Pilot.
    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-ISE-2009-32 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-ISE-2009-32. 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 public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing will also be available for 
inspection and copying at the principal office of the self-regulatory 
organization. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-ISE-
2009-32 and should be submitted on or before July 16, 2009.


[[Page 30349]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-14959 Filed 6-24-09; 8:45 am]

BILLING CODE 8010-01-P
