
[Federal Register: December 1, 2009 (Volume 229, Number 74)]
[Notices]               
[Page 62857-62859]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de09-145]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61061; File No. SR-NYSEArca-2009-44]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Partial Approval of a Proposed Rule Change, as Modified by Amendment 
No. 4 Thereto, Expanding the Penny Pilot Program

November 24, 2009.

I. Introduction

    On May 15, 2009, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend its options trading rule to extend through December 31, 2010

[[Page 62858]]

and expand a program to quote certain options in smaller increments 
(``Pilot Program'' or ``Pilot''). The proposed rule change was 
published for comment in the Federal Register on May 27, 2009.\3\ The 
Commission received nine comments letters in response to the initial 
notice of this proposal.\4\ On August 19, 2009 and September 22, 2009, 
the Exchange filed Amendment Nos. 1 and 3, respectively.\5\ Among other 
things, in Amendment No. 3, the Exchange consented to a bifurcation of 
the filing such that the portion of the proposed rule change proposing 
to quote all series of IWM (iShares Russell 2000 Index Fund) and SPY 
(SPDR S&P 500 ETF) in pennies would be subject to further notice and 
comment prior to Commission action. On September 23, 2009, the 
Commission solicited further comment on the proposed rule change, as 
modified by Amendment Nos. 1 and 3, and simultaneously granted partial 
approval to the proposed rule change, as modified by Amendment Nos. 1 
and 3, on an accelerated basis.\6\ The Commission specifically 
requested comment on NYSE Arca's proposal to quote all option series of 
IWM and SPY in pennies. The Commission received two additional comment 
letters in response to this further request for comments.\7\ On October 
30, 2009, the Exchange filed Amendment No. 4 to the proposed rule 
change.\8\ This Order approves the balance of the proposed rule change, 
as modified by Amendment No. 4.\9\
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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. 59944 (May 20, 
2009), 74 FR 25294 (May 27, 2009) (``Notice'').
    \4\ See letter from Stephen Schuler and Daniel Tierney, Managing 
Members, Global Electronic Trading Company, dated June 10, 2009 
(``GETCO Letter 1''); letter from Edward J. Joyce, President and 
COO, Chicago Board Options Exchange, dated June 12, 2009 (``CBOE 
Letter 1''); letter from Thomas Wittman, Vice President, The NASDAQ 
OMX Group, Inc., dated June 12, 2009 (``Nasdaq Letter''); letter 
from Christopher Nagy, Managing Director Order Routing Strategy, TD 
Ameritrade, Inc., dated June 17, 2009 (``Ameritrade Letter''); 
letter from Thomas F. Price, Managing Director, Securities Industry 
and Financial Markets Association, dated June 17, 2009 (``SIFMA 
Letter''); letter from Anthony J. Saliba, CEO, LiquidPoint LLC, 
dated June 17, 2009 (``LiquidPoint Letter''); letter from Michael J. 
Simon, Secretary, International Securities Exchange, LLC, dated June 
23, 2009 (``ISE Letter''); letter from John Ingrill, Gerard Satur, 
Karen Wendell, Managing Directors, UBS Securities LLC, dated June 
30, 2009 (``UBS Letter''); and letter from Jerome Johnson, Vice 
President, Market Development, BATS Exchange, Inc., dated August 28, 
2009 (``BATS Letter''). See Notice, supra note 3.
    \5\ On September 22, 2009, the Exchange filed Amendment No. 2 to 
the proposed rule change, which it withdrew on September 22, 2009.
    \6\ See Securities Exchange Act Release No. 60711 (September 23, 
2009), 74 FR 49419 (September 28, 2009) (order granting partial 
approval of SR-NYSEArca-2009-44, (``Order'')).
    \7\ See letter from John A. McCarthy, General Counsel, Global 
Electronic Trading Company, to Elizabeth M. Murphy, Secretary, 
Commission, dated October 19, 2009 (``GETCO Letter 2'') and letter 
from Edward J. Joyce, President and Chief Operating Officer, Chicago 
Board Options Exchange, Incorporated, to Elizabeth M. Murphy, 
Secretary, Commission, dated October 15, 2009 (``CBOE Letter 2'').
    \8\ In Amendment No. 4, the Exchange proposes to move the start 
date for quoting all options on IWM and SPY in one-cent increments 
to February 1, 2010, to correspond with the second phase-in date for 
additional classes in the Pilot. The Commission believes that 
Amendment No. 4 is technical in nature and therefore not subject to 
separate notice and comment.
    \9\ The Exchange has granted the Commission an extension of time 
to act, until November 30, 2009.
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II. Description of the Proposal

    Currently, all seven options exchanges participate in the Pilot 
Program, which is scheduled to expire on December 31, 2010. The minimum 
variation for all classes included in the Pilot, except for QQQQ,\10\ 
is $0.01 for all quotations in option series that are quoted at less 
than $3.00 per contract, and $0.05 for all quotations in option series 
that are quoted at $3.00 or greater. Thus, the current minimum 
increment for bids and offers in SPY and IWM is $0.01 for all options 
series below $3.00 and $0.05 for all options series $3.00 and above. 
The Exchange proposes to designate all options series of SPY and IWM as 
eligible to quote and trade in $0.01 increments, regardless of premium 
value, similar to QQQQ.
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    \10\ Options on QQQQ are quoted in $0.01 increments for all 
series.
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III. Discussion and Findings

    After careful review of the proposed rule change, Amendment Nos. 1, 
3, and 4, the comment letters,\11\ and the NYSE Arca Response,\12\ the 
Commission finds that the portion of the proposal to quote IWM and SPY 
entirely in one-cent increments is consistent with the requirements of 
the Act, and the rules and regulations thereunder that are applicable 
to a national securities exchange. Specifically, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\13\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and in general, 
to protect investors and the public interest.\14\
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    \11\ See supra notes 4 and 7.
    \12\ See letter from Janet M. Kissane, Senior Vice President--
Legal & Corporate Secretary, NYSE Arca, to Elizabeth M. Murphy, 
Secretary, Commission, dated August 18, 2009.
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    In response to the initial notice of this proposal,\15\ the 
Commission received several comment letters with respect to the portion 
of the proposal that would allow quoting of all series of options on 
IWM and SPY in one-cent increments.\16\ In response to the additional 
request for comment, the Commission received two comment letters.\17\
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    \15\ See Notice, supra note 3.
    \16\ See CBOE Letter 1, GETCO Letter 1, and SIFMA Letter, supra 
note 4.
    \17\ See GETCO Letter 2 and CBOE Letter 2, supra note 7.
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    Two commenters do not support this aspect of NYSE Arca's proposal 
and question NYSE Arca's basis for the proposal.\18\ In particular, one 
commenter does not find persuasive NYSE Arca's rationale that because 
IWM and SPY have more series trading at premiums between $3.00 and 
$10.00, the $3.00 breakpoint should be eliminated, noting that only 11% 
of IWM's national average daily volume and 18% of SPY's national 
average daily volume is in series with premiums greater than $3.00.\19\ 
In its second comment letter, this commenter stated its belief that the 
potential benefit to retail investors of eliminating the $3.00 
breakpoint in these classes is small and does not outweigh the costs of 
the proposed change.\20\ Specifically, the commenter estimates that 
eliminating the $3.00 breakpoint in IWM and SPY would result in a 128% 
increase in quote message traffic. In addition, the commenter believes 
that investors are already receiving the benefits of penny quoting in 
these two classes because the majority of volume and trades in these 
two classes occurs in series that are already quoting in $0.01 
increment.\21\ Finally, this commenter notes that they have not 
observed pressure on the minimum increment in SPY and IWM in series 
priced at $3.00 and above.\22\
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    \18\ See CBOE Letter 1, supra note 4, at 2-3, and SIFMA Letter, 
supra note 4, at 5.
    \19\ See CBOE Letter 1, supra note 4, at 3. This commenter 
further noted that the average spread width in series with a premium 
$3.00 or greater is $0.27 for SPY and $0.25 for IWM. Id.
    \20\ See CBOE Letter 2, supra note 7, at 1.
    \21\ See id. at 2.
    \22\ See id. at 2.
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    One commenter supports NYSE Arca's proposal to eliminate a 
breakpoint for options on these two exchange-traded funds, as a way to 
expand the benefits of penny quoting to more options.\23\ In its second 
comment letter, this commenter reiterates its

[[Page 62859]]

strong support of NYSE Arca's proposal.\24\ This commenter believes 
that all option series of SPY and IWM are well suited to quoting in 
penny increments and provides data supporting the elimination of 
breakpoints with respect to SPY and IWM. Specifically, the commenter 
compared effective spreads in options on IWM, SPY, and QQQQ and found 
that the size of the effective spreads for options on IWM and SPY 
increased markedly at the $3.00 breakpoint, as compared to options on 
QQQQ. This commenter also compared effective spreads for options on 
IWM, SPY, and QQQQ when quoted in one-cent increments with effective 
spreads for SPY and IWM when quoted in five-cent increments. The 
results show that the size of the quoting increment appears to be a 
significant determinant of the width of the effective spreads.\25\
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    \23\ See GETCO Letter 1, supra note 4, at 2-3.
    \24\ See GETCO Letter 2, supra note 7, at 1-2.
    \25\ Id. at 3-4.
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    The Commission believes that NYSE Arca's proposal is consistent 
with the Act because allowing market participants to quote in smaller 
increments has been shown to reduce spreads, thereby lowering costs to 
investors. The reduction in the minimum quoting increment has resulted 
in narrowing the average quoted spreads in options included in the 
Pilot.\26\ Permitting all series in options on IWM and SPY to be quoted 
in smaller increments will provide the opportunity for reduced spreads 
for a significant amount of trading volume.\27\ The Commission believes 
that the proposed rule change, which will allow quoting in one-cent 
increments for all series in options on IWM and SPY, is designed to 
allow the continuing narrowing of spreads.\28\
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    \26\ See Memorandum from J. Daniel Aromi, Office of Economic 
Analysis (``OEA''), to Heather Seidel, Assistant Director, Division 
of Trading and Markets, Commission, dated July 24, 2009.
    \27\ OEA staff estimated that for a four month period earlier 
this year, approximately 40.9 million contracts for SPY and 
approximately 4.5 million contracts for IWM traded at premia of 
$3.00 or greater, as compared to approximately 2.7 million contracts 
for QQQQ that traded at premia of $3.00 or greater. See Memorandum 
from J. Daniel Aromi, OEA, to Heather Seidel, Assistant Director, 
Division of Trading and Markets, Commission, dated August 14, 2009 
(measuring from February 2, 2009 to May 27, 2009). These numbers 
represent approximately 29% of contract volume for SPY and 18% of 
contract volume for IWM. The Commission specifically requested 
comment on these findings. See Order, supra note 6.
    \28\ One commenter stated that ``full access to penny increments 
provides investors with more flexibility to compete and determine 
the natural spread for each security independently.'' This commenter 
further stated that ``penny pricing gives market participants the 
flexibility to trade with spreads at six or eleven cents wide, as 
much as it facilitates trading in one or two cent spreads.'' This 
commenter explained that even if spreads in a Pilot class increase, 
quoting in pennies mitigates the increase. For example, the 
commenter noted that CBOE's March Report showed that for the period 
August 1, 2008 through January 31, 2009, the average spread in OIH 
options increased from $0.13 to $0.19. The commenter pointed out 
that if this class were not quoting in pennies, the $0.06 increase 
in the spread could have been a $0.10 increase. See BATS Letter, 
supra note 4, at 1-2.
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    Further, although the Pilot has contributed to the increase in 
quote message traffic, it has been manageable by the exchanges and the 
Options Price Reporting Authority, and the Commission has not received 
any reports of disruptions in the dissemination of pricing information. 
As noted in the Order, although the Commission anticipates that NYSE 
Arca's proposal, including that portion proposing to quote and trade 
all series of options on SPY and IWM, will contribute to further 
increases in quotation message traffic, the Commission believes that 
NYSE Arca's proposal is sufficiently limited such that it is unlikely 
to increase quotation message traffic beyond the capacity of market 
participants' systems and disrupt the timely receipt of information.
    The Commission believes that eliminating the $3.00 breakpoint in 
options on IWM and SPY will result in additional meaningful data from 
which to analyze the impact of quoting and trading entirely in one-cent 
increments. Currently, only one class, the QQQQ, quotes and trades all 
series in one-cent increments. The Commission believes that allowing 
two additional classes to quote and trade all series in pennies may 
provide valuable information, useful to future analysis of the Penny 
Pilot.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
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-2009-44 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2009-44. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (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 such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-NYSEArca-2009-44 and should be 
submitted on or before December 22, 2009.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-NYSEArca-2009-44) as 
modified by Amendment No. 4, be, and hereby is, partially approved, as 
discussed above.
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    \29\ 15 U.S.C. 78s(b)(2).
    \30\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-28680 Filed 11-30-09; 8:45 am]

BILLING CODE 8011-01-P
