
[Federal Register Volume 78, Number 31 (Thursday, February 14, 2013)]
[Notices]
[Pages 10671-10674]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03386]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68873; File No. SR-CBOE-2013-016]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change To Permit the 
Minimum Price Variation for Mini-Options To Be the Same as Permitted 
for Standard Options on the Same Security

February 8, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 10672]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 31, 2013, Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II 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

    CBOE proposes to permit the minimum price variation for mini-option 
contracts that deliver 10 shares to be the same as permitted for 
standard options that deliver 100 shares on the same security. The text 
of the proposed rule change is available on the Exchange's Web site 
http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the 
Exchange's Office of the Secretary, and at the Commission.

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 those 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
    CBOE recently amended its rules to allow for the listing of mini-
options that deliver 10 physical shares on SPDR S&P 500 (``SPY''), 
Apple, Inc. (``AAPL''), SPDR Gold Trust (``GLD''), Google Inc. 
(``GOOG'') and Amazon.com Inc. (``AMZN'').\3\ Mini-options trading is 
expected to commence in March 2013. Prior to the commencement of 
trading mini-options, the Exchange proposes to establish and permit the 
minimum price variation for mini-option contracts to be the same as 
permitted for standard options on the same security. In addition to 
giving market participants clarity as to the minimum pricing increments 
for mini-options, the filing would harmonize penny pricing between 
mini-options and standard options on the same security.
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    \3\ See Securities Exchange Act Release No. 68656 (January 15, 
2013), 78 FR 4526 (January 22, 2013) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change to List and Trade Option 
Contracts Overlying 10 Shares of Certain Securities) (SR-CBOE-2013-
001).
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    Of the five securities on which mini-options are permitted, four of 
them (SPY, AAPL, GLD and AMZN) participate in the Penny Pilot Program. 
Under the Penny Pilot Program:
     The minimum price variation for AAPL, GLD and AMZN options 
is $0.01 for all quotations in series that are quoted at less than $3 
per contract and $0.05 for all quotations in series that are quoted at 
$3 per contract or greater; \4\ and
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    \4\ See CBOE Rule 6.42(3).
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     The minimum price variation for SPY options is $0.01 for 
all quotations in all series.\5\
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    \5\ See CBOE Rule 6.42(3) and Securities Exchange Act Release 
No. 61478 (February 3, 2010), 75 FR 6762 (February 10, 2010) (Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change to 
[sic] Relating to the Penny Pilot Program) (SR-CBOE-2010-09).
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    In the lead up to the launch of mini-options trading, the Exchange 
has polled firms with customer bases of potential product users and 
they have indicated a preference that premium pricing for mini-options 
match what is currently permitted for standard options that deliver 100 
physical shares on the same securities. Specifically, firms' systems 
are configured using the ``root symbol'' of an underlying security and 
cannot differentiate, for purposes of minimum variation pricing, 
between contracts on the same security. Mini-options will be loaded 
into firms' systems using the same ``root symbol'' that is used for 
standard options on the same security. As a result, it is believed that 
existing systems will not be able to assign different minimum pricing 
variations to different contracts on the same security. As a result, 
firms have indicated their preference that there be matched pricing 
between mini-options and standard options on the same security because 
their systems, which are programmed using ``root symbols,'' would not 
be able to assign different minimum pricing variations to mini-options 
and standard options on the same security.
    Because mini-options are a separate class from standard options on 
the same security, mini-options would have to qualify separately for 
entry into the Penny Pilot Program. This, however, is not possible by 
product launch (or possibly ever) for a number of reasons. First, there 
is a six calendar month trading volume criteria for entry into the 
Penny Pilot Program, which mini-options cannot satisfy prior to launch. 
Second, even if mini-options met the trading volume criteria, 
replacement classes are only added to the Penny Pilot Program on the 
second trading day following January 1 and July 1 in a given year. 
Finally, there is a price test for entry into the Penny Pilot Program 
which excludes ``high premium'' classes, which are defined as classes 
priced at $200 per share or higher at the time of selection. As of the 
date of this filing, three of the five securities (AAPL, AMZN and GOOG) 
eligible for mini-options would be excluded as ``high premium'' 
classes, even though two of those securities (AAPL and AMZN) are in the 
Penny Pilot Program for standard options. The Exchange notes that GOOG 
is not in the Penny Pilot Program.\6\
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    \6\ The minimum price variation for standard options on GOOG is 
$0.05 for all quotations in series that are quoted at less than $3 
per contract and $0.10 for all quotations in series that are quoted 
at $3 per contract or greater. See CBOE Rule 6.42(1) and (2).
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    The Exchange, therefore, is proposing to establish a pricing regime 
for mini-options separate from the Penny Pilot Program that permits the 
minimum price variation for mini-option contracts to be the same as 
permitted for standard options on the same security, which would 
encompass penny pricing for mini-option contracts on securities that 
participate in the Penny Pilot Program.\7\
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    \7\ As noted in the Exchange's original mini-option filing, 
mini-options are limited to five securities and any expansion of the 
program would require that a subsequent proposed rule change be 
submitted to the Commission. The current proposal is limited to the 
five securities originally approved to underlie mini-options. The 
Exchange anticipates that a similar minimum pricing variation regime 
would be included in any rule change to expand the mini-option 
program.
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    As to the Penny Pilot Program, the Exchange believes that there are 
several good reasons to allow penny pricing for mini-options on 
securities that currently participate in the Penny Pilot Program, 
without requiring mini-options to separately qualify for the Penny 
Pilot Program. First, the Penny Pilot Program applies to the most 
actively-traded, multiply-listed option classes. Likewise, the five 
securities which may underlie mini-options were chosen because of the 
significant liquidity in standard options on the same security. The 
Exchange also believes that the marketplace and investors will be 
expecting the minimum price variation for contracts on the same 
security to be the same. Second, one of the primary goals of the Penny 
Pilot Program is to

[[Page 10673]]

narrow the bid-ask spreads of exchange-traded options to reduce the 
cost of entering and exiting positions. This same goal can similarly be 
accomplished by permitting penny pricing for mini-option contracts on 
securities that already participate in the Penny Pilot Program. 
Finally, the Exchange believes that penny pricing for mini-options is 
desirable for a product that is geared toward retail investors. Mini-
options are on high priced securities and are meant to be an investment 
tool with more affordable and realistic prices for the retail average 
investor. Penny pricing for mini-options on securities that are 
currently in the Penny Pilot Program would benefit the anticipated 
users of mini-options by providing more price points. The Exchange 
notes that it is not requesting penny pricing for all of the five 
securities eligible for mini-options trading; but rather is seeking to 
permit matched penny pricing for mini-options on those securities for 
which standard options already trade in pennies.
    In addition to an expressed market preference for matched minimum 
increment pricing (including penny pricing) between mini-options and 
standard options on the same securities, the Exchange believes that its 
rules establish precedent for the current proposal. Specifically, CBOE 
Rule 6.42.03 provides, among other things, that matched penny pricing 
between SPY and Mini-S&P 500 Index (``XSP'') options is permitted. As 
to SPY and XSP options, the rationale for matched pricing was that the 
underlying SPY ETF is designed to track the performance of the S&P 500 
Index and XSP options are options based on the S&P 500 Index.\8\ In 
support of this earlier filing, the Exchange believed that having the 
same minimum price variation for SPY and XSP options was necessary for 
consistency and for competitive reasons.
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    \8\ See Securities Exchange Act Release No. 56565 (September 27, 
2007), 72 FR 56403 (October 3, 2007) (Order Granting Approval to a 
Proposed Rule Change Regarding the Extension and Expansion of the 
Penny Pilot Program) (SR-CBOE-2007-98).
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    To effect the current proposed rule changes, CBOE proposes to amend 
CBOE Rules 6.42 and 5.5. As to CBOE Rule 6.42 (Minimum Increments for 
Bids and Offers), CBOE proposes adding new Interpretation and Policy 
.04 that would be an internal cross reference to new proposed 
Interpretation and Policy .22(d) to CBOE Rule 5.5 as the provision that 
sets forth the minimum price variation for bids and offers for mini-
options. Proposed Interpretation and Policy .22(d) to CBOE Rule 5.5 
would provide as follows:

    The minimum price variation for bids and offers for mini-options 
shall be the same as permitted for standard options on the same 
security. For example, if a security participates in the Penny Pilot 
Program, mini-options on the same underlying security may be quoted 
in the same minimum increments, e.g., $0.01 for all quotations in 
series that are quoted at less than $3 per contract and $0.05 for 
all quotations in series that are quoted at $3 per contract or 
greater, $0.01 for all SPY option series, and mini-options do not 
separately need to qualify for the Penny Pilot Program.

    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it and the 
Options Price Reporting Authority have the necessary systems capacity 
to handle the potential additional traffic associated with this 
proposal. The Exchange does not believe that this increased traffic 
will become unmanageable since mini-options are limited to a fixed 
number of underlying securities.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder, including the 
requirements of Section 6(b) of the Act.\9\ In particular, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \10\ requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that investors and other market 
participants would benefit from the current rule proposal because it 
would clarify and establish the minimum price variation for mini-
options prior to the commencement of trading. The Exchange believes 
that the marketplace and investors will be expecting the minimum price 
variation for contracts on the same security to be the same. As a 
result, the Exchange believes that this change would lessen investor 
and marketplace confusion because mini-options and standard options on 
the same security would have the same minimum price variation.
    While price protection between mini-options and standard options on 
the same security is not required, the Exchange believes that 
consistency between mini-options and standard options as to the minimum 
price variation is desirable and is designed to promote just and 
equitable principles of trade. Matching the minimum price variation 
between mini-options and standard options on the same security would 
help to eliminate any unnecessary arbitrage opportunities that could 
result from having contracts on the same underlying security traded in 
different minimum price increments. Similarly, matched minimum pricing 
would hopefully generate enhanced competition among liquidity 
providers. The Exchange believes that matched pricing for mini-options 
and standard options on the same security would attract additional 
liquidity providers who would make markets in mini-options and standard 
options on the same security. In addition to the possibility of more 
liquidity providers, the Exchange believes that the ability to quote 
mini-options and standard options on the same security in the same 
minimum increments would hopefully result in more efficient pricing via 
arbitrage and possible price improvement in both contracts on the same 
security. The Exchange also believes that allowing penny pricing for 
mini-options on securities that currently participate in the Penny 
Pilot Program (without mini-options having to qualify separately for 
entry into the Penny Pilot Program) will benefit the marketplace and 
investors because penny pricing in mini-options may also accomplish one 
of the primary goals of the Penny Pilot Program, which is to narrow the 
bid-ask spreads of exchange-traded options to reduce the cost of 
entering and exiting positions. Finally, the proposed rule would be 
beneficial from a logistical perspective since firms' existing systems 
are configured using the ``root symbol'' of an underlying security and 
would not be able to assign different minimum pricing variations to 
mini-options and standard options on the same security.

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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act. Specifically, since mini-options are permitted 
on multiply-listed classes, other exchanges that have received approval 
to trade mini-options will have the opportunity to similarly establish 
the minimum price variation for mini-options prior to the anticipated 
launch in March 2013. CBOE also believes that the proposed rule change 
will enhance competition by allowing

[[Page 10674]]

products on the same security to be priced in the same minimum price 
increments.

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 (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 or disapprove 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. 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 email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2013-016 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-CBOE-2013-016. 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 (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 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-CBOE-2013-016 and should be 
submitted on or before March 7, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03386 Filed 2-13-13; 8:45 am]
BILLING CODE 8011-01-P


