
[Federal Register Volume 78, Number 52 (Monday, March 18, 2013)]
[Notices]
[Pages 16752-16753]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06121]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69124; File Nos. SR-CBOE-2013-016; SR-ISE-2013-08]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; International Securities Exchange, LLC; Order Granting 
Accelerated Approval of Proposed Rule Changes To Permit the Minimum 
Price Variation for Mini Options To Be the Same as Permitted for 
Standard Options on the Same Underlying Security

March 12, 2013.

I. Introduction

    On January 31, 2013, Chicago Board Options Exchange, Incorporated 
(``CBOE'') and on February 6, 2013, International Securities Exchange, 
LLC (``ISE,'' and together with CBOE, ``Exchanges'') 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\ proposed rule changes to permit the 
minimum price variation for Mini Options to be the same as the minimum 
price variation for standard options on the same underlying security. 
CBOE's proposed rule change was published for comment in the Federal 
Register on February 14, 2013,\3\ and the Commission received three 
comment letters on the proposal.\4\ On March 8, 2013, CBOE submitted a 
response letter.\5\ ISE's proposed rule change was published for 
comment in the Federal Register on February 20, 2013,\6\ and the 
Commission received one comment letter on the proposal.\7\ The 
Commission is approving the Exchanges' proposals on an accelerated 
basis.
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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. 68873 (February 8, 
2013), 78 FR 10671 (``CBOE Notice'').
    \4\ See letters from David Schmueck, Director, Chief Regulatory 
Officer, LiquidPoint LLC, dated March 11, 2013 (``LiquidPoint 
Letter''); Ellen Greene, Vice President, Financial Services 
Operations, Securities Industry and Financial Markets Association 
(``SIFMA''), dated March 6, 2013 (``SIFMA Letter''); and Michael L. 
Sheedy, dated February 22, 2013 (``Sheedy Letter'').
    \5\ See letter from Jenny Golding, Senior Attorney, Legal 
Division, CBOE, dated March 8, 2013 (``CBOE Response Letter'').
    \6\ See Securities Exchange Act Release No. 68919 (February 13, 
2013), 78 FR 11921 (``ISE Notice'').
    \7\ See letter from Gary J. Sjostedt, Director, Order Routing 
Strategy, TD Ameritrade, Inc. (``TD Ameritrade''), dated January 30, 
2013 (``TD Ameritrade Letter'').
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II. Description of the Proposed Rule Changes

    CBOE and ISE currently have rules that provide for the listing and 
trading of options (``Mini Options'') that deliver 10 physical shares 
of SPDR S&P 500 (``SPY''), Apple Inc. (``AAPL''), SPDR Gold Trust 
(``GLD''), Google Inc. (``GOOG''), and Amazon.com, Inc. (``AMZN'').\8\ 
The Exchanges now propose to amend their rules to provide that the 
minimum price variation for bids and offers for Mini Options be the 
same as the minimum price variation for standard options on the same 
underlying security.\9\ For example, if standard options on a security 
participate in the Penny Pilot Program, Mini Options on the same 
underlying security would be quoted in the same minimum increments 
(i.e., $0.01 for series that are quoted at less than $3 per contract 
and $0.05 for series that are quoted at $3 per contract or greater, and 
$0.01 for all SPY options series). Of the five securities on which Mini 
Options are permitted, SPY, AAPL, GLD, and AMZN participate in the 
Penny Pilot Program. As proposed, for Mini Options on AAPL, GLD, and 
AMZN, the minimum price variation would be $0.01 for quotations in 
series that are quoted at less than $3 per contract and $0.05 for 
quotations in series that are quoted at $3 per contract or greater.\10\ 
For Mini Options on SPY, the minimum price variation would be $0.01 for 
all quotations in all series.\11\ Because GOOG does not participate in 
the Penny Pilot Program, the minimum price variation for Mini Options 
on GOOG would be $0.05 for series that are quoted at less than $3 per 
contract and $0.10 for series that are quoted at $3 per contract or 
greater.\12\
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    \8\ See Securities Exchange Act Release Nos. 68656 (January 15, 
2013), 78 FR 4526 (January 22, 2013) (SR-CBOE-2013-001) (``CBOE Mini 
Options Notice'') and 67948 (September 28, 2012), 77 FR 60735 
(October 4, 2012) (SR-ISE-2012-58) (``ISE Mini Options Order'').
    \9\ See CBOE Rule 5.5, Interpretation and Policy .22(d) and ISE 
Rule 504, Supplementary Material .13(d). While the Exchanges propose 
these minimum price variations for Mini Options, they are not 
proposing to include any Mini Option in the Penny Pilot Program. See 
CBOE Notice, supra note 3, at 10672 and ISE Notice, supra note 6, at 
11922. As CBOE states, because Mini Options are a separate class 
from standard options on the same underlying security, Mini Options 
would have to qualify separately for entry into the Penny Pilot 
Program, which they do not, at least initially. See CBOE Notice, 
supra note 3, at 10672.
    \10\ See CBOE Rule 6.42(3) and ISE Rule 710, Supplementary 
Material .01.
    \11\ See CBOE Rule 6.42(3) and ISE Rule 710, Supplementary 
Material .01.
    \12\ See CBOE Rules 6.42(1) and (2) and ISE Rule 710(a).
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule changes filed by the 
Exchanges are consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.\13\ Specifically, the Commission finds that the proposed rule 
changes are consistent with Section 6(b)(5) of the Act,\14\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, 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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    \13\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that permitting Mini Options on SPY, AAPL, 
GLD, GOOG, and AMZN to have the same minimum price variation as 
standard options on the same underlying securities, in the manner 
proposed by the Exchanges, is consistent with the Act.\15\ In addition,

[[Page 16753]]

the Commission believes that it is important to clearly establish the 
minimum price variation for Mini Options prior to the anticipated 
commencement of trading on March 18, 2013.
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    \15\ Mini Options are currently limited to overlie SPY, AAPL, 
GLD, GOOG, and AMZN, and any expansion of the Mini Options program 
would require that a subsequent proposed rule change be submitted to 
the Commission. See CBOE Mini Options Notice, supra note 8, at n.4 
and ISE Mini Options Order, supra note 8, at n.12. In addition, the 
current proposals are limited to the five approved Mini Options, and 
the Exchanges must submit subsequent proposed rule changes to extend 
such treatment of minimum price variations to new Mini Options. See 
CBOE Notice, supra note 3, at n.7.
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    Commenters offer strong support for the Exchanges' proposals.\16\ 
In their letters, SIFMA and LiquidPoint state that they strongly agree 
with CBOE's request to mimic the pricing convention of standard options 
with mini-option contract pricing and note that they believe it is 
appropriate to allow penny-pricing for Mini Options on securities for 
which standard options already trade in pennies, specifically SPY, 
AAPL, GLD, and AMZN.\17\
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    \16\ See SIFMA Letter, supra note 4; LiquidPoint Letter, supra 
note 4; and TD Ameritrade Letter, supra note 7. In his comment 
letter, Sheedy suggested that Mini Options should not be settled by 
using a portion of a standard option such that a standard option 
would be ``split,'' resulting in a fractional ownership of a 
standard option. Sheedy also opined that the option symbols 
designating each type of option should be distinct and easily 
identifiable in order to minimize inadvertent mistakes in rapidly 
changing markets. See Sheedy Letter, supra note 4. In its response 
letter, CBOE notes that the deliverable security for standard 
options will not be used to settle Mini Options on the same 
underlying security. See CBOE Response Letter, supra note 5, at 1-2. 
CBOE also reiterates that Mini Options will be designated with 
different trading symbols than standard options on the same 
underlying security. See id., at 2. Further, CBOE notes that the 
industry-wide symbology for Mini Options will be the use of the same 
symbol that currently exists for standard options on the same 
underlying security, followed by ``7.'' See id.
    \17\ See SIFMA Letter, supra note 4, at 1-2 and LiquidPoint 
Letter, supra note 4, at 1.
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    In its letter, SIFMA notes that given the significant liquidity in 
the market for the standard options on SPY, AAPL, GLD, GOOG, and AMZN, 
``investor confusion could be profound if the standard and mini-options 
are not aligned with respect to the minimum price variation.''\18\ 
LiquidPoint also expressed similar concern in its letter.\19\ Further, 
in its letter, TD Ameritrade states that ``[i]nvestor confusion would 
invariably result if Mini Options did not retain the important 
characteristics, such as the trading increments,'' of the standard 
options on the same underlying security.\20\ The Commission believes 
that allowing the same minimum price variation for Mini Options as 
standard options on the same underlying security should help prevent 
investor confusion.
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    \18\ See SIFMA Letter, supra note 4, at 2.
    \19\ See LiquidPoint Letter, supra note 4, at 2.
    \20\ See TD Ameritrade Letter, supra note 7, at 1.
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    Maintaining consistency between Mini Options and standard options 
as to the minimum price variation may also provide additional market 
benefits. In this regard, the Commission notes that, in its proposal, 
CBOE states its belief that matched pricing for Mini Options and 
standard options on the same underlying security would attract 
additional liquidity providers who would make markets in these options 
and that the ability to quote Mini Options and standard options on the 
same underlying 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 underlying security.\21\ 
SIFMA and LiquidPoint also note that penny pricing for Mini Options 
``would benefit anticipated users by providing additional price points, 
particularly as the product is intended to be an investment tool with 
more affordable and realistic prices for the average retail investor.'' 
\22\ Further, TD Ameritrade states that the proposal will allow market 
makers to ``provide better fills to investors by quoting and trading 
within a lesser spread than the existing Rule 710 allows.'' \23\
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    \21\ See CBOE Notice, supra note 3, at 10673.
    \22\ See also SIFMA Letter, supra note 4, at 2 and LiquidPoint 
Letter, supra note 4, at 2.
    \23\ See TD Ameritrade Letter, supra note 7, at 1.
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    The Commission notes that the proposed minimum price variation 
treatment is also consistent with the current operation of member 
firms' systems. Specifically, in its proposal, CBOE states that it has 
polled its member firms with customers who would be potential users of 
Mini Options, and these firms have indicated a preference that the 
premium pricing for Mini Options match what is currently permitted for 
standard options on the same underlying securities.\24\ CBOE states 
that its firms' systems are configured using the ``root symbol'' of an 
underlying security and cannot differentiate, for purposes of minimum 
price variations, between contracts on the same underlying 
security.\25\ In its letter, SIFMA also notes that its members' systems 
are programmed using ``root symbols,'' and would not be able to assign 
different minimum price variations to Mini Options and standard options 
on the same underlying security.\26\ Further, LiquidPoint notes that 
its systems are programmed such that it would be difficult and 
confusing to systems users to assign different minimum price variations 
to Mini Options and standard options on the same underlying 
security.\27\
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    \24\ See CBOE Notice, supra note 3, at 10672.
    \25\ See id.
    \26\ See SIFMA Letter, supra note 4, at 2.
    \27\ See LiquidPoint Letter, supra note 4, at 2.
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    Lastly, the Commission notes that, with respect to the impact of 
the proposals on the Exchanges' systems capacity, each of the Exchanges 
represents that it and the Options Price Reporting Authority have the 
necessary systems capacity to handle the potential additional traffic 
associated with this proposal.\28\ The Exchanges state that they do not 
believe that the increased traffic will become unmanageable because 
Mini Options are limited to a fixed number of underlying 
securities.\29\
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    \28\ See CBOE Notice, supra note 3, at 10673 and ISE Notice, 
supra note 6, at 11922.
    \29\ See CBOE Notice, supra note 3, at 10673 and ISE Notice, 
supra note 6, at 11922.
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    Accordingly, for the reasons stated above, and in consideration of 
the anticipated Mini Options launch date of March 18, 2013, the 
Commission finds good cause, pursuant to Section 19(b)(2) of the Act, 
\30\ for approving the Exchanges' proposals prior to the 30th day after 
the publication of the notices in the Federal Register.
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    \30\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule changes (SR-CBOE-2013-016; SR-ISE-2013-
08), be, and hereby are, approved on an accelerated basis.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
Kevin M. O'Neill,
Deputy Secretary.
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    \32\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-06121 Filed 3-15-13; 8:45 am]
BILLING CODE 8011-01-P


