[Federal Register Volume 72, Number 21 (Thursday, February 1, 2007)]
[Notices]
[Pages 4759-4761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-1589]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55156; File No. SR-NYSEArca-2006-73]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval to Proposed Rule Change as Modified by Amendment No. 1
Thereto, To Create an Options Penny Pilot Program
January 23, 2007.
I. Introduction
On October 10, 2006, 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 the NYSE Arca Rules to permit certain
option classes to be quoted in pennies on a pilot basis and to adopt a
quote mitigation strategy. The proposed rule change was published for
comment in the Federal Register on October 18, 2006.\3\ The Commission
received three comment letters on the proposed rule change.\4\ On
December 1, 2006, the Exchange filed Amendment No. 1 to the proposed
rule change.\5\ The Exchange responded to the comment letters on
January 9, 2007.\6\ 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. 54590 (October 12,
2006), 71 FR 61525.
\4\ See letters to Nancy M. Morris, Secretary, Commission, from
Wayne Jervis, Managing Member of the General Partner, Jervis
Alternative Asset Management Co. (``JAAMCO''), dated January 7, 2007
(``JAAMCO Letter''); from Christopher Nagy, Chair, Securities
Industry and Financial Markets Association (``SIFMA'') Options
Committee, dated December 20, 2006 (``SIFMA Letter''); and from
Peter J. Bottini, Executive Vice-President, optionsXpress, Inc.
(``optionsXpress''), dated October 31, 2006 (``optionsXpress
Letter'').
\5\ Among other things, 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.
\6\ See letter to Nancy M. Morris, Secretary, Commission, from
Mary Yeager, Corporate Secretary, NYSE Arca, dated January 9, 2007
(``Exchange Response'').
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II. Description of the Proposal
A. Scope of the Penny Pilot Program
NYSE Arca proposes to amend its rules to permit certain options
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 (1) clarify the language in NYSE Arca Rule 6.72,
which sets forth the minimum increments for options quoted on the
Exchange; (2) add a reference in Rule 6.72 to the Penny Pilot Program;
and (3) provide for an approved quote mitigation exception to NYSE Arca
Rule 6.86.
Currently, all six options exchanges, including NYSE Arca, 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);
[[Page 4760]]
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.\7\
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\7\ In Amendment No. 1, NYSE Arca requested that an additional
option class be designated to quote and trade all series in pennies.
In its comment letter, JAAMCO also expressed strong support for
penny increments in all listed options. See JAAMCO Letter, supra
note 4.
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NYSE Arca 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.
B. Quote Mitigation Proposal
NYSE Arca Rule 6.86 describes the obligations of the Exchange to
collect, process and make available to quotation vendors the best bid
and best offer for each option series that is a reported security. The
Exchange proposes an exception to making quotes available to quotation
vendors as part of an approved quote mitigation plan. The quote
mitigation strategy proposed by the Exchange is intended to reduce the
number of quotations generated by NYSE Arca for all option issues
traded at NYSE Arca, not just issues included in the Penny Pilot
Program. NYSE Arca plans to reduce the number of quote messages it
sends to the Options Price Reporting Authority (``OPRA'') by only
submitting quote messages for ``active'' options series. Active options
series will be defined as: (i) The series has traded on any options
exchange in the previous 14 calendar days; (ii) the series is solely
listed on NYSE Arca; (iii) the series has been trading ten days or
less; or (iv) the Exchange has an order in the series. For any option
series that falls into one of the aforementioned categories, NYSE Arca
will submit quotes to OPRA as it currently does. For any options series
that falls outside of the above categories, NYSE Arca will still accept
quotes from OTP Holders in these series; however, such quotes will not
be disseminated to OPRA.
In addition, under the proposal, there are certain instances when a
series would become active intraday. This would occur if: (i) The
series trades at any options exchange; (ii) NYSE Arca receives an order
in the series; or (iii) NYSE Arca receives a request for quote from a
customer in that series. When one of the above circumstances exists,
NYSE Arca would immediately begin disseminating quotes to OPRA in that
particular series and would continue doing so until that series fell
outside of the active series definition. If the series does not trade,
and there are no orders in the series the next day, the series would no
longer be considered active.
Finally, because NYSE Arca will continue to collect quotes from OTP
Holders in inactive series, upon receiving an order in an inactive
series, the Exchange will either execute that order against any
marketable quotes in the trading system, or will link that order to the
away market displaying the NBBO in that series. Accordingly, OTP
Holders' orders will not be disadvantaged and will still have an
opportunity to execute at the best price in such inactive series. By
limiting quote dissemination to solely active series as described
above, the Exchange anticipates that it will reduce quote message
traffic by 20-30%.
III. Discussion
After careful review of the proposal, the comment letters, and the
Exchange's response thereto, 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.\8\ In particular, the
Commission finds that the proposal is consistent with Section 6(b)(5)
of the Act,\9\ 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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\8\ 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).
\9\ 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 NYSE Arca 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.\10\ Nevertheless, because the
Commission expects that the Penny Pilot Program will increase quote
message traffic, the Commission is also approving the Exchange's
proposal to reduce the number of quotations it disseminates.
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\10\ The Commission does not agree with the Exchange's
recommendation to allow an additional options class to be quoted in
pennies in all series at this time. The Commission believes that it
is important to commence penny quoting in a measured manner so as
not to exacerbate systems capacity constraints.
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In this regard, two of the commenters expressed concern about NYSE
Arca's proposed quote mitigation strategy.\11\ In particular,
optionsXpress was concerned that removing quotes from the market will
reduce transparency and thereby undermine investor opportunity. SIFMA
also objected to NYSE Arca's quote mitigation proposal because it
believes that ``going dark'' in certain less active series will reduce
investment opportunities for investors and may impede growth in the
options industry.
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\11\ JAAMCO did not comment directly on NYSE Arca's proposal,
but rather stated its strong support for penny increment options
trading that ``(1) includes all listed options, (2) prohibits
Internalization of order flow to the extent that it disadvantages
the customer, (3) has pricing linked to all listed options
exchanges, (4) does not exclude options above $3.00 in value, and
(5) does not exclude illiquid/not-daily-traded options.'' JAAMCO
Letter, supra note 4.
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In addition, SIFMA recommended that all six of the option exchanges
adopt a comprehensive and uniform quote mitigation strategy. In
particular, SIFMA strongly supports the adoption of the ``holdback
timer'' mitigation proposal as the most efficient means of reducing
quotation traffic. SIFMA expressed concern that the lack of uniformity
among the quote mitigation proposals adopted by the exchanges will
impose a burden on member firms and cause confusion for market
participants, especially retail investors.
[[Page 4761]]
Although the Commission supports efforts to implement a uniform,
industry-wide quote mitigation plan, it does not believe such efforts
preclude individual exchanges from initiating their own quote
mitigation strategies. The Exchange stated its belief that, ``by not
burdening the marketplace with excessive quotes, in series that have
proven to have little or no investor interest, the Exchange will have
the ability to supply additional quoting activity where most needed,
thereby creating liquidity and a more competitive marketplace, which in
turn should provide increased opportunities for all investors.'' \12\
In addition, the Exchange clarified that it will continue to collect
and process quotes from Exchange Market Makers and will publish a quote
upon a trade at another market or upon receipt of an order in that
series.
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\12\ See Exchange Response, supra note 6.
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The Commission believes that NYSE Arca's proposed quote mitigation
strategy is consistent with the Act and that it is unlikely to lead to
confusion among market participants. In this regard, the Commission
notes that Exchanges do not currently quote the identical series and
classes of options. Furthermore, the Exchange has committed to provide
a thorough study of the impact that its quote mitigation plan has on,
among other things, system capacity problems or other problems that
arose related to the operation of the Penny Pilot Program.
Consequently, the Commission believes there are sufficient safeguards
in place to analyze and, if necessary, address any negative impact that
may result from NYSE Arca's proposal to disseminate quotes only in
``active options series'' as defined by Commentary .03 to NYSE Arca
Rule 6.86.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-NYSEArca-2006-73), 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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\13\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-1589 Filed 1-31-07; 8:45 am]
BILLING CODE 8011-01-P