[Federal Register Volume 74, Number 108 (Monday, June 8, 2009)]
[Notices]
[Pages 27211-27214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-13207]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60018; File No. SR-CBOE-2009-031]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Amending CBOE 
Rules Relating to the Penny Pilot Program

June 1, 2009.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on May 28, 2009, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or the ``Exchange'') filed with the Securities 
and Exchange Commission (the ``Commission'') the proposed rule change 
as described in Items I, II, and III below, which Items have been 
prepared by the Exchange. 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\ 15 U.S.C. 78a.
    \3\ 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 Exchange is proposing to amend CBOE rules relating to the Penny 
Pilot Program. The text of the rule proposal is available on the 
Exchange's Web site (http://www.cboe.org/legal), at the Exchange's 
Office of the Secretary and at the Commission's Public Reference Room.

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. CBOE 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 proposes to extend and expand the Penny Pilot Program, which

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commenced on January 26, 2007. Presently, the Penny Pilot Program is in 
effect in fifty-eight multiply-listed option classes, representing 
approximately 53% of the national volume in April 2009.\4\ For all 
classes in the Program except for the QQQQs, the minimum increment for 
bids and offers is 0.01 for all option series below $3 (including 
LEAPS), and $0.05 for all option series $3 and above (including LEAPS). 
For QQQQs, the minimum increment is $0.01 for all option series. The 
Penny Pilot Program is scheduled to expire on July 3, 2009.
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    \4\ CBOE's rules also provide that for so long as SPDR options 
(SPY) and options on Diamonds (DIA) participate in the Penny Pilot 
Program, the minimum increments for Mini-SPX Index Options (XSP) and 
options on the Dow Jones Industrial Average (DJX), respectively, are 
$0.01 for all option series below $3, and $0.05 for all option 
series $3 and above. See CBOE Rule 6.42.03.
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    During the course of the Penny Pilot, CBOE has thoroughly analyzed 
the impact of penny quoting in the Pilot classes, including in such 
areas as average spread, average size, quote message traffic, and 
industry volume. CBOE has submitted several reports to the SEC 
describing the impact of the changes to the minimum increments in the 
Pilot classes, and has identified various trends that have manifested 
themselves.\5\ These trends include: a significant reduction in 
liquidity at the BBO; a decrease in volume in some classes \6\; a 
dramatic rise in quote traffic; and a reduction in average spread 
width. With respect to quote traffic, five of seven options exchanges 
have set all-time peak message rates thus far in 2009, three of which 
occurred in the past three weeks.
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    \5\ CBOE has submitted five reports analyzing the Penny Pilot 
Program. See letters from CBOE's President Edward Joyce to Elizabeth 
King, dated June 1, 2007, November 1, 2007, March 4, 2008, September 
4, 2008, and March 9, 2009.
    \6\ CBOE recognizes that it is difficult to discern the extent 
to which the reduction in volume in some Pilot classes may be 
attributable to the Penny Pilot, as opposed to some combination of 
the Penny Pilot and market conditions overall and/or conditions in a 
particular security.
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    In an effort to develop a long-term solution to the issue of penny 
pricing in options, last March 2008 CBOE proposed that the industry 
adopt a structure whereby option series of less than $1 premium value 
are quoted in penny increments, and series at $1 or above quoted in 
nickel increments. CBOE has explained the advantages of its proposal, 
which include:
     Providing the benefits of penny quoting and trading in 
those option contracts that customers actually trade. 61% of customer 
contract volume is in series priced up to $1. In the Penny Pilot 
classes, 52% of customer contract volume is in series priced up to $1;
     Introducing penny increments in nearly all listed option 
classes;
     Reducing the current dime increment to nickels in those 
same classes for series priced $1 and above;
     Helping to reduce the explosion of quote traffic that 
would otherwise occur if the current $3 breakpoint was maintained as 
part of a large expansion;
     Providing a simple and easily understood standard for 
investors as to which options are quoted in penny increments; and
     Providing flexibility in that if it is determined that the 
benefits of penny quoting at a breakpoint higher than $1 outweigh any 
negatives, modifying the breakpoint would be fairly easy to implement.
    CBOE's proposal to reduce the $3 breakpoint to $1 for the Penny 
Pilot classes has been endorsed by the Equity Options Committee of 
SIFMA, which has stated that ``retail order flow is far more likely to 
concentrate activity in low premium options as opposed to those with 
much larger premium levels.'' \7\ CBOE reiterated its long-term 
solution to the issue of penny pricing in options in its September 4, 
2008, and March 9, 2009 Penny Pilot Report to the SEC.
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    \7\ See letter from Melissa MacGregor, Vice President and 
Assistant General Counsel, SIFMA, to Elizabeth King dated March 10, 
2008.
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    CBOE believed then and continues to believe that developing a long-
term solution is necessary so that the exchanges, its members, market 
data vendors, and other market participants can make informed decisions 
regarding systems and capacity planning. Accordingly, CBOE proposes to 
extend the Pilot Program through December 31, 2010. CBOE also proposes 
to significantly expand Pilot Program to all equity and ETF option 
classes, such that at the end of a brief roll-out period all equity and 
ETF option classes would be included in the Penny Pilot Program. 
Moreover, in all Pilot classes, option series of less than $1 premium 
value would be quoted in penny increments, and series at $1 or above 
would be quoted in nickel increments. Specifically, CBOE proposes the 
following \8\:
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    \8\ The proposed roll-out schedule assumes that the new Linkage 
will be implemented in the 3rd quarter of 2009, and that this 
proposed rule change is approved on or about July 1, 2009.
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     Extend the existing Penny Pilot Program until 60 days 
following SEC approval of this rule change, at which time the minimum 
increment ``breakpoint'' would be reduced from $3 to $1 in all Penny 
Pilot classes, such that all option series of less than $1 premium 
value are quoted in penny increments with all series $1 and above 
quoted in nickel increments. Although all series in the QQQQ currently 
are quoted in penny increments, CBOE believes that the same $1 
breakpoint standard should apply in the QQQQs as well.\9\
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    \9\ The minimum increment breakpoint for XSP options and DJX 
options similarly would be reduced from $3 to $1. See CBOE Rule 
6.42.03.
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     90 days following SEC approval of this rule change, an 
additional forty-two classes would be added to the Penny Pilot Program 
bringing the total number of classes in the Pilot Program to 100. These 
forty-two new classes would be among the most active, multiply-listed 
equity and ETF option classes that are not currently in the Pilot 
Program.
     120 days following SEC approval of this rule change, an 
additional 200 option classes would be added to the Penny Pilot Program 
bringing the total number of classes in the Pilot Program to 300. These 
200 new classes would be among the most active, multiply-listed equity 
or ETF option classes that are not currently in the Pilot Program.
     150 days following SEC approval of this rule change, an 
additional 400 option classes would be added to the Penny Pilot Program 
bringing the total number of classes in the Pilot Program to 700. These 
400 new classes would be among the most active, multiply-listed equity 
or ETF option classes that are not currently in the Pilot Program.
     180 days following SEC approval of this rule change, all 
remaining equity and ETF option classes would be added to the Penny 
Pilot Program.
    The above roll-out schedule contemplates the launch of the new 
Linkage Plan, which is scheduled to occur in the 3rd quarter of 2009, 
prior to any expansion of the Penny Pilot Program. CBOE believes 
strongly the new Linkage Plan should be implemented before a 
significant expansion occurs because intermarket sweep orders (ISOs) 
will be available in the new Linkage Plan, and thus allow market 
participants to simultaneously access better priced quotations across 
all options exchanges. The new option classes to be added to the Pilot 
Program would be identified based on national average daily volume in 
the six calendar months prior to the date the classes are added to the 
Program.\10\ CBOE will work jointly with the SEC to identify the option 
classes to be added to the Pilot Program and to determine the exact 
dates the classes will be added, and will

[[Page 27213]]

submit proposed rule changes pursuant to Section (b)(3)(A) of the 
Exchange Act announcing the names of the new classes prior to their 
being added to the Pilot Program in each of the phases mentioned 
above.\11\ Based on the proposed roll-out described above, CBOE 
anticipates that all equity and ETF option classes would be included in 
the Penny Pilot Program by early 2010.
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    \10\ CBOE would use volume data from the Options Clearing 
Corporation.
    \11\ CBOE also intends to issue a Regulatory Circular, which 
will be published on its Web site, identifying these option classes 
added to the Pilot Program.
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    CBOE also will submit to the SEC semi-annual reports 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
    CBOE anticipates that its reports will assess the impact of the 
changes to the minimum increments during the specific time period being 
analyzed, including, among other things, effects on (i) market 
participants and customers; (ii) market performance and quality, such 
as quoted spreads, effective spreads, and the displayed size in the 
Pilot classes; and (iii) OPRA, vendor and exchange capacity. CBOE's 
reports will be submitted within one month following the end of the 
period being analyzed.
    CBOE believes that extending and expanding the Penny Pilot Program 
as proposed is balanced, responsible, and reasonable. It will benefit 
investors by expanding the Pilot Program in all equity and ETF option 
classes over a relatively short period of time, which will enable 
investors to obtain the benefits of penny quoting and trading in those 
option contracts that customers actually trade. The proposal is 
balanced in that it recognizes that the Pilot Program, while providing 
certain clear benefits such as reducing spreads, also has resulted in a 
significant reduction in liquidity at the BBO, a decrease in volume in 
some classes, and a significant rise in quote traffic. Moreover, CBOE's 
plan eliminates investor confusion as to which options are quoted in 
penny increments, and helps to reduce the growth of quote traffic.
2. Statutory Basis
    The Exchange believes the rule proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (``Act'') and the rule and 
regulations under the Act applicable to a national securities exchange 
and, in particular, the requirements of Section 6(b) of the Act.\12\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the Section 6(b)(5) Act \13\ requirements that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and, 
in general, to protect investors and the public interest. The Exchange 
believes that expanding the current Penny Pilot Program as proposed 
will enable investors to obtain the benefits of penny quoting and 
trading in those option contracts that customers actually trade. It 
will also eliminate investor confusion as to which options are quoted 
in penny increments, and help to reduce the growth of quote traffic.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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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 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 neither solicited nor received comments on the 
proposal.

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 generally on the impact on quote 
capacity, if any, were the Commission to approve SR-NYSEArca-2009-44, 
NYSE Arca's proposal to expand the Penny Pilot program to include the 
next 300 most actively traded, multiply listed options classes over 
four successive quarters, in addition to this proposed rule change.
    2. The Commission requests comment on the impact, if any, to market 
participants' technological systems and platforms to accommodate the 
proposed change in breakpoint at $1.00 applied to all option classes.
    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 [email protected]. Please include 
File Number SR-CBOE-2009-031 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-2009-031. 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-
CBOE-2009-031 and should be submitted on or before June 29, 2009.


[[Page 27214]]


    For the Commission, by the Division of Trading and Markets, 
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. E9-13207 Filed 6-5-09; 8:45 am]
BILLING CODE 8010-01-P