Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Notices 49419 

10 15 U.S.C. 78s(b)(2). 

11 15 U.S.C. 78s(b)(2). 

12 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The current pilot is scheduled to expire on 

October 31, 2009. See Securities Exchange Act 

Release No. 60224 (July 1, 2009), 74 FR 32991 (July 

9, 2009). 

4See Securities Exchange Act Release No. 59944 

(May 20, 2009), 74 FR 25294 (May 27, 2009) 

(‘‘Notice’’). 

5See letter from Stephen Schuler and Daniel 

Tierney, Managing Members, Global Electronic 

Trading Company, dated June 10, 2009 (‘‘GETCO 

Letter’’); letter from Edward J. Joyce, President and 

COO, Chicago Board Options Exchange, dated June 

12, 2009 (‘‘CBOE Letter’’); 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’’) (collectively, the 

‘‘Comment Letters’’). 

6See letter from Janet M. Kissane, Senior Vice 

President—Legal & Corporate Secretary, NYSE 

Arca, to Elizabeth M. Murphy, Secretary, 

Continued 

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 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–NYSEArca–2009–36 and 

should be submitted on or before 

October 19, 2009. 

V. Accelerated Approval of Proposed 

Rule Change, as Modified by 

Amendment No. 1 

The Commission finds good cause to 

approve the proposed rule change, as 

modified by Amendment No. 1, prior to 

the thirtieth day after publication for 

comment in the Federal Register. 

In Amendment No. 1, the Exchange 

clarifies that, throughout the rule, the 

definition of ‘‘Officer’’ encompasses 

only Officers of the Corporation or such 

other senior level employee designee of 

the Corporation. In addition, in the 

context of rulings in Unusual 

Circumstances, the Exchange added the 

protection of investors and the public 

interest as a basis for using a reference 

price other than the consolidated last 

sale. 

In the context of the Numerical 

Guidelines, the Exchange also clarifies 

that the execution time of the 

transaction under review determines 

whether the Numerical Guideline 

applied is Core Trading Session or 

Opening and Late Trading Session. In 

addition, the Exchange corrected a 

drafting error regarding the sales price at 

which certain numerical guidelines are 

applicable. The corrected language, 

which is reflected in the discussion 

above, now states that the proposed 

guidelines for sales greater than $0.00 

up to and including $25.00 are 10% for 

the Core Trading Session and 20% for 

the Opening and Late Trading Sessions, 

and the proposed guidelines for sales 

greater than $25.00 up to and including 

$50.00 are 5% for the Core Trading 

Session and 10% for Opening and Late 

Trading Sessions. 

In addition, as is reflected in the 

discussion above, the Exchange clarifies 

the percentage range at which volatility 

in the S & P 500 Futures would trigger 

the Exchange’s ability to double or triple 

the applicable Numerical Guidelines. 

The Exchange also clarifies that, the 

context of appeals, in no case will a CEE 

Panel include a person affiliated with a 

party to the trade in question. 

The changes proposed in Amendment 

No. 1, discussed above, seek to clarify 

the operation of the proposed rule and 

do not differ materially from the 

proposal as published in the Federal 

Register on May 5, 2009. Therefore, the 

Commission finds good cause, 

consistent with Section 19(b)(2) of the 

Act,10 to approve the proposed rule 

change, as modified by Amendment No. 

1, on an accelerated basis. 

VI. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,11 that the 

proposed rule change (SR–NYSEArca– 

2009–36), as amended, be, and it hereby 

is, approved on an accelerated basis. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.12

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–23358 Filed 9–25–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60711; File No. SR– 

NYSEArca–2009–44] 

Self-Regulatory Organizations; NYSE 

Arca, Inc.; Notice of Filing of 

Amendment Nos. 1 and 3 and Order 

Granting Partial Accelerated Approval 

of a Proposed Rule Change, as 

Modified by Amendment Nos. 1 and 3 

Thereto, Amending NYSE Arca Rule 

6.72 and Expanding the Penny Pilot 

Program 

September 23, 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 

and expand a program to quote certain 

options in smaller increments (‘‘Pilot 

Program’’ or ‘‘Pilot’’).3 The proposed 

rule change was published for comment 

in the Federal Register on May 27, 

2009.4 The Commission received nine 

comment letters in response to the 

proposed rule change.5 On August 18, 

2009, the Exchange responded to the 

comment letters 6 and filed Amendment 


srobinson on DSKHWCL6B1PROD with NOTICES
49420 Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Notices 

Commission, dated August 18, 2009 (‘‘NYSE Arca 

Response’’). 

7 In Amendment No. 1, the Exchange: (i) Clarified 

how replacement issues would be selected in the 

event that a Pilot class were delisted; (ii) proposed 

to begin the phased implementation of the 

expansion of the Pilot on September 28, 2009 and 

continue over four successive quarters; and (iii) 

clarified that under its proposal NYSE Arca would 

begin quoting SPY and IWM entirely in pennies on 

September 28, 2009. See infra note 17 with respect 

to that portion of the proposal to change the quoting 

increments for options on SPY and IWM. 

8Also, in Amendment No. 3, the Exchange 

clarified the threshold levels for determining when 

an options class would not be eligible to participate 

in the Pilot due to a high premium. The Exchange 

also proposed to begin the phased implementation 

of the Pilot on October 26, 2009 and continue over 

four successive quarters. The Exchange has 

consented to an extension of time for the 

Commission to act until October 31, 2009. 

9See infra note 17 and accompanying text. 

10See Securities Exchange Act Release Nos. 

55156 (January 23, 2007), 72 FR 4759 (February 21, 

2007); 56568 (September 27, 2007), 72 FR 56422 

(October 3, 2007); 59628 (March 26, 2009), 74 FR 

15025 (April 2, 2009); and 60224 (July 1, 2009) 74 

FR 32991 (July 9, 2009). 

11One commenter raised issues with the aspect 

of NYSE Arca’s proposal that would exclude 

options with high premiums, claiming that the 

Exchange’s proposal did not give guidance, 

definition or indication of what constitutes a ‘‘high 

premium.’’ See CBOE Letter, supra note 5, at 2. In 

response to this comment, NYSE Arca clarified in 

Amendment No. 3 that a class would be excluded 

from the Pilot for having a high premium if at the 

time of selection of new classes the underlying 

equity security was priced at $200 per share or 

above or the underlying index level was at 200 or 

above. The determination of whether a security is 

trading above $200 or above a calculated index 

value of 200 shall be based on the price at the close 

of trading on the Expiration Friday prior to being 

added to the Pilot. See supra note 8, and NYSE 

Arca Response, supra note 6, at 3–4. 

12See supra note 8. 

13The Exchange has committed to file a proposed 

rule change under Section 19(b)(3)(A) of the Act to 

identify the option classes to be included each 

quarter. 

14See supra note 8 and infra note 17. 

15 In Amendment No. 1, the Exchange clarified 

that the replacement classes also would exclude 

options with high premiums. See supra note 7. 

16The replacement issues will be announced to 

the Exchange’s membership in a Regulatory 

Bulletin and published by the Exchange on its Web 

site. 

17The Commission is not at this time approving 

the portion of the proposed rule change that would 

designate options on IWM and SPY as eligible to 

quote all options series in one-cent increments. The 

Commission is soliciting further comment on that 

portion of the proposed rule change. See infra 

Section IV. 

18 15 U.S.C. 78f(b)(5). 

19 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). 

20PCX News Release, ‘‘Pacific Exchange to Trade 

Options in Pennies,’’ June 28, 2005. 

No. 1 to the proposed rule change.7 On 

September 21, 2009, the Exchange filed 

Amendment No. 2 to the proposed rule 

change. On September 22, 2009, the 

Exchange withdrew Amendment No. 2 

and filed Amendment No. 3. 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 IWM and SPY entirely in pennies 

would be subject to further notice and 

comment prior to Commission action.8

The Commission is publishing this 

notice to solicit comments on the 

proposed rule change, as modified by 

Amendment Nos. 1 and 3, and 

simultaneously is partially approving 

the proposed rule change, as modified 

by Amendment Nos. 1 and 3, on an 

accelerated basis.9

II. Description of the Proposal 

Currently, all seven options 

exchanges participate in the Pilot 

Program, which is scheduled to expire 

on October 31, 2009.10 The Exchange 

proposes to extend the time period of 

the Pilot Program through December 31, 

2010 and expand the Pilot Program. 

NYSE Arca proposes to add the next 

300 most actively traded, multiply listed 

options classes that are not currently 

included in the Pilot Program, 

excluding options with high 

premiums.11 The Exchange proposes to 

phase-in these 300 classes in groups of 

75 additional classes each quarter over 

four successive quarters on October 26, 

2009, January 25, 2009, April 26, 2010 

and July 26, 2010.12 The Exchange will 

identify the classes to be added each 

quarter based on national average daily 

volume in the prior six calendar months 

immediately preceding their addition to 

the Pilot Program, using data compiled 

and disseminated by the Options 

Clearing Corporation. The Exchange 

will announce the classes to be added 

to the Pilot Program each quarter to the 

Exchange’s membership in a Regulatory 

Bulletin and by publishing the 

information on its Web site, in addition 

to submitting a filing with the 

Commission.13

The minimum variation for all classes 

to be included in the Pilot, except for 

QQQQ, will continue to be $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. 

Options on QQQQ will continue to be 

quoted in $0.01 increments for all 

series. Further, the Exchange proposes 

to designate options on SPY (SPDR S&P 

500 ETF) and IWM (iShares Russell 

2000 Index Fund) as eligible to quote 

and trade all options series in one cent 

increments, regardless of premium 

value.14

The Exchange further proposes that 

any option class included in the Pilot 

Program that has been delisted may be 

replaced on a semi-annual basis by the 

next most actively traded, multiply 

listed options class that is not yet 

included in the Pilot, based on trading 

activity in the previous six months.15

The replacements issue(s) would be 

added to the Pilot Program on the 

second trading day following January 1, 

2010 and July 1, 2010.16

The Exchange will submit semiannual reports to the Commission that 

will include sample data and analysis of 

information collected from April 1 

through September 30, and from 

October 1 through March 31, for each 

year, for the ten most active and twenty 

least active options classes added to the 

Pilot Program, in addition to continuing 

to provide data concerning the existing 

Pilot Program classes. The Exchange 

also will identify, for comparison 

purposes, a control group consisting of 

the ten least active options classes from 

the existing Pilot Program classes. The 

report will include, but not be limited 

to the following: (1) Data and analysis 

on the number of quotations generated 

for options included in the report; (2) an 

assessment of the quotation spreads for 

the options included in the report; (3) 

an assessment of the impact of the Pilot 

Program on the capacity of NYSE Arca’s 

automated systems; (4) data reflecting 

the size and depth of markets; and (5) 

any capacity problems or other 

problems that arose related to the 

operation of the Pilot Program and how 

the Exchange addressed them. 

III. Discussion and Findings 

After careful review of the proposed 

rule change, Amendment Nos. 1 and 3, 

the Comment Letters, and the NYSE 

Arca Response, the Commission finds 

that the proposed rule change, as 

amended, except for the portion of the 

proposal to quote IWM and SPY entirely 

in pennies, is consistent with the 

requirements of the Act, and the rules 

and regulations thereunder that are 

applicable to a national securities 

exchange.17 Specifically, the 

Commission finds that the proposal is 

consistent with Section 6(b)(5) of the 

Act,18 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.19

On June 28, 2005, the Pacific 

Exchange (now known as NYSE Arca) 

announced its intention to begin 

quoting and trading all listed options in 

penny increments.20 In June 2006, to 


srobinson on DSKHWCL6B1PROD with NOTICES
Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Notices 49421 

21Commission Press Release 2006–91, ‘‘SEC 

Chairman Cox Urges Options Exchanges to Start 

Limited Penny Quoting,’’ June 7, 2006. 

22See Securities Exchange Act Release Nos. 

55154 (January 23, 2007), 72 FR 4743 (February 1, 

2007) (SR–CBOE–2006–92); 55162 (January 24, 

2007), 72 FR 4738 (February 1, 2007) (Amex–2006– 

106); 55155 (January 23, 2007), 72 FR 4741 

(February 1, 2007) (SR–BSE–2006–49); 55161 

(January 24, 2007), 72 FR 4754 (February 1, 2007) 

(SR–ISE–2006–62); 55156 (January 23, 2007), 72 FR 

4759 (February 1, 2007) (SR–NYSEArca–2006–73); 

and 55153 (January 23, 2007), 72 FR 4553 (January 

31, 2007) (SR–Phlx–2006–74). 

23See supra note 3. Although the proposed rule 

changes approved by the Commission to implement 

and expand the Pilot provide for 65 classes in the 

current Pilot Program, the actual number of those 

classes still trading is 59. 

24See Memorandum to Heather Seidel, from J. 

Daniel Aromi, Office of Economic Analysis 

(‘‘OEA’’), ‘‘Volume and Spreads for Pilot and NonPilot Options Classes,’’ dated July 24, 2009 (‘‘OEA 

Memo’’). See also Ameritrade Letter, supra note 5, 

at 1 (noting the firm’s belief that overall, the Pilot 

has brought about tighter trading increments); 

GETCO Letter, supra note 5, at 1 (noting as a benefit 

of the Pilot the substantial decreases in quoted 

spreads); UBS Letter, supra note 5, at 1 (noting that 

spreads have narrowed as a result of penny 

quoting); and BATS Letter, supra note 5, at 1–2 

(noting a reduction in spreads in Pilot classes). 

Average spread width reductions for some 

options included in the Pilot were less during the 

period from approximately August 2008 through 

January 2009 than in prior periods. See e.g., CBOE 

Penny Pilot Report, dated March 9, 2009 (‘‘CBOE 

March Report’’) at 2; CBOE Penny Pilot Report, 

dated September 4, 2008 (‘‘CBOE September 

Report’’) at 1 to 5; and Report by BOX, BOX Penny 

Pilot Report: Penny Pilot Report 5 (‘‘BOX Penny 

Pilot Report 5’’) at 7. However, this time frame 

covers a period of significant overall market 

volatility. The CBOE Volatility Index (‘‘VIX’’) was 

well above previous levels through most of this 

period. From late September 2008 through January 

2009 (and beyond) the VIX was almost always 

above 40, peaking at 80 in October and November 

2008. See also Report by NYSE Arca, The Options 

Penny Pilot, dated August 18, 2009 (‘‘NYSE Arca 

Report’’) at 7 to 10 and Report by NYSE Arca, 

Reporting Period 5 (‘‘NYSE Arca Report 2’’) 

(showing overall greater reductions in volumeweighted average spreads for the period February 1, 

2009 through April 30, 2009 as compared to the 

period August 1, 2008 through January 31, 2009); 

CBOE March Report at 2 and CBOE Penny Pilot 

Report, dated July 31, 2009 (‘‘CBOE July Report’’) 

at 2 (these reports show that the average spread 

width decreased from the period of February 1, 

2009 through April 30, 2009, as compared to the 

period of August 1, 2008 through January 1, 2009); 

and Report by BOX, BOX Penny Pilot Report: Penny 

Pilot Report 6 (‘‘BOX Penny Pilot Report 6’’) at 7 

(stating that the average bid/ask spread narrowed in 

the period February 1, 2009 through April 30, 2009 

as compared to the period from August 1, 2008 

though January 31, 2009). Further, one exchange 

that measured average spreads in non-Pilot classes 

during the same time period for which it measured 

average spreads for Pilot classes showed that 

average spreads in non-Pilot classes also widened. 

See Report by ISE, Penny Pilot Analysis 5, dated 

May 2009 (‘‘ISE Report’’) at 4. ISE provides 

statistics showing volume-weighted spreads for the 

classes in each phase of the Pilot, for the 3 months 

prior to each group being included in the Pilot, the 

first year after inclusion in the Pilot, and the six 

months from November 2008 to April 2009, as well 

as volume-weighted spread statistics for comparable 

classes not included in the Pilot for the same time 

periods as used for the classes in phase 3 of the 

Pilot. The data shows that the spreads for the nonpenny classes also widened in the time period from 

November 2008 to April 2009. See also CBOE 

March Report at 2 (stating that the exchange is 

aware that average spread width in many non-Pilot 

classes widened during the same reporting period 

due to the unusual market conditions that existed). 

25See Securities Exchange Act Release Nos. 

55328 (February 21, 2007), 72 FR 9050 (February 

28, 2007) (SR–Amex–2007–16); 55197 (January 30, 

2007), 72 FR 5772 (February 7, 2007) (SR–BSE– 

2007–02); 55265 (February 9, 2007), 72 FR 7697 

(February 16, 2007) (SR–CBOE–2007–11); 55271 

(February 12, 2007), 72 FR 7699 (February 16, 2007) 

(SR–ISE–2007–08); 55223 (February 1, 2007) 72 FR 

6306 (February 9, 2007) (SR–NYSEArca–2007–07); 

and 55290 (February 13, 2007), 72 FR 8051 

(February 22, 2007) (SR–Phlx–2007–05). 

26See BATS Letter, supra note 5, at 1–2. 

27See, e.g., CBOE Letter, supra note 5, at 2; 

LiquidPoint Letter, supra note 5, at 4; SIFMA Letter, 

supra note 5, at 4–5; and UBS Letter, supra note 5, 

at 1. 

28See, e.g., SIFMA Letter, supra note 5, at 4; and 

UBS Letter, supra note 5, at 1. 

29See ISE Letter, supra note 5, at 3–4; and SIFMA 

Letter, supra note 5, at 4. 

30See, e.g., CBOE Letter, supra note 5, at 2; ISE 

Letter, supra note 5, at 5; and SIFMA Letter, supra 

note 5, at 4. 

31See, e.g., CBOE Letter, supra note 5, at 4; 

LiquidPoint Letter, supra note 5, at 3–4; SIFMA 

Letter, supra note 5, at 2–3; and UBS Letter, supra 

note 5, at 1. 

facilitate the orderly transition to 

quoting a limited number of options in 

penny increments, the then Chairman of 

the Commission sent a letter to the six 

options exchanges urging the exchanges 

that chose to begin quoting in smaller 

increments to plan for the 

implementation of a limited penny pilot 

program to commence in January 

2007.21 The then existing options 

exchanges submitted proposals to 

permit quoting a limited number of 

classes in smaller increments, and, in 

January 2007, the Commission approved 

those proposals to implement the 

current Pilot Program.22 The Pilot, 

which has since been extended and 

expanded, currently includes 63 classes 

and is scheduled to expire on October 

31, 2009.23 NYSE Arca now proposes to 

extend and further expand the Pilot. 

The Commission believes that NYSE 

Arca’s proposal is consistent with the 

Act in large measure because allowing 

market participants to quote in smaller 

increments has been shown to reduce 

spreads, thereby lowering costs to 

investors. An analysis of the current 

Pilot shows that the reduction in the 

minimum quoting increment has 

resulted in narrowing the average 

quoted spreads in classes included in 

the Pilot.24 The reduction in spreads 

also has led the exchanges to reduce or 

eliminate their exchange-sponsored 

payment-for-order-flow programs.25 The 

Commission believes that the proposed 

rule change, which will expand the 

Pilot to include 300 of the next most 

actively traded, multiply listed classes, 

is designed to allow the continuing 

narrowing of spreads. 

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.’’ 26 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. 

Several commenters expressed 

concern about the impact of NYSE 

Arca’s proposal on displayed size that 

will be available at the best bid and offer 

in the additional classes to be included 

in the Pilot, and the impact that a 

decrease in displayed size would have 

on the market quality.27 In particular, 

several commenters expressed concern 

that decreased liquidity in Pilot classes 

has made, and will continue to make, it 

harder for market participants to 

execute orders of large size.28 They 

argue that decreased liquidity in Pilot 

classes is causing market participants to 

seek liquidity from off-exchange venues, 

such as the OTC market or off-exchange 

dark pools, which results in less 

transparent markets.29 Several 

commenters also expressed concerns 

with the potential impact of increased 

quotation traffic on costs to exchanges 

and other market participants to process 

and store the additional quotations, and 

on the ability of market systems to 

effectively handle increased quotation 

traffic if NYSE Arca’s proposal were 

approved.30

These commenters generally believe 

that to mitigate any concerns about the 

impact of decreased displayed size and 

increased quotation traffic from the 

Pilot, classes included in the Pilot 

Program should have a $1, rather than 

$3, breakpoint.31 These commenters 

generally believe that a $1 breakpoint 

would appropriately balance the 

benefits of narrower spreads for an 

expanded number of options against the 

strain on systems capacity and 

increased costs due to increased 

quotation traffic and reduced liquidity 

at the national best bid and offer, by 

concentrating the benefits where 


srobinson on DSKHWCL6B1PROD with NOTICES
49422 Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Notices 

32See, e.g., LiquidPoint Letter, supra note 5, at 4; 

SIFMA Letter, supra note 5, at 1–2; and UBS Letter, 

supra note 5, at 1–2. 

33See, e.g., BOX Penny Pilot Report 6, supra note 

24, at 6 (stating that the quantity at the top of the 

BOX book was sufficient to satisfy the average trade 

size in the Pilot classes); CBOE July Report, supra 

note 24, at 2, 4 and 6 (showing the change in quoted 

size in Pilot classes); ISE Report, supra note 24, at 

5 (showing the change in volume weighted size at 

the ISE’s best bid or best offer in Pilot classes); 

Nasdaq OMX Phlx, Options Penny Pilot Expansion 

Report 4, dated February 27, 2009, at 3 and 6 

(showing the change in quoted size at the NBBO in 

Pilot Classes); NYSE Arca Report, supra note 24, at 

3–5 (showing that 100 percent of customer and firm 

orders up to 100 contracts in the Pilot classes were 

filled during the periods February 1, 2008 through 

July 31, 2008 and February 1, 2009 through April 

30, 2009); and NYSE Arca Report, supra note 24, 

at 3 (showing that 100% of customer orders up to 

50 contracts in the Pilot classes were filled during 

the period August 1, 2008 to January 31, 2009, and 

94% of all customer orders in the Pilot classes were 

filled during the same period). 

34See NYSE Arca Response, supra note 6, at 5 

(stating that the current mechanisms for sourcing 

block-sized liquidity will continue to grow and 

evolve to meet the demands of users). 

35See Securities Exchange Act Release No. 60405 

(July 30, 2009), 74 FR 39362 (August 6, 2009) (File 

No. 4–546) (order approving Linkage Plan). The 

Linkage Plan was implemented on August 31, 2009. 

The Commission encourages the options 

exchanges to consider measures that would 

facilitate access to depth of book quotations. The 

Commission notes that currently several exchanges 

make available quotations and orders on their 

respective books below their best bid and offer. The 

Commission anticipates that to the extent display 

of this information proves to be valuable to the 

options market as a whole, other exchanges may 

choose to make this information available as well. 

36See CBOE Letter, supra note 5, at 3; and UBS 

Letter, supra note 5, at 2. 

37See supra note 7. In Amendment No. 3, the 

Exchange proposed to begin the phased 

implementation on October 26, 2009. See supra 

note 8. 

38Several commenters noted that the introduction 

of ISOs and improvements in order routing 

technology anticipated as part of the new linkage 

plan would provide an improved trading 

environment for the expansion of penny quoting 

and permit market participants to simultaneously 

access better priced quotations across all options 

exchanges. See GETCO Letter, supra note 5, at 4 

and UBS Letter, supra note 5, at 2. See also NYSE 

Arca Response, supra note 6, at 5 (stating that the 

soon-to-be implemented ISO will allow block-sized 

liquidity to be sourced at prices inferior to the 

NBBO and let it trade, offering institutional 

investors the certainty of both trade and price that 

they need and desire). 

39See SIFMA Letter, supra note 5, at 4 (citing to 

CBOE March Report, supra note 24). 

40Memorandum from J. Daniel Aromi, OEA, to 

Heather Seidel, Assistant Director, Division of 

Trading and Markets, Commission, dated August 

14, 2009 (‘‘OEA Memo 2’’) (looking at the change 

in volume from August to September 2007 to April 

to May 2008, and from August to September 2007 

to May to June 2009). 

41One commenter states that although the 

exchange reports have shown that quotation traffic 

has increased significantly, the quotation volume 

has not resulted in significant problems for 

exchanges or market participants. See UBS Letter, 

supra note 5, at 1. Another commenter noted that 

the risks associated with OPRA’s capacity being 

overwhelmed appear to be mitigated. See GETCO 

Letter, supra note 5, at 3. Another commenter notes 

that market participants will continue to make the 

investment in technology that results in more 

efficient markets and states that many of the 

exchanges have doubled the number of physical 

network connections between themselves and 

OPRA as a result. See BATS Letter, supra note 5, 

at 2. 

42See NYSE Arca Report, supra note 24, at 11 

(noting a sustained five second peak of 852,350 

messages per second as reported by OPRA on June 

2, 2009, and noting OPRA’s current output capacity 

customers trade the most and provide 

the most liquidity.32

The Commission continues to believe 

that the impact of the Pilot on displayed 

size, as well as on non-displayed depthof-book, and the impact of decreased 

size on market and execution quality, is 

an area that requires careful analysis as 

the Pilot continues. The Commission 

further recognizes that the options 

exchanges have consistently shown in 

their reports that there has been a 

reduction in the displayed size available 

in the Pilot classes. However, the 

Commission does not believe that the 

decrease in displayed size that 

accompanies smaller increments and 

narrower spreads means that NYSE 

Arca’s proposal to expand the Pilot is 

not consistent with the Act. A decrease 

in displayed size available at the best 

bid or offer may have a greater effect on 

the ability of market participants to 

execute large-sized orders as compared 

to smaller-sized orders, given the 

smaller size that would be available at 

that best price. The Commission does 

not believe that the data to date shows 

that retail customers have been 

adversely affected by the reduction in 

size at the inside price.33

Moreover, the Commission anticipates 

that market participants with large sized 

orders will adjust their trading strategies 

to accommodate smaller displayed size 

in additional classes quoting in 

pennies.34 Importantly, the Commission 

notes that the new Options Order 

Protection and Locked/Crossed Market 

Plan (‘‘Linkage Plan’’) provides for the 

use of intermarket sweep orders 

(‘‘ISOs’’), which will allow market 

participants to more efficiently access 

liquidity at multiple price levels across 

exchanges.35 Several commenters 

acknowledged the anticipated benefits 

of the new Linkage Plan, especially for 

options quoted in pennies, and 

requested that any expansion of the 

Pilot Program be contingent on the 

implementation of the new options 

linkage plan.36 In response to these 

comments, NYSE Arca amended its 

proposed rule change to modify the 

phased roll-out of the additional 300 

classes to begin following 

implementation of the Linkage Plan on 

August 31, 2009.37 The Commission 

agrees with commenters that the ability 

of market participants to use ISOs to 

access liquidity across exchanges and at 

different price levels will help to 

address concerns that a decrease in 

displayed size at the BBO negatively 

impacts the ability to execute large sized 

orders.38

In addition, one commenter notes a 

decrease in average daily volume in the 

Pilot classes as a negative effect of the 

Pilot.39 The Commission believes that 

the impact of smaller increments on 

trading volume is one of the more 

difficult aspects of the Pilot to assess. 

The bid-ask spread is only one factor 

that influences volume. Other factors 

that impact options volume are trading 

activity in the underlying security and 

in related products, volatility in the 

market and in the underlying security, 

as well as firm and market specific 

events. The Commission does not 

believe that exchange reports show a 

clear change in trading volume, and the 

Commission’s Office of Economic 

Analysis looked at the change in average 

contract volume for classes included in 

the Pilot and a sample of classes not 

included in the Pilot, over two time 

periods, finding that volume increased 

for the Pilot classes as compared to the 

control group of non-Pilot classes (the 

difference for one time period was 

statistically significant).40 Thus, based 

on the data viewed to date, the 

Commission cannot conclude that the 

Pilot has had an adverse impact on 

volume in the Pilot securities. 

As anticipated, the Pilot has 

contributed to the increase in quotation 

message traffic from the options 

markets. However, while the increase in 

quotation message traffic is appreciable, 

it has been manageable by the 

exchanges and the Options Price 

Reporting Authority (‘‘OPRA’’), and the 

Commission did not receive any reports 

of disruptions in the dissemination of 

pricing information as a result of 

quotation capacity restraints.41 While 

the Commission anticipates that NYSE 

Arca’s proposed expansion of the Pilot 

Program 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 quote 

information. NYSE Arca has proposed 

to roll out the additional 300 classes 

over time, in groups of 75 classes each 

quarter beginning on October 26, 2009. 

The Commission further notes that a 

June 2, 2009 sustained message traffic 

peak of 852,350 messages per second 

reported by OPRA42 is still well below 


srobinson on DSKHWCL6B1PROD with NOTICES
Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Notices 49423 

of 2,050,000 messages per second, which is 

scheduled to increase to over 3,000,000 messages 

per second in January 2010). 

43See NYSE Arca Response, supra note 6, at 6 

(stating that ‘‘there has been no outcry from vendors 

or firms in response to quote traffic projections 

through mid-year 2011, as published by [OPRA]’’). 

44See Securities Exchange Act Release No. 56157 

(July 27, 2007), 72 FR 42459 (August 2, 2007) (SR– 

NYSEArca-2007–71) (notice and immediate 

effectiveness of a proposed rule change to 

implement the Exchange’s quote mitigation 

strategy); and NYSE Arca Response, supra note 6, 

at 6 (representing that the Exchange will retain and 

continue to employ its quotation mitigation 

strategy). 

45One commenter argues that NYSE Arca’s 

proposal is confusing to investors because it will 

provide for 355 classes to be quoted in pennies and 

nickels, three classes to be quoted in all pennies, 

and the rest of the classes to be quoted in nickels 

and dimes (see CBOE Letter, supra note 5, at 2), 

while another commenter states its belief that a 

single break point for all classes will provide 

consistency for the industry and investors (see 

LiquidPoint Letter, supra note 5, at 3). The 

Commission does not believe that NYSE Arca’s 

proposal will result in increased confusion. The 

Commission notes that the proposal will continue 

the same breakpoint as the existing Pilot, and thus 

changes to the structure of the Pilot will be 

minimal. See Ameritrade Letter, supra note 5, at 3 

(noting that the current Pilot program carries a 

$3.00 breakpoint and thus changes to the pilot 

securities would be minimal, thus reducing any 

investor confusion related to the expansion of the 

Pilot). 

46One commenter that supports retaining the $3 

breakpoint noted that the majority of its customers’ 

trades occur at or below the $3 breakpoint. This 

commenter believes that a $3 breakpoint is in the 

best interest of retail investors. See Ameritrade 

Letter, supra note 5, at 2–3 (stating that in April 

2009, 71% of its customers’ trades and 89% of its 

customers’ volume was in series priced up to $3, 

and that in May 2009, 74% of its customers’ trades 

and 88% of its customers’ volume was in series 

priced up to $3). Another commenter that supports 

quoting in one-cent increments in all series in all 

options classes included in the Pilot believes that 

doing so would make the benefits of penny pricing 

available to more options. See GETCO Letter, supra 

note 5, at 3. Further, the Commission’s Office of 

Economic Analysis estimates that, under NYSE 

Arca’s proposal, approximately 70% of options 

contract volume would be quoted in one-cent 

increments. See OEA Memo 2, supra note 39. 

One commenter noted that if the Pilot were rolled 

back, as is proposed by several of the commenters, 

this would eliminate much of the benefit 

experienced by the options markets and customers 

due to the Pilot. See GETCO Letter, supra note 5, 

at 3. Another commenter similarly stated that a 

rollback of the Pilot would be ‘‘unfortunate’’ given 

the benefits from the Pilot that participants have 

realized and recommended that the Pilot move 

forward. See BATS Letter, supra note 5, at 2. 

47See Ameritrade Letter, supra note 5, at 3 (also 

noting its belief that the proposal would lead to 

investor confusion as it would not be representative 

of all classes). 

48See Notice, supra note 4, at 4. 

49One commenter believes the incidence of 

locked markets in Pilot classes has increased since 

the introduction of quoting in pennies. In addition, 

this commenter believes that an expansion of the 

Pilot could exacerbate the friction that it believes 

exists between competing payment models among 

the exchanges. The commenter believes that this 

issue could be mitigated if the Commission adopts 

the Linkage Plan. See Ameritrade Letter, supra note 

5, at 2. The Commission notes that it approved the 

Linkage Plan on July 30, 2009. See Securities 

Exchange Act Release No. 60405, supra note 34. 

The commenter also urges the Commission to 

consider expanding the provisions of Rule 610 of 

Regulation NMS to options trading. See Ameritrade 

Letter, supra note 5, at 2. The Commission staff is 

currently considering the issue of access and access 

fees in the context of its ongoing consideration of 

a petition for rulemaking requesting that the 

Commission impose a cap of $.20 on certain 

transaction fees. See Letter from John C. Nagel, 

Managing Director & Deputy General Counsel, 

Citadel, to Nancy M. Morris, Secretary, 

Commission, dated July 15, 2008. 

50See Securities Exchange Act Release Nos. 

60018 (June 1, 2009), 74 FR 27211 (June 8, 2009) 

and 60146 (June 19, 2009), 74 FR 30346 (June 25, 

2009). 

51See, e.g., ISE Letter, supra note 5, at 1 and 3; 

Nasdaq Letter, supra note 5; SIFMA Letter, supra 

note 5, at 5–6; and UBS Letter, supra note 5, at 2. 

52See, e.g., CBOE Letter, supra note 5, at 4; 

LiquidPoint Letter, supra note 5, at 2; and UBS 

Letter, supra note 5, at 2. 

53See ISE Letter, supra note 5, at 1; and 

LiquidPoint Letter, supra note 5, at 2. 

54See LiquidPoint, supra note 5, at 2–3; and 

Nasdaq Letter, supra note 5, at 2. Another 

commenter further states that multiple plans would 

subject members and ultimately investors to the 

elevated costs of excessive systems modifications 

and personnel training activities. See SIFMA Letter, 

supra note 5, at 6. 

OPRA’s current messages per second 

capacity limit of 2,050,000.43 Moreover, 

NYSE Arca has adopted and will 

continue to utilize quote mitigation 

strategies that should continue to 

mitigate the expected increase in 

quotation traffic.44

As noted above, NYSE Arca has 

proposed to expand the current Pilot 

Program to the 300 next most actively 

traded, multiply listed options classes, 

and to continue the existing $3 

breakpoint for classes included in the 

Pilot (with the exception of options on 

QQQQ, IWM, and SPY).45 The 

Commission believes that NYSE Arca’s 

proposal is consistent with the Act. The 

Commission believes that the proposed 

rule change is designed to continue the 

narrowing of spreads in options 

included in the Pilot. NYSE Arca’s 

proposal will provide the opportunity 

for reduced spreads where a significant 

amount of trading occurs, thus 

maximizing the economic benefits of the 

Pilot while minimizing the impact of 

increased quotation traffic.46 Further, 

the Commission believes that the 

proposal will provide an opportunity for 

increased transparency in the options 

markets, by allowing market 

participants to display their trading 

interest in one-cent increments in the 

consolidated quotation stream. 

One commenter stated its belief that 

NYSE Arca’s proposal, which would be 

expanded to the next most-active, 

multiply-traded 300 classes, rather than 

all classes, does not provide a stringent 

process to renew names that will be 

eliminated from the Pilot due to 

delisting, merger or other 

circumstances, and that the proposal in 

this regard would represent an ongoing 

administration that would be costly to 

the commenter.47 The Commission 

notes that NYSE Arca’s proposal 

explicitly includes a process for 

replacing, on a semi-annual basis, any 

Pilot class that has been delisted with 

the next most actively traded, multiply 

listed class that is not already included 

in the Pilot, based on trading activity in 

the previous six months.48 While there 

may be other approaches to address 

Pilot classes that have been delisted, 

none have been submitted to the 

Commission for its consideration. The 

Commission believes that NYSE Arca’s 

proposal to replace delisted classes from 

the Pilot is reasonable and consistent 

with the Act.49

The Commission has published for 

comment proposed rule changes from 

CBOE and ISE that propose alternative 

approaches to expanding the Pilot.50 In 

recognition of these other proposals, 

several commenters express the view 

that uniformity is necessary for an 

expansion of the Pilot Program.51 These 

commenters argue that approval of 

multiple plans permitting exchanges to 

adopt different breakpoints would 

create confusion,52 and that a uniform 

approach is necessary to assure that 

there is a fair and orderly national 

market system.53 Several commenters 

state that adopting different penny pilot 

rules would cause technological and 

implementation problems for all 

participants in the National Market 

System, and that varied breakpoints will 

impact order entry, routing, quoting and 

compliance systems for each venue.54

While the Commission agrees that a 

uniform approach may be preferable, 

the Commission must analyze each 

exchange’s proposed rule change on its 

own merits for consistency with the Act. 

As discussed above, the Commission 

has analyzed NYSE Arca’s proposal and 

finds that it is consistent with the Act. 

In this case, the Commission does not 

believe the choice of other exchanges to 

propose different quoting increments, or 

to not expand the current Pilot, makes 

NYSE Arca’s proposed rule change 

inconsistent with the Act. The 

Commission notes, however, that if an 

options exchange chooses not to permit 

quoting in one-cent increments in a 

particular option at the same time as 

another exchange, it would nevertheless 

remain obligated to comply with the 

provisions of the Linkage Plan, as well 

as its own rules, to avoid trading at 

prices worse than those offered by other 

exchanges, including prices in pennies. 


srobinson on DSKHWCL6B1PROD with NOTICES
49424 Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Notices 

55 15 U.S.C. 78s(b)(2). 

56See supra 8 and supra note 9. 

57 In its proposed rule change, the Exchange 

proposed to quote SPY and IWM entirely in 

pennies. In Amendment No. 1, the Exchange stated 

that this proposed change to the minimum quoting 

increment in these classes would take place on 

September 28, 2009. The Commission notes, 

however, that it is not approving this aspect of the 

proposal in this order. 58See Notice, supra note 4. 59See GETCO Letter, supra note 5, at 2–3. 60See CBOE Letter, supra note 5, at 2 to 3, and 

SIFMA Letter, supra note 5, at 5. 61See CBOE Letter, supra note 5, at 3. This 

commenter further noted that the average spread 

width in series with a premium $3 or greater is 

$0.27 for SPY and $0.25 for IWM. Id. 

62See OEA Memo 2, supra note 40 (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 continued operation and phased 

expansion of the Pilot Program will 

provide further valuable information to 

the exchanges, the Commission, and 

others about the impact of penny 

quoting in the options market. In 

particular, extending and expanding the 

Pilot Program as proposed by NYSE 

Arca will allow further analysis of the 

impact of penny quoting in the Pilot 

classes over a longer period of time on, 

among other things: (1) Spreads; (2) 

peak quotation rates; (3) quotation 

message traffic; (4) displayed size; (5) 

‘‘depth of book’’ liquidity; and (6) 

market structure. NYSE Arca has 

committed to provide the Commission 

with periodic reports, which will 

analyze the impact of the expanded 

Pilot Program. The Commission expects 

the Exchange to include statistical 

information relating to these factors in 

its periodic reports. 

IV. Partial Accelerated Approval 

The Commission finds good cause, 

pursuant to Section 19(b)(2) of the 

Act,55 for partially approving the 

proposed rule change,56 as modified by 

Amendment Nos. 1 and 3 thereto, prior 

to the 30th day after the date of 

publication in the Federal Register. In 

its proposed rule change, the Exchange 

proposed that any option class included 

in the Pilot Program that has been 

delisted be replaced on a semi-annual 

basis by the next most actively traded, 

multiply listed options class that is not 

yet included in the Pilot, based on 

trading activity in the previous six 

months. In Amendment No. 1, the 

Exchange provided clarification that the 

Exchange will employ the same 

parameters to prospective replacement 

issues as approved and applicable under 

the Pilot Program, including the 

exclusion of high-priced underlying 

securities and indexes. In Amendment 

No. 3, the Exchange clarified that the 

threshold for ‘‘high priced’’ designation 

is $200 per share or a calculated index 

value of 200, at the time of selecting 

new issues to be included in the Pilot. 

The Exchange also represented that the 

threshold and the Exchange’s approach 

for excluding high priced underlying 

securities is consistent with the 

Exchange’s prior process in determining 

issues to be included in the Pilot. The 

Exchange stated that the determination 

of whether a security is trading above 

$200 or above a calculated index value 

of 200 shall be based on the price at the 

close of trading on the Expiration Friday 

prior to being added to the Pilot. These 

changes clarify the operation of the 

proposal and do not differ materially 

from the proposal as noticed in the 

Federal Register. Also, in response to 

commenters, in Amendment No. 1 the 

Exchange proposes to delay the start of 

the phased implementation of the 

expansion of the Pilot from July 28, 

2009 to September 28, 2009. In 

Amendment No. 3 the Exchange 

proposed to begin the phased 

implementation on October 26, 2009. 

The proposed change to the 

implementation date is responsive to 

concerns expressed by commenters. 

Accordingly, the Commission finds that 

good cause exists to approve the 

proposed rule change, as modified by 

Amendment Nos. 1 and 3, on an 

accelerated basis.57

V. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning Amendment Nos. 

1 and 3, including whether Amendment 

Nos. 1 and 3 are consistent with the Act. 

The Commission also is soliciting 

additional comment on NYSE Arca’s 

proposal to quote two classes entirely in 

pennies, SPY and IWM, in addition to 

QQQQs. In response to the initial notice 

of this proposal,58 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. One commenter supported 

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,59 while two other 

commenters did not support this aspect 

of NYSE Arca’s proposal and question 

NYSE Arca’s basis for the proposal.60 In 

particular, one commenter did not find 

persuasive NYSE Arca’s rationale that 

because IWM and SPY have more series 

trading at premiums between $3 and 

$10, the $3 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 $3.61

The Commission’s Office of Economic 

Analysis 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 or greater, 

as compared to approximately 2.7 

million contracts for QQQQ that traded 

at premia of $3 or greater.62 The 

Commission specifically requests 

comment on these findings. 

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 rulecomments@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 


srobinson on DSKHWCL6B1PROD with NOTICES
Federal Register / Vol. 74, No. 186 / Monday, September 28, 2009 / Notices 49425 

63 15 U.S.C. 78s(b)(2). 

64 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The current FINRA rulebook consists of (1) 

FINRA Rules; (2) NASD Rules; and (3) rules 

incorporated from NYSE (‘‘Incorporated NYSE 

Rules’’) (together, the NASD Rules and Incorporated 

NYSE Rules are referred to as the ‘‘Transitional 

Rulebook’’). While the NASD Rules generally apply 

to all FINRA members, the Incorporated NYSE 

Rules apply only to those members of FINRA that 

are also members of the NYSE (‘‘Dual Members’’). 

The FINRA Rules apply to all FINRA members, 

unless such rules have a more limited application 

by their terms. For more information about the 

rulebook consolidation process, see FINRA 

Information Notice, March 12, 2008 (Rulebook 

Consolidation Process). 

4Other provisions that set forth certain financial 

and operational requirements, including, NASD 

Rules 2330(b) (General Provisions), 2330(c) 

(Authorization to Lend), 2330(d) (Segregation and 

Identification of Securities) and Interpretive 

Material 2330 (Segregation of Customers’ Securities) 

would remain in the Transitional Rulebook to be 

addressed as part of a later phase of the 

consolidation process. 

5NYSE Rules 352(e), 352(f) and 352(g) govern 

borrowing from or lending to customers. These 

provisions generally are equivalent to the 

provisions of NASD Rule 2370 (Borrowing From or 

Lending to Customers). NASD Rule 2370 and the 

corresponding NYSE provisions would remain in 

the Transitional Rulebook to be addressed as part 

of a later phase of the rulebook consolidation 

process. 

6Securities Exchange Act Release No. 60135 

(June 18, 2009), 74 FR 30198 (‘‘Notice’’). 

7For convenience, Incorporated NYSE Rule 352 

is hereinafter referred to as ‘‘NYSE Rule 352.’’ 

submissions should refer to File No. 

SR–NYSEArca-2009–44 and should be 

submitted on or before October 19, 

2009. 

VI. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,63 that the 

proposed rule change (SR–NYSEArca– 

2009–44) as modified by Amendment 

Nos. 1 and 3 thereto, be, and hereby is, 

partially approved on an accelerated 

basis, as discussed above. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.64

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–23374 Filed 9–25–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60701; File No. SR–FINRA– 

2009–014] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving 

Proposed Rule Change To Adopt 

FINRA Rule 2150 (Improper Use of 

Customers’ Securities or Funds; 

Prohibition Against Guarantees and 

Sharing in Accounts) in the 

Consolidated FINRA Rulebook 

September 21, 2009. 

I. Introduction 

On March 24, 2009, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’ 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 as 

part of the process of developing a new 

consolidated rulebook (the 

‘‘Consolidated FINRA Rulebook’’).3

FINRA proposed to adopt NASD Rules 

2330(a), 2330(e) and 2330(f) as FINRA 

Rules 2150(a), 2150(b) and 2150(c), 

respectively, in the Consolidated FINRA 

Rulebook, with certain changes as 

described below.4 Proposed FINRA Rule 

2150 also would take into account 

certain provisions of NYSE Rule 352. In 

addition, proposed FINRA Rule 2150 

includes a ‘‘Supplementary Material’’ 

section that contains certain 

clarifications and codifications of 

existing staff guidance. FINRA further 

proposed to delete NYSE Rule 352 (with 

the exception of paragraphs (e), (f) and 

(g)) 5 from the Transitional Rulebook. 

The proposed rule change was 

published for public comment in the 

Federal Register on June 24, 2009.6 The 

Commission received no comment 

letters regarding proposed rule change. 

This order approves the proposed rule 

change. 

II. Description of the Proposal 

FINRA proposed to adopt certain 

paragraphs, as specified below, of NASD 

Rule 2330 (Customers’ Securities or 

Funds) as FINRA Rule 2150 (Improper 

Use of Customers’ Securities or Funds; 

Prohibition Against Guarantees and 

Sharing in Accounts) in the 

Consolidated FINRA Rulebook taking 

into account certain provisions of 

Incorporated NYSE Rule 352 

(Guarantees, Sharing in Accounts, and 

Loan Arrangements) 7 and to delete 

NYSE Rule 352, with the exception of 

NYSE Rules 352(e) (Limitations on 

Borrowing From or Lending to 

Customers), 352(f) (Loan Procedures) 

and 352(g). 

The proposed rule change would 

renumber NASD Rule 2330(a) (Improper 

Use) as FINRA Rule 2150(a) (Improper 

Use), NASD Rule 2330(e) (Prohibition 

Against Guarantees) as FINRA Rule 

2150(b) (Prohibition Against 

Guarantees) and NASD Rule 2330(f) 

(Sharing in Accounts; Extent 

Permissible) as FINRA Rule 2150(c) 

(Sharing in Accounts; Extent 

Permissible) in the consolidated FINRA 

rulebook. The proposed rule change also 

would add a ‘‘Supplementary Material’’ 

section to proposed FINRA Rule 2150 

that contains certain clarifications and 

codifications of existing staff guidance. 

A. Improper Use of Customers’ 

Securities or Funds (Proposed FINRA 

Rule 2150(a)) 

NASD Rule 2330(a) prohibits 

members and associated persons from 

making improper use of a customer’s 

securities or funds. The improper use of 

customer securities or funds threatens 

the fundamental relationship between a 

broker and a customer and undermines 

the integrity of the securities industry. 

FINRA proposed to adopt NASD Rule 

2330(a) as FINRA Rule 2150(a) in the 

Consolidated FINRA Rulebook without 

changes. 

B. Prohibition Against Guarantees 

(Proposed FINRA Rule 2150(b)) 

NASD Rule 2330(e) prohibits 

members and their associated persons 

from guaranteeing a customer against 

loss in connection with any securities 

transaction or in any securities account 

of the customer. The reason for the 

prohibition is that such guarantees 

create the expectation that the customer 

is insulated from market risk intrinsic in 

securities ownership and may induce 

the customer to engage in a securities 

transaction that is not otherwise 

appropriate for the customer. 

FINRA proposed to adopt NASD Rule 

2330(e) as FINRA Rule 2150(b) in the 

Consolidated FINRA Rulebook without 

changes and delete NYSE Rule 352(a) 

(Prohibitions Against Guarantees) 

because its provisions are substantially 

similar to proposed FINRA Rule 

2150(b). 

C. Sharing in Accounts (Proposed 

FINRA Rule 2150(c)) 

NASD Rule 2330(f) prohibits members 

and associated persons from sharing in 

the profits or losses in a customer’s 

account except under certain limited 

conditions specified in the Rule. 

FINRA proposed to adopt NASD Rule 

2330(f) as FINRA Rule 2150(c) in the 

Consolidated FINRA Rulebook, with 

only minor changes. 

FINRA proposed to delete NYSE 

Rules 352(b), (c) and (d) as they are 

substantially similar to proposed FINRA 

Rule 2150(c) or are otherwise 

incorporated as part of the 

supplementary material to proposed 

FINRA Rule 2150. 


srobinson on DSKHWCL6B1PROD with NOTICES