Document ID: SEC-2009-1530-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Penny Pilot Program
Posted Date: 2009-10-29T04:00Z

[Federal Register: October 29, 2009 (Volume 74, Number 208)]
[Notices]               
[Page 55876-55878]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29oc09-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60864; File No. SR-CBOE-2009-076]

 
 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to the Penny Pilot Program

October 22, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 20, 2009, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. The Exchange filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its 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.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE proposes to extend and expand the Penny Pilot Program, which 
commenced on January 26, 2007, in accordance with the proposed 
expansion that the SEC approved on September 23, 2009.\5\
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    \5\ See Securities Exchange Act Release No. 60711 (September 23, 
2009), approving SR-NYSEArca-2009-44.
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    Background:
    The Penny Pilot Program currently is in effect in fifty-eight 
multiply-listed option classes.\6\ 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 October 31, 2009.\7\
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    \6\ 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.
    \7\ See Securities Exchange Act Release No. 60223 (July 1, 
2009), 74 FR 32993 (July 9, 2009), granting immediate effectiveness 
to SR-CBOE-2009-43.
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    On May 20, 2009, CBOE filed SR-CBOE-2009-31, which filing proposed 
to extend the Pilot Program, and also proposed to significantly expand 
the 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.\8\ 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. CBOE believed that extending and expanding the Penny Pilot 
Program as proposed was balanced, responsible, and reasonable. It would 
benefit investors by expanding the Pilot Program in all equity and ETF 
option classes over a relatively short period of time, which would 
enable investors to obtain the benefits of penny quoting and trading in 
those option contracts that customers actually trade. CBOE also 
believed that its proposal was balanced in that it recognized that the 
Pilot Program, while providing certain benefits such as reducing 
spreads, also 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 eliminated investor confusion as 
to which options are quoted in penny increments, and helps to reduce 
the growth of quote traffic.
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    \8\ See Securities Exchange Act Release No. 60018 (June 1, 
2009), 74 FR 27211 (June 8, 2009).
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    Proposed Expansion:
    In light of the SEC's recent approval the NYSEArca's proposed 
expansion of the Penny Pilot Program (see SR-NYSEArca-2009-44), CBOE 
has determined to withdraw its proposal to expand the Pilot Program as 
described in SR-CBOE-2009-31. Instead, CBOE now proposes to extend the 
Pilot Program from November 1, 2009 until December 31, 2010, and expand 
the Penny Pilot Program by adding the 300 most actively-traded, 
multiply-listed option classes that are not currently in the Pilot 
Program, excluding option classes with high premiums. An option class 
would be designated as ``high premium'' if, at the time of selection, 
the underlying security was priced at $200 per share or above, or the 
underlying index level was at 200 or above. These determinations shall 
be based on the price at the close of trading on Expiration Friday 
prior to the class being added to the Pilot Program. CBOE believes that 
it is appropriate to exclude high priced underlying securities, as the 
benefit to the public from excluding such issues is minimal because of 
the high price of at-the-money options.
    The 300 option classes would be added in groups of 75 classes each 
quarter beginning on the following dates: November 2, 2009, February 1, 
2010, May 3, 2010, and August 2, 2010. The option classes will be 
identified based on national average daily volume

[[Page 55877]]

in the six calendar months preceding their addition to the Pilot 
Program using data compiled by The Options Clearing Corporation, except 
that the month immediately preceding their addition to the Pilot 
Program would not be utilized for purposes of the six month 
analysis.\9\ CBOE will not include option classes in which the issuer 
of the underlying security is subject to an announced merger or is in 
the process of being acquired by another company, or if the issuer is 
in bankruptcy. CBOE will announce the classes to be added by circular, 
in addition to filing a proposed rule change identifying the option 
classes.
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    \9\ Thus, the 75 classes to be added on November 2, 2009 would 
be identified based on OCC volume data from April 1, 2009 through 
September 30, 2009; the 75 classes to be added on February 1, 2010 
would be identified based on OCC volume data from July 1, 2009 
through December 31, 2009; the 75 classes to be added on May 3, 2010 
would be identified based on OCC volume data from October 1, 2009 
through March 31, 2010; and the 75 classes to be added on August 2, 
2010 would be identified based on OCC volume data from January 1, 
2010 through June 30, 2010.
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    In the event an option class included in the Pilot Program is 
delisted, the Exchange may replace it on a semi-annual basis with the 
next most actively-traded, multiple-listed option class that is not yet 
participating in the Pilot Program, based on national average daily 
volume in the preceding six months. Any replacement class would be 
added on the second trading day following January 1, 2010 and July 1, 
2010.\10\ CBOE will employ the same parameters to prospective 
replacement issues as approved and applicable under the Penny Pilot 
Program, including excluding high-priced underlying securities. CBOE 
will announce any replacement classes by circular.
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    \10\ The month immediately preceding their addition to the Pilot 
Program, i.e., December or June, would not be used for purposes of 
the six month analysis. For example, a replacement class to be added 
on the second trading following January 1 would be identified based 
on OCC volume data from June 1 through November 30.
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    CBOE is specifically authorized to act jointly with the other 
options exchanges participating in the Penny Pilot Program in 
identifying the 300 option classes that will be added to the Pilot 
Program, as well as any replacement class for an option class included 
in the Pilot Program that has been delisted.
    CBOE will submit to the SEC semi-annual reports 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 option classes added to the 
Pilot Program. This proposed sampling approach provides an appropriate 
means by which to monitor and assess the Penny Pilot Program's impact. 
CBOE will also identify, for comparison purposes a control group 
consisting of the ten least active option classes from the existing 58 
Penny Pilot Program classes. This report will include, but is not 
limited to the following: (1) Data and analysis of 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 CBOE'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.
2. Statutory Basis
    The Exchange believes the rule proposal is consistent with the 
Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations under the Act applicable to a national securities exchange 
and, in particular, the requirements of Section 6(b) of the Act.\11\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the Section 6(b)(5) Act\12\ 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. In particular, the proposed 
rule change allows for an expansion of the Penny Pilot Program for the 
benefit of market participants.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule does not (i) significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; and (iii) become operative for 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative for 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \16\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay so that the proposal may 
become operative immediately upon filing. The Exchange notes that the 
proposed rule change is substantially similar to a proposal submitted 
by another options exchange that was recently approved by the 
Commission and also incorporates a change to the initial expansion date 
filed by the other exchange. The Exchange further states that waiving 
the 30-day operative delay will allow the Pilot Program to continue 
uninterrupted and allow CBOE to adopt the same expansion schedule as 
other exchanges.
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because such waiver will allow the Exchange to implement the 75 
additional classes on November 2, 2009 and permit the Penny Pilot 
Program to continue uninterrupted, consistent with other exchanges.\17\ 
Accordingly, the Commission designates the proposed rule change 
operative upon filing with the Commission.
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    \17\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78(c)(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

[[Page 55878]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2009-076 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-2009-076. 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 CBOE. 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-2009-076 and should be 
submitted on or before November 19, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-26024 Filed 10-28-09; 8:45 am]

BILLING CODE 8011-01-P