Penny Pilot Program

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The Penny Pilot Program is in an industry-wide program implemented by the Securities and Exchange Commission (SEC) on January 26, 2007. In June of 2005, NYSE Arca Options (at that time, the Pacific Exchange Inc.) filed to allow the quoting and trading of all option classes in minimum increments of $0.01 for all series a price of up to $5; and an increment of $0.05 for all other series. After negotiation and discussion with various exchanges, the SEC approved a pilot program to trade 12 classes in pennies below $3, nickels above $3, and to trade all series in QQQ in a $0.01 increment.

The pilot was intended by the Commission to demonstrate tighter price spreads, provide better prices to retail customers, and reduce payment for order flow. The original pilot program was scheduled to end in September 27, 2007. Since its launch the program has been expanded to include 363 securities. [1]

In 2007, the SEC approved the Chicago Board Options Exchange (CBOE) proposal to expand the penny pilot program into two-stages. The first phase was set to begin on September 28, 2007 and last for six months. An additional 22 options were then to be added. After the end of the first phase on March 27, 2008, phase 2 kicked in, adding another 28 more actively traded names to the list. Phase 2 ended on March 28, 2009. This proposal brought the program total to 63. [2]

The pilot, set to expire in July 2009, was extended by the SEC to Oct. 31, 2009. [3]

On September 23, 2009, the SEC approved NYSE Arca’s proposal to extend and expand the pilot through December 31, 2010. The proposal included four quarterly additions consisting of 75 issues each. The expansion offered benefits such as increased transparency, improved price discovery and reduced spreads. [4]

On August 20, 2013, NYSE Arca filed a proposal with the SEC to make the Penny Pilot Program permanent on a reduced level, limiting the number of applicable classes from 363 to 150. NYSE analysis found that roughly 90.8% of all penny pilot volume was in the Top 150 issues, while the Bottom 203 resulted in more overhead costs and lagged the overall market in various statistics. This proposal would help the options industry continue to provide deep liquid markets for investors, while making a meaningful impact on quote traffic.[5] Because of a lack of consensus in the options industry regarding the scope of a reduced program, NYSE Arca withdrew its proposal in December of 2013.

Today, all of the exchanges are working together to reach a unified agreement for the program under the auspices of the Options Listings Procedure Plan (“OLPP”), a National Market System Plan governing all the options exchanges and the Options Clearing Corporation (OCC).

The pilot program is currently set to expire on June 30, 2014. [6]

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