OPTIONS REPORT: NYSE Looks to Cull List of Penny Names

In a move intended to reduce quote traffic and the exchange operator’s administrative burden, NYSE Euronext is proposing to cut significantly the number of options subject to penny trading and to end the so-called “Penny Pilot” program.

In a letter to the Securities and Exchange Commission, the operator of two options exchanges—NYSE Arca Options and NYSE Amex Options—is recommending the SEC reduce the number of options traded in 1-cent increments from 362 to 150.

The purpose is to introduce some efficiency into the quoting and trading of penny names that has been a part of the landscape since 2007.

“At some point, we need to draw a line and state what is working and what is not working,” Steve Crutchfield, NYSE Euronext head of U.S. Options, told reporters during a recent media briefing. “Let’s make this a permanent program.”

NYSE wants to streamline the program by reducing the number of options traded in pennies, Crutchfield said at the Options Industry Conference in Las Vegas at the turn of the month. By shedding the least active 200 names from the program, the percentage of industry volume traded in pennies would shrink from 82 percent to 75 percent, according to NYSE data.

Those less active names would revert to nickel and dime increments. Prior to the introduction of the pilot in 2007, all options traded in 5-cent and 10-cent ticks.

The move would not hurt the quality of the markets in those names, Crutchfield, argued, as most already trade with wide spreads. In fact, the bottom 20 percent can trade with spreads as wide as 60 cents, he said.

One benefit of culling the list would be to reduce quote traffic. Those names NYSE would like to remove from penny trading generate more quotes per trade than the more active options, Crutchfield explained.

“They have significantly greater overhead from quote activity,” he said. “They have almost 270 percent more quotes distributed per contract executed than the Top 150 names in the penny pilot program.”

The move would also relieve the exchange operator of filing periodic reports, Crutchfield said