Moving On With Pennies

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The Beginning
The first phase of the controversial Penny Pilot began back on January 26. After a few weeks of testing, the Pilot eventually expanded to include 13 options classes. These 13 classes represented a relatively broad cross-section of the options market and were designed to test the impact of pennies on a variety of products.

Deep Divisions
Unfortunately, the transition to penny pricing did not go as smoothly as many hoped. Although the feared technological problems never materialized, other issues arose during the first phase of the Penny Pilot.

As is to be expected whenever a systemic change is forced upon an entire industry, the Penny Pilot has caused deep divisions in the options business. Supporters of the Pilot,  including retail traders and brokerages, have come to see pennies as a boon to their segment of the industry.

Arrayed against them are the institutional traders and brokerages that feel the Pilot has damaged executions and reduced liquidity for institutional orders.




The End of the First Phase
The first phase of the Penny Pilot was scheduled to expire in late July. As the first phase drew to a close, exchanges and industry firms were asked to provide feedback on the Pilot to the SEC. Not surprisingly, the deep divisions in the industry spilled over into the feedback that was submitted to the SEC. Supporters of the Pilot urged the SEC to expand the program while opponents argued for caution or perhaps even an end to the Pilot altogether.

Siding With The Naysayers?
Referring to the SEC as an ardent proponent of pennies would be the understatement of the century. Convinced that pennies are a panacea for the ills of the options world, the SEC has become the single driving force behind the Penny Pilot.

Given the SEC's one-sided view of pennies, many observers assumed that the feedback phase was merely a formality designed to silence Pilot critics. After all, with the SEC acting as the chief evangelist for the Pilot, a rapid expansion of penny pricing appeared to be a foregone conclusion.

The Second Phase
However, in a somewhat surprising move, the SEC has sided with the opponents of the Pilot and opted for a relatively modest expansion of the program.

The SEC's first step was to extend the initial phase of the Pilot to September 27. The second phase is scheduled to begin on the following day, adding 22 new options classes to the Pilot. These new classes are:

1. SPDR S&P 500 (SPY/SPY)
2. NYSE Euronext (NYX/NYX)
3. Apple Inc. (AAPL/AAQ)
4. Cisco Systems (CSCO/CYQ)
5. Altria Group, Inc. (MO/MO)
6. Financial Select Sector SPDR (XLF/XLF)
7. Dendreon Corp. (DNDN/UKO)
8. AT&T, Inc. (T/T)
9. Amgen Inc. (AMGN/AMQ)
10. Citigroup, Inc. (C/C)
11. Yahoo! Inc. (YHOO/YHQ)
12. Amazon.com Inc. (AMZN/ZQN)
13. Qualcomm Inc. (QCOM/QAQ)
14. Motorola Inc. (MOT/MOT)
15. General Motors (GM/GM)
16. Research in Motion Ltd. (RIMM/RUL)
17. Energy Select Sector SPDR (XLE/XLE)
18. Freeport-McMoRan Copper & Gold, Inc. (FCX/DPJ)
19. Diamonds Trust (DIA/DIA)
20. ConocoPhillips (COP/COP)
21. Oil Services HLDRS (OIH/OIH)
22. Bristol-Myers Squibb Co. (BMY/BMY)
    

The Third Phase
The third phase of the Pilot is scheduled to begin on March 28, 2008 and last for one year. Although the total number of classes that will be added during the third phase of the Pilot has yet to be determined, most estimates range from 28-30. 
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