Option Penny Pilot Eligibility and Market Effects
Summary
The discussion explains how options enter the U.S. Penny Pilot Program and whether monthly contract volume determines eligibility. The accepted answer says selection was phased through SEC and exchange decisions, rather than governed by a disclosed volume threshold. It notes a price test: most eligible classes had premiums below $3, with IWM, QQQ, and SPY treated as exceptions, and cites a separate share-price screen that excluded high-premium classes at selection.
A second answer reports findings from an exchange study: tighter quoted spreads accompanied lower displayed size and depth, while market-maker quotes and trading volume rose. It also describes added capacity demands and predicts that the eligible list would expand. These observations are presented as historical pilot results and commentary, not a current eligibility guide or a causal analysis. The discussion supplies no monthly contract-volume rule, and readers should consult current exchange rules for present-day requirements.
Key ideas
- Penny Pilot eligibility was described as phased selection by the SEC and exchanges, not a stated monthly volume cutoff.
- Most options classes were subject to a premium threshold, with named broad-market products treated as exceptions.
- The discussion cites historical evidence of narrower spreads alongside lower displayed depth and increased volume.
- The pilot's selection rules and status are historical, so current exchange rules should be checked separately.
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Full text
# monthly contract volume required for penny increments? # monthly contract volume required for penny increments? Have the exchanges disclosed their criteria? Does anyone have a best guess based upon observations of volume (however you wish to define it)? Please no qualitative answers. ## Answer by user3232 (score -1, accepted) https://quant.stackexchange.com/a/7686 The first 13 were some pretty active securities, but they definitely weren't the most. chrisaycock's noted $3 threshold undoubtedly plays a role, so does volume, but there's probably some sort of other political consideration (like "don't leave out the small caps!") that could be quantified. It looks like, generally speaking, it's the highest dollar volume underlyings with most option premium volume under $3 as well as a few political choices here and there. http://www.ise.com/assets/files/investors/Penny_Report.pdf Fun facts from the link: - Offered spread drops from 10c to 7c. - Size at the offer drops 80%, but how is this a shock that everyone at the nickel can't play along at the penny? - Depth drops 60%, so it looks like some came part of the way, and those who have no hope of ever getting their order filled went away. - Quotes from market makers doubled. Looks like they like it. - The part the exchange cares about most: volume increased 33% for PP stocks, 9% for no PP. - The part the exchanges are afraid of the most: 25% increase in capacity needed to handle pennies. I can't wait for the penny pilot to be over. - Whoever actually drops out and only does nickels will get murdered by the last one(s) still doing pennies (NYSE/Arca looks pretty enthusiastic based upon their papers). We might watch CBOE take a huge hit to earnings and prestige if they're the only ones who bow out. Could be a funny day! - The exponential rate (current average annual 74% rate) that underlyings have been added to the penny list will continue. We're at 362 pennies, 3215 total now, so it looks like it'll be ~4 years until totally ubiquitous. ## Answer by chrisaycock (score 2) https://quant.stackexchange.com/a/7670 You are referring to the Penny Pilot Program. Only options whose premiums are quoted at a price less than \$3 may be eligible for penny increments, except for IWM, QQQ, and SPY, which are always quoted in pennies. The list of permitted classes doesn't seem to come from specific volume criteria. Instead, the SEC and the exchanges together roll-out names in phases. CBOE's proposal for mini-options gives some additional insight: > There is a price test for entry into the Penny Pilot Program which excludes “high premium” classes, which are defined as classes priced at $200 per share or higher at the time of selection. This is why GOOG is not in the Penny Pilot Program, for example. The best bet is to use the list of eligible classes from ISE or CBOE. Note that Rule 6.42 states, "the Penny Pilot shall expire on June 30, 2013".
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.