U.S. regulators have approved an NYSE Euronext (NYX) proposal to expand the number of options priced in pennies on the company's two options exchanges, part of a pilot program now set to run through the end of next year.

The approval, granted late Wednesday, makes it likely that other options exchanges will follow suit, though not all agree on the issue of penny pricing.

The Securities and Exchange Commission initiated the so-called penny pilot program in 2007, with the aim of tightening price spreads in options contracts by pricing some names in one-cent increments.

It's worked, but some of the biggest options exchanges argue that tighter spreads have come at the expense of liquidity in some penny-priced names, and made it tougher to execute large orders.

Under current terms, the pilot program requires options costing less than $3 to be priced in penny increments, while options costing more trade in nickels and dimes.

With Wednesday's SEC nod, NYSE Euronext's penny program has been extended through Dec. 31, 2010 and will expand to include 300 new issues, eventually covering 85% of overall U.S. options volume, according to NYSE Euronext officials.

The penny pilot, which had been set to expire Oct. 31 and now covers 63 names, will add 75 new issues each quarter beginning next month.

The SEC's approval for NYSE Euronext's penny pricing proposal essentially compels other options exchanges to follow suit to remain competitive and maintain order routing linkages between markets.

NYSE Euronext, which operates two options exchanges, has long pushed for more options to be priced in pennies, a shift that some see benefiting exchanges with maker-taker market models like NYSE Arca Options, which are set up to incentivize high-frequency traders.

"Expanding the penny pilot program, in my opinion, provides a cleaner and more transparent marketplace with reduced spreads, which basically gives retail investors a level playing field," said Paul Finnegan, senior director of NYSE Arca Options, in an interview.

Options markets operating on traditional, pro-rata models, including the Chicago Board Options Exchange and the International Securities Exchange, are among the chief critics of penny pricing.

However, rival options markets signaled that they will move to expand their own penny pricing following Wednesday's SEC decision.

"We will remain competitive, and to do so will adopt rules that parallel what the commission ultimately approves," an ISE spokeswoman said.

A spokesperson for CBOE said that the exchange supports "a more balanced and flexible approach that considers the benefits of pennies for customers as well as the the impact for institutional investors and for market liquidity overall."

"That said, CBOE will evaluate the plan approved yesterday and take the steps necessary to remain competitive."

The CBOE's and ISE's market model remains dominant in the U.S., with the two exchanges combined accounting for about 60% of all on-exchange options business.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com