[Federal Register Volume 61, Number 215 (Tuesday, November 5, 1996)]
[Notices]
[Pages 56991-56993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28314]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37887; File No. SR-Phlx-96-39]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to the
Selective Quoting Facility for Foreign Currency Options
October 29, 1996.
I. Introduction
On August 20, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section
[[Page 56992]]
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule
19b-4 thereunder,\2\ a proposed rule change to amend the foreign
currency option selective quote facility.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposed rule change was published for comment in the
Federal Register on September 20, 1996.\3\ No comments were received on
the proposal. This order approves the proposal.
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\3\ Securities Exchange Act Release No. 37688 (September 16,
1996) 61 FR 49515.
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II. Description of the Proposal
The foreign currency option (``FCO'') Selective Quoting Facility
(``SQF'') establishes criteria to determine whether the bid/ask
quotation for each FCO series is eligible for transmission to the
Options Price Reporting Authority (``OPRA'') for off-floor
dissemination to securities data vendors. Implemented in 1994,\4\ the
SQF, a feature of the Exchange's Auto-Quote system, was intended to
reduce the number of strike prices being continuously updated and
disseminated, thus resulting in more timely and accurate FCO quote
displays. Specifically, designating as ``inactive'' those series that
are away-from-the-money or not recently traded eliminates quote changes
in those series that have the least amount of investor interest, thus
reducing the dissemination delays caused by thousands of quote changes
in volatile trading periods.
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\4\ Securities Exchange Act Release No. 33067 (October 19,
1993), 58 FR 57658 (October 26, 1993) (File No. SR-Phlx-92-23).
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Currently, the SQF categorizes certain FCO strikes as ``non-
update'' or ``inactive'' strikes, which are disseminated with the OPRA
indicator ``I'' and zeroes (e.g., 000-000), in lieu of a market. In
contrast, ``update'' or ``active'' strikes include, at minimum: (1)
Around-the-money strikes in near-term American style options, and (2)
strikes with open interest that have traded with the previous five
days. Around-the-money strikes were recently \5\ defined as those with
an approximate 10, 20, 30, 40 and 50 delta.\6\ Active strikes may also
be added at the initiative of the Exchange or in response to a request
by the Specialist or an FCO Floor Official.
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\5\ Securities Exchange Act Release No. 36636 (December 26,
1995) 61 FR 209.
\6\ ``Delta'' is a measure of how much an option premium changes
in relation to changes in the underlying security. For example, a 50
delta represents that for every one point move in the spot price of
an underlying foreign currency, the option moves \1/2\.
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When a series is inactive, those bids and offers are no longer
updated in the Exchange's Auto-Quote system for dissemination.
However, if interest is then voiced in any such series, it can be
activated immediately upon establishment of a quote in that series.
Inactive strikes with open interest (that have not traded in the
previous five days) are quoted once at the close of trading each day
for purposes of mark-to-market valuation. Because inactive series are
not continuously updated and disseminated, quotation processing times
are reduced such that quotes respecting active strikes are updated and
disseminated to customers much more quickly.
The Exchange amended the SQF last year \7\ to reduce the number of
strikes considered active by: (1) Eliminating from the definition of
active strikes those series with open interest that have not traded
within the previous five trading days, but nevertheless requiring a
closing quotation; (2) ``de-activating'' strikes intra-day that no
longer fit the definition of active; and (3) redefining around-the-
money active strikes as the five options with an approximate 10, 20,
30, 40 and 50 delta, instead of those four above and four below the
spot price. This change was precipitated by volatility in the foreign
currency markets causing dramatic fluctuation in foreign currency
exchange rates, and, in turn, the addition of many strike prices to
accommodate the new trading ranges of the underlying currencies.
Therefore, the changes were intended to alleviate this burden and to
improve the timeliness and accuracy of FCO quotes.
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\7\ See Securities Exchange Act Release No. 36636, supra note 5.
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In building system enhancements to implement this change, testing
revealed that the delta-based around-the-money strikes did not most
accurately capture around-the-money interest and was not the most
efficient or simple method of determining those strikes, as originally
contemplated by the FCO floor. The Exchange had previously sought to
define active strikes using deltas, in order to correspond to the
terminology used by traders and to capture strikes of certain
volatilities, which was an improvement upon having a set number. During
testing, it was determined that the definition of around-the-money
strikes should be revisited, resulting in the proposal at hand.
The purpose of the proposal is to codify certain system
enhancements pertaining to the SQF into the governing Rule and Floor
Procedure Advice.\8\ Specifically, the current proposal redefines
around-the-money active strikes as two in-the-money strikes and six
out-of-the money strikes for both puts and calls. The purpose of this
change is to more accurately reflect the most active series for
dissemination of the most significant and meaningful quotes. FCO floor
representatives determined that the 10-50 delta range did not
necessarily incorporate such strikes. Each morning, under the proposal,
the SQF would set eight calls and eight puts for each FCO expiration
month. Previously, under the delta-based method, at least ten series
were activated, and, in certain cases, more than five strikes out-of-
the-money were required to capture the 50 delta and less than five
captured the 50 delta in-the-money. Thus, based on specialist
experience, the ``two in the six out-of-the-money'' definition garners
those strikes that are active daily and have the most trading interest.
Furthermore, preliminary testing revealed that 10% fewer strikes in the
sample were activated under the new definition. Therefore, the Exchange
does not believe that the number of resulting strikes should differ
significantly from the delta-based method. The actual number for each
FCO depends upon the fluctuations in the underlying currency. Likewise,
the Exchange believes that the ``two in the six out'' method is easier
to discern for customers, floor traders, Exchange staff, and vendors
alike.
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\8\ Phlx Rule 1012, Commentary .04 and Floor Procedure Advice
(``Advice'') F-18, FCO Expiration Months and Strikes Prices--
Selective Quoting Facility.
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Rule 1012, Commentary .04 establishes the minimum strikes to be
activated, thus permitting the Exchange to designate other strikes as
active. In this regard, the Exchange proposed to add the language ``at
minimum'' to the Advice, for consistency with Rule 1012. In
implementing the ability to activate other strikes, the Exchange has
also designated as active all expiration months (except long-term) and
around-the-money European style options. Activating expiration months
other than the first three months became necessary due to complex
system needs related to disseminating implied volatility levels using
an outside vendor. Activation of around-the-money strikes is currently
needed in all months to continue disseminating these levels under
existing system configurations. With respect to end-of-month FCOs, only
the first three expiration months are currently activated. Further,
European style options are treated the same as American style options
by the SQF system, such that the around-the-money definition activates
the same strikes. The Exchange notes that these changes were
implemented by FCO Committee
[[Page 56993]]
representatives to facilitate the smooth operation of the SQF, and this
proposal codifies this result by adding the permissive language from
the Rule into the Advice.
The Exchange believes that the proposed rule change is consistent
with Section 6 \9\ of the Act in general, and in particular, with
Section 6(b)(5),\10\ in that it is designed to promote just and
equitable principles of trade, prevent fraudulent and manipulative acts
and practices, to foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in securities, as well as to
protect investors and the public interest. Specifically, the Exchange
believes the proposal promotes just and equitable principles of trade
by facilitating speedier dissemination of FCO markets. Although the
proposal may, but does not necessarily, result in a greater number of
active strikes, the Exchange believes that any additional activation of
strikes is necessary to ensure that SQF dissemination includes truly
active strikes. Thus, the proposal balances the need to prevent
excessive quote disseminations with preserving meaningful dissemination
of FCO quotes. The proposal is also designed to facilitate coordination
between the Exchange, the Options Clearing Corporation (``OCC''), OPRA
and securities information vendors. A quote will always be disseminated
when a trade occurs in a previously-inactive series and quotes in
inactive series can always be requested from the trading crowd,
consistent with the protection of investors and the public interest. In
sum, the Phlx believes that the proposed changes to the SQF should
facilitate the specialists' ability to focus on active series, which
should, in turn, result in tighter, more liquid markets, consistent
with Section 6(b)(5).
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\9\ 15 U.S.C. 78f.
\10\ 15 U.S.C. 78f(b)(5).
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, the requirements of Section 6(b)(5).\11\ The Commission
believes that the proposed amendments to the SQF will result in timely
and accurate FCO quote displays in series of known or probable interest
to public customers, rather than those with improbable public investor
interest, thereby helping the Phlx to maintain fair and orderly options
markets.
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\11\ 15 U.S.C. 78f(b)(5).
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Specifically, the Phlx proposes to redefine around-the-money active
strikes as two in-the-money strikes and six out-of-the-money strikes
for both puts and calls. According to the Exchange, the purpose of this
change is to more accurately reflect the most active series for
dissemination of the most significant and meaningful quotes. The
Exchange states that FCO floor representatives determined that the 10-
50 delta range did not necessarily incorporate such strikes. Each
morning, under the proposal, the SQF will set eight calls and eight
puts for each FCO expiration month. Previously, under the delta-base
method, at least ten series were activated, and, in certain cases, more
than five strikes out-of-the-money were required to capture the 50
delta and less than five captured the 50 delta in-the-money.
According to the Exchange, based on specialist experience, the
``two in and six out-of-the-money'' definition garners those strikes
that are active daily and have the most trading interest. The Exchange
states that the number of resulting strikes should not differ
significantly from the delta-based method. The Exchange states that
preliminary testing revealed that 10% fewer strikes in the sample were
activated under the new definition, though the actual number for each
FCO depends upon the fluctuations in the underlying currency. The
Exchange also believes that the ``two in and six out'' method is easier
to discern for customers, floor traders, Exchange staff, and vendors
alike. Therefore, the Commission finds that the proposal may benefit
investors and help the Phlx maintain fair and orderly markets by
allowing for the updating and dissemination of quotations that are most
useful to FCO market participants.
Rule 1012, Commentary .04 establishes the minimum strikes to be
activated, thus permitting the Exchange to designate other strikes as
active. In this regard, for consistency with Rule 1012, the Exchange
proposed to add the language ``at minimum'' to the Advice. The
Commission finds this conforming change appropriate.
In addition, the Commission believes that the proposal protects
market participants by providing for the dissemination of one bid/ask
quote at the end of each day for non-update series with open interest.
This quote will provide option holders with an indication of the market
for that option and will provide the OCC with a closing value to mark
the market for margin and capital purposes.
The Commission continues to believe, as it has concluded
previously,\12\ that the SQF, as amended, will not create an advantage
to FCO participants on the trading floor with the trading of options
series not disseminated to the public. Public customers are protected
by the feature of the SQF which requires a quotation to be disseminated
after an options series is activated but before a trade can be entered.
Accordingly, a participant who is physically on the trading floor will
learn of the specialist's market for a given options series when the
series is activated and a quote is published, nearly identical in time
to a potential customer watching a vendor screen off-floor.
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\12\ See Securities Exchange Act Release No. 33067 (October 19,
1993), 58 FR 57458 (order approving SQF, SR-Phlx-92-23); Securities
Exchange Act Release No. 36636, supra note 5.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (File No. SR-Phlx-96-39) is
approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28314 Filed 11-4-96; 8:45 am]
BILLING CODE 8010-01-M
