96-2618. Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating to Exercise Price Intervals for Index Options  

  • [Federal Register Volume 61, Number 26 (Wednesday, February 7, 1996)]
    [Notices]
    [Pages 4698-4701]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 96-2618]
    
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    [Release No. 34-36796; File No. SR-PHLX-95-68]
    
    
    Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
    Change by the Philadelphia Stock Exchange, Inc., Relating to Exercise 
    Price Intervals for Index Options
    
    January 31, 1996.
        Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
    (``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January 
    2, 1996, the Philadelphia Stock Exchange, Inc. (``PHLX'' or 
    ``Exchange'') filed with the Securities and Exchange Commission 
    (``SEC'' or ``Commission'') the proposed rule change as described in 
    Items I, II, and III below, which Items have been prepared by the self-
    regulatory organization. The Commission is publishing this notice to 
    solicit comments on the proposed rule change from interested persons.
    
    I. Self-Regulatory Organization's Statement of the Terms of Substance 
    of the Proposed Rule Change
    
        Currently, paragraph (a) of PHLX Rule 1101A, ``Terms of Option 
    Contracts,'' states that the PHLX shall determine fixed point intervals 
    of exercise prices for index options. Commentary .02 to PHLX Rule 1101A 
    provides that exercise prices for index options shall be $5.00, except 
    exercise prices in the far-term series of National Over-the-Counter 
    (``XOC'') options, Value Line Composite Index (``VLE'') options, Big 
    Cap Index options and USTOP 100 Index (``TPX'') options shall be $25,00 
    unless there is demonstrated customer interest at $5.00 intervals.\1\ 
    Under the proposal, the exercise (strike) price interval for near-term 
    index options generally will be $5, except: (1) Where the exercise 
    price exceeds $500, the strike price interval may be $10; and (2) where 
    the exercise price exceeds $1,000, the strike price interval may be 
    $20. For out-of-the-money, far-term (fifth month),\2\ or long-term 
    index option series (long-term options or ``LEAPS''),\3\ the proposal 
    provides that the exercise price interval generally will be $25, 
    except: (1) Where the exercise price exceeds $500, the strike price 
    interval may be $50; and (2) where the exercise price exceeds $1,000, 
    the exercise price interval may be $100. In addition, where the 
    exercise price interval is greater than $5, the PHLX may list exercise 
    prices at $5 intervals in response to demonstrated customer interest or 
    a specialist request. The proposal also allows the PHLX to list 
    exercise prices at wider intervals.
    
        \1\ Commentary .02 states that, for purposes of the commentary, 
    demonstrated customer interest includes institutional (firm), 
    corporate or customer interest expressed directly to the Exchange or 
    through the customer's floor brokerage unit, but not interest 
    expressed by a Registered Options Trader (``ROT'') with respect to 
    trading for the ROT's own account.
        \2\ Under PHLX Rule 1101A(b), the Exchange may list index option 
    series of up to four cycle months and up to three consecutive 
    months. According to the PHLX, most index options currently have 
    five months trading at a given time, consisting of three cycle/
    quarterly series and two consecutive month series. For example, as 
    of September 1995, the XOC had the following months listed: October, 
    November, December, March, and June.
        \3\ Under PHLX Rule 1101A(b)(iii), the Exchange may list long-
    term options with up to 60 months until expiration. See Securities 
    Exchange Act Release No. 35616 (April 17, 1995), 60 FR 20135 (April 
    24, 1995) (order approving File No. SR-PHLX-95-11).
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        The text of the proposed rule change is available at the Office of 
    the Secretary, PHLX, and at the Commission.
    
    II. Self-Regulatory Organization's Statement of the Purpose of, and 
    Statutory Basis for, the Proposed Rule Change
    
        In its filing with the Commission, the self-regulatory organization 
    included statements concerning the purpose of and basis for the 
    proposed rule change and discussed any comments it received on the 
    proposed rule change. The text of these statements may be examined at 
    the places specified in Item IV below. The self-regulatory organization 
    has prepared summaries, set forth in sections (A), (B), and (C) below, 
    of the most significant aspects of such statements.
    
    (A) Self-Regulatory Organization's Statement of the Purpose of, and 
    Statutory Basis for, the Proposed Rule Change
    
        The PHLX proposes to amend PHLX Rule 1101A to incorporate new 
    strike (exercise) price intervals for index options. Currently, 
    although PHLX Rule 1101A(a) states that the Exchange shall determine 
    fixed point intervals of exercise prices for index options, the 
    interval is generally $5,\4\ except in the far-term series of broad-
    based index options.\5\ The PHLX proposes to widen the exercise price 
    interval for all index options in accordance with a formula which takes 
    into consideration the index value and time until expiration. 
    Specifically, the PHLX proposes to list the following exercise price 
    intervals for index options:
    
        \4\ See e.g., Securities Exchange Act Release No. 35591 (April 
    11, 1995), 60 FR 19423 (April 18, 1995) (order approving File No. 
    SR-PHLX-95-07) (listing of TPX options). The PHLX notes that, 
    generally, the strike price interval of an index option is listed in 
    the contract specifications for the option.
        \5\ See PHLX Rule 1101A, Commentary .02.
    
    ------------------------------------------------------------------------
                                                            Near-      5th  
                         Index value                        term     month/ 
                                                           strikes    LEAPS 
    ------------------------------------------------------------------------
    500 or less.........................................        $5       $25
    500 to 999..........................................        10        50
    1,000 or more.......................................        20       100
    ------------------------------------------------------------------------
    
        Where the exercise price interval would be wider than $5, the 
    Exchange proposes to list (fill-in) exercise prices at $5 intervals in 
    response to demonstrated customer interest or a specialist request.
        The purpose of the proposal is to list index options with exercise 
    prices at wider intervals, which should reduce the number of index 
    option exercise prices listed on the Exchange. First, the PHLX notes 
    that the proposal is intended to incorporate the PHLX's index option 
    exercise price policy into PHLX Rule 1101A. Currently, Exchange Rule 
    1101A(a) states that the Exchange shall determine fixed point intervals 
    of exercise prices for index options. The proposal will specifically 
    list the interval, depending upon the index value and the time 
    remaining until expiration.
        Second, the Exchange proposes to list higher-priced index options 
    (above 500), as well as far-term (fifth month) series and long-term 
    options, at wider intervals in order to reduce the number of exercise 
    prices. The PHLX states that most Exchange index options currently are 
    listed at 5-point intervals. However, the PHLX has observed that in 
    higher-priced indexes, the need does not exist for $5 exercise price 
    intervals. Similarly, according to the PHLX, in the farthest-month 
    trading as well as with long-term options, $5 intervals are not 
    necessary. The PHLX notes that the bids and offers in many far-term 
    series often are substantially similar because the volatility levels do 
    not differ significantly.
        According to the PHLX, narrower exercise price intervals generally 
    are most useful where there is little volatility and in lower-priced 
    series. For equity options, exercise price intervals widen as the 
    strike price increases.\6\ The PHLX notes that limited trading volume 
    occurs in the far-term series of index options. Thus, the proposed 
    reduction in exercise prices would be concentrated in the series with 
    the least trading interest.
    
        \6\ See PHLX Rule 1012, ``Series of Options Open for Trading,'' 
    Commentary .05.
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        For high-priced or far-term series, where the PHLX proposes to list 
    exercise prices, generally, at intervals of 
    
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    $25 (or at intervals of $50 where the exercise price exceeds $500 or 
    intervals of $100 where the exercise price exceeds $1,000), the PHLX 
    proposes to list series at intervals as narrow as $5 in response to 
    demonstrated customer interest or specialist request. This proposal is 
    similar to existing PHLX Rule 1101A, Commentary .02 which permits the 
    far-term series of broad-based index options to be listed at $25 
    intervals, unless customer interest exists for a $5 interval. For 
    purposes of the proposal, demonstrated customer interest includes 
    institutional (firm), corporate or customer interest expressed directly 
    to the Exchange or through the customer's floor brokerage unit, but not 
    interest expressed by an ROT with respect to trading for the ROT's own 
    account. This limitation and definition of customer interest is 
    intended to ensure that only legitimate customer requests lead to the 
    listing of exercise prices at narrower intervals.
        Under the proposal, the Exchange may also determine to list 
    exercise prices at wider intervals. The narrowest permissible interval 
    would remain at $5 under this proposal. The PHLX proposes to delete 
    Commentary .02 from Exchange Rule 1101A because the $25 interval is 
    incorporated in the proposed first paragraph of PHLX Rule 1101A for all 
    index options.
        The Exchange believes that the ability to add $5 intervals in 
    response to customer interest is important in that specific trading 
    opportunities will not be lost. In fact, the $25 interval preserves key 
    trading strategies because it often represents a 2\1/2\ point index 
    movement, which is similar to a stock trading at $25 with the option 
    traded at 2\1/2\ point exercise price intervals. Although the PHLX 
    believes that reducing the number of exercise prices by widening the 
    interval and incorporating such interval into Exchange rules should be 
    beneficial to the marketplace, the flexibility to list exercise prices 
    at intervals of $5 or greater is important to respond to the needs of 
    the marketplace. Thus, Exchange Rule 1101A would permit both narrower 
    (not narrower than $5) and wider exercise price intervals in 
    extraordinary circumstances to permit the PHLX to react to market 
    conditions.
        The PHLX states that the effect of the proposal would be to permit 
    $25 intervals in the fifth month and long-term options for most 
    Exchange index options. However, VLE and TPX options would become 
    subject to wider intervals because the value of those indexes exceeds 
    500. Specifically, as of January 22, 1996, the value of VLE was 563 and 
    the value of the TPX was 551.
        In implementing the wider intervals, the PHLX would begin listing 
    exercise prices at the wider interval following the expiration after 
    Commission approval, only listing the exercise prices required by the 
    proposal. For example, under its current rules, the Exchange would have 
    listed the new fifth month series of options on the PHLX/Keefe Bruyette 
    & Woods Bank Index (``KBW'') at $5 intervals from 335 to 400), 
    totalling 14 exercise prices; under the proposal, the Exchange would 
    list the new fifth month series at $25 intervals, thereby listing only 
    three additional exercise prices (350, 375, and 400).\7\
    
        \7\ The KBW example applies to fifth month series, rather than 
    fourth month series. Telephone conversation between Edith Hallahan, 
    Special Counsel, Regulatory Services, PHLX, and Yvonne Fraticelli, 
    Attorney, Office of Market Supervision, Division of Market 
    Regulation, Commission, on January 24, 1996.
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        At the subsequent quarterly expiration, when new five-month and 
    long-term options are listed, new series would then be listed at the 
    wider intervals. If the proposal is approved and implemented in 
    January, the far-term series (i.e., September) is already listed at 
    existing intervals, which would be delisted if no open interest exists. 
    Complete implementation of the proposal would begin at the next 
    quarterly expiration in March, when the December series are listed. 
    Upon implementation of the proposal, the Exchange will list far-term 
    series at wider intervals until there are less than six months 
    remaining until expiration, when intervening exercise prices will be 
    listed at narrower intervals.\8\
    
        \8\ For example, because each quarter a far-term series with 
    nine months until expiration is listed, after December expiration, a 
    September option is listed. After March expiration, the September 
    option is no longer the far-term series, as a December option is 
    added, so that the intervening strike prices would be added to the 
    December series.
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        The Exchange believes that listing higher-priced index options, 
    far-term series and long-term options at wider intervals should improve 
    the efficiency of quotation dissemination and speedy pricing by 
    reducing the number of listed exercise prices. As discussed above, the 
    immediate effect on the number of exercise prices in notable. 
    Concomitantly, the effect on Exchange systems is likewise notable, with 
    a reduction in system capacity and usage as well as operational 
    burdens. For instance, exercise prices occupy trading floor screen 
    space and line traffic to outside vendors for dissemination. Further, 
    the role of the specialist in monitoring multitudes of exercise prices 
    should be simplified.
        With respect to operational burdens, the Exchange expects that 
    reducing the number of exercise prices should also reduce the instances 
    of wrap-around symbols.\9\ The use of wrap-around symbols, although 
    common, increases operational burdens, complicates screen displays and 
    potentially confuses investors viewing vendor screens.
    
        \9\ A wrap-around occurs when the strike price codes A-T 
    indicating the strike price of an option (from 5 to 100) have been 
    used and additional strike prices require listing the option with a 
    different root symbol. For example, KBW October 310 calls use the 
    symbol ``B'' to denote 310, but the 410 calls would also have used 
    that symbol. Thus, the October 410 calls are traded under the symbol 
    BKV JB.
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        The Exchange believes that the proposal is an important 
    contribution to the effort to limit the number of option exercise 
    prices. In recently approving 2\1/2\ point exercise prices on a pilot 
    basis for equity options, the Commission cited the need to balance an 
    exchange's desire to accommodate market participation by offering a 
    wide array of investment opportunities and the need to avoid 
    proliferation of option series.\10\ The Commission also cited this 
    balance in approving PHLX Rule 1101A, Commentary .02, which permits $25 
    intervals in the far-term series of the XOC and VLE, noting that such 
    intervals preserve key trading strategies while limiting the number of 
    outstanding strike prices.\11\ The PHLX believes that the proposal at 
    hand achieves such a balance by reducing the number of exercise prices 
    and, thus, the associated systems and operational burdens, yet 
    retaining trading strategies and investment opportunities by listing 
    wider intervals at reasonable intervals and permitting the flexibility 
    to widen or narrow such intervals in response to investor requests or 
    market conditions.
    
        \10\ See Securities Exchange Act Release No. 35993 (July 19, 
    1995), 60 FR 38073 (July 25, 1995) (order approving File Nos. SR-
    PHLX-95-08, SR-Amex-95-12, SR-PSE-95-07, SR-CBOE-95-19, and SR-PSE-
    95-12).
        \11\ See Securities Exchange Act Release No. 33301 (December 8, 
    1993), 58 FR 65611 (December 15, 1993) (order approving File No. SR-
    PHLX-93-06).
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        For these reasons, the Exchange believes that the proposal is 
    consistent with Section 6 of the Act, in general, and, in particular, 
    with Section 6(b)(5), in that it is designed to promote just and 
    equitable principles of trade, remove impediments to and perfect the 
    mechanism of a free and open market, and protect investors and the 
    public interest by eliminating excessive strike prices, thereby 
    improving quotation dissemination capabilities, while maintaining 
    investors' flexibility to better tailor index option trading to meet 
    their investment objectives. 
    
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    (B) Self-Regulatory Organization's Statement on Burden on Competition
    
        The PHLX does not believe that the proposed rule change will impose 
    any inappropriate burden on competition.
    
    (C) Self-Regulatory Organization's Statement on Comments on the 
    Proposed Rule Change Received From Members, Participants or Others
    
        No written comments were either solicited or received.
    
    III. Date of Effectiveness of the Proposed Rule Change and Timing for 
    Commission Action
    
        Within 35 days of the date of publication of this notice in the 
    Federal Register or within such longer period (i) as the Commission may 
    designate up to 90 days of such date if it finds such longer period to 
    be appropriate and publishes its reason for so finding or (ii) as to 
    which the self-regulatory organization consents, the Commission will:
        (a) By order approve such proposed rule change, or
        (b) Institute proceedings to determine whether the proposed rule 
    change should be disapproved.
    
    IV. Solicitation of Comments
    
        Interested persons are invited to submit written data, views and 
    arguments concerning the foregoing. Persons making written submissions 
    should file six copies thereof with the Secretary, Securities and 
    Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies 
    of the submission, all subsequent amendments, all written statements 
    with respect to the proposed rule change that are filed with the 
    Commission, and all written communications relating to the proposed 
    rule change between the Commission and any person, other than those 
    that may be withheld from the public in accordance with the provisions 
    of 5 U.S.C. 552, will be available for inspection and copying at the 
    Commission's Public Reference Section, 450 Fifth Street NW., 
    Washington, DC. Copies of such filing will also be available for 
    inspection and copying at the principal office of the above-mentioned 
    self-regulatory organization. All submissions should refer to the file 
    number in the caption above and should be submitted by February 28, 
    1996.
    
        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.\12\
    
        \12\ 17 CFR 200.30-3(a)(12) (1995).
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    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 96-2618 Filed 2-6-96; 8:45 am]
    BILLING CODE 8010-01-M
    
    

Document Information

Published:
02/07/1996
Department:
Securities and Exchange Commission
Entry Type:
Notice
Document Number:
96-2618
Pages:
4698-4701 (4 pages)
Docket Numbers:
Release No. 34-36796, File No. SR-PHLX-95-68
PDF File:
96-2618.pdf