[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
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500 or less......................................... $5 $25
500 to 999.......................................... 10 50
1,000 or more....................................... 20 100
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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
[[Page 4700]]
$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
