[Federal Register Volume 59, Number 48 (Friday, March 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5677]
[[Page Unknown]]
[Federal Register: March 11, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33723; File No. SR-Phlx-93-21]
Self-Regulatory Organizations; Order Granting Approval and Notice
of Filing and Order Granting Accelerated Approval of Amendment No. 1 to
a Proposed Rule Change by the Philadelphia Stock Exchange, Inc.,
Relating to Trading Rotations
March 7, 1994.
On June 8, 1993, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change dealing with options rotation procedures. Notice
of the proposal appeared in the Federal Register on September 22,
1993.\3\ No comment letters were received on the proposed rule change.
The Exchange subsequently filed Amendment No. 1 to the proposed rule
change.\4\ This order approves the Exchange's proposal.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
\3\See Securities Exchange Act Release No. 32881 (September 14,
1993), 58 FR 49346 (September 22, 1993) (``Exchange Act Release No.
32881'').
\4\In Amendment No. 1 to the proposed rule change, which was
filed with the Commission on March 2, 1994, the Exchange proposes to
amend proposed Commentary .03(b) to restore certain language from
the original version of the paragraph as it appears in Rule 101.
Specifically, .03(b) would provide that notice of a rotation to be
conducted due to unusual market conditions must be disseminated to
the trading floor no later than 4:10 p.m. Eastern Standard Time
(E.S.T.). In addition, such rotation would not begin until ten
minutes after the required notice is given. Finally, the Exchange
proposes to amend Commentary .01(a) to Rule 1047 to specify that
opening rotations in foreign currency options shall occur promptly
following the opening of trading, as opposed to ``at the times fixed
by the Exchange,'' as originally proposed. See Letter from Gerald
O'Connell, Vice President, Market Surveillance, Phlx, to Sharon
Lawson, Assistant Director, Office of Derivatives and Equity
Regulation, Division of Market Regulation, Commission, dated
February 28, 1994 (``Amendment No. 1'').
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The Phlx is proposing, with some substantive amendments, to move
the text of Phlx Rule 101, Commentary .01 (a) through (d) to a new
Commentary .03 to Phlx Rule 1047, which deals with trading
rotations.\5\ Proposed Commentary .03 to Rule 1047 would permit stock
option trading after 4:10 P.M. E.S.T. in the context of a trading
rotation approved by the Exchange's Options Committee due to either
unusual circumstances, or the opening or reopening of a stock
underlying a particular equity option. The Exchange believes that this
change will more logically group rotation procedures in one rule for
ease of reference.
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\5\The Exchange is also proposing to amend Commentary .01 to
Rule 101 to clarify that the rule deals solely with stock option
trading occurring after 4:10 p.m. E.S.T. and that any such trading
must be conducted pursuant to Rule 1047.
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The specific substantive changes being made to the text from
Commentary .01 to Rule 101 are as follows. First, the reference in Rule
101, Commentary .01(a), to the reopening of trading in the underlying
``after 3:30 p.m.'' is being deleted. The proposed language instead
provides that a trading rotation may occur promptly after the opening
or reopening of trading in the underlying security. The Exchange
believes 3:30 p.m. E.S.T. is an arbitrary deadline which could be
ineffective in certain situations.\6\ Secondly, the Exchange's Options
Committee, as opposed to two floor officials as currently provided in
Rule 101, must approve such any post-closing rotation. The Exchange
believes this is consistent with the remainder of Phlx Rule 1047 for
which, when approval for an action is required, it is the appropriate
standing committee which must grant such approval. Because Commentary
.03 would apply only to equity options, the Exchange believes that it
is appropriate to require approval from the Options Committee for post-
closing trading of stock options.\7\
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\6\See Amendment No. 1, supra note 4.
\7\Id.
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In addition to these amendments, because Rule 1047 applies to the
foreign currency options floor as well as to the equity options floor,
the Phlx is proposing to amend 1047(c) to state that the ``appropriate
floor standing committee,'' as opposed to solely the Options Committee,
has authority to delay an options opening, halt trading, or reopen
after a halt. Rule 1047(c), as amended, would include the ability to
open an options class for trading where the underlying stock did not
open or where current quotations are unavailable for any foreign
currency, and to conduct a closing rotation on the trading day prior to
expiration where the underlying stock did not open during that day or
was halted as of its normal close of trading. Such trading and closing
rotations, however, could only be conducted if such action is deemed
necessary in the interests of maintaining a fair and orderly market and
to protect investors.
The Phlx is also proposing to amend Commentary .02 to Rule 1047 to
provide that the determination to open options trading where the
underlying security did not open for trading or where foreign currency
quotations are unavailable will be made by the appropriate floor
standing committee, as opposed to solely the chairman of that
committee.
Furthermore, the Phlx proposes to amend Commentary .01(d), which
governs closing rotations at expiration. The proposed language states
that where an underlying stock does not trade or where trading was
halted as of the normal close of trading in the primary market for that
stock (i.e., 4 p.m. E.S.T.) on the day prior to expiration, with the
approval of the Options Committee, a closing rotation in the expiring
equity options may be conducted immediately after the time at which the
options normally cease free trading. The Exchange believes that by
establishing a more objective standard, the proposed deadline would
provide notice to floor traders and customers alike. Under the
proposal, however, the standing committee may still determine not to
open the option at all.
Finally, the Phlx also proposes to further amend Rule 1047 by: (1)
Specifying in 1047(a) that closing rotations are only required for
expiring equity options contracts; (2) specifying in Commentary .01(a)
that the deadline for opening foreign currency options will be promptly
after the current time those options open for trading;\8\ and (3)
adding a heading (``Modified Rotations'') to Commentary .01(b).
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\8\Id.
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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)\9\ in that the proposal
is designed to foster just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market, and
protect investors and the public interest. Specifically, the Commission
believes that the proposed rule change should serve to minimize
investor confusion by grouping all of the Exchange's rotation
procedures in one rule for ease of reference. In addition, the
Commission believes that the proposed changes to Rule 1047 apply more
objective standards to Phlx's rotation procedures which will provide
consistency in the application of those procedures.
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\9\15 U.S.C. 78f(b)(5) (1988).
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The proposed change to Rule 1047(c) to permit the appropriate floor
committee to open for trading an equity option or foreign currency
option where trading in the underlying equity security or foreign
currency has not opened or has been halted raises concerns regarding
the integrity of the price of the options. Certainly, where there is a
regulatory halt in the trading of the underlying or trading in the
underlying is suspended pursuant to section 12(k) of the Act the Phlx
would not be permitted to trade the related options.\10\ Moreover, the
appropriate floor committee can only commence trading an option based
upon a finding that it is necessary in order to maintain a fair and
orderly market and to protect investors. In making this determination,
the Commission would expect the floor committee to ensure the integrity
of the pricing of the options and would expect this authority to only
be used in the most exceptional of circumstances.
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\10\Telephone conversation between Gerald O'Connell, Vice
President, Market Surveillance, Phlx, and Brad Ritter, Attorney,
Office of Derivatives and Equity Regulation, Division of Market
Regulation, Commission, on March 7, 1994. Additionally, the Phlx
would not be permitted to trade options when trading in equity
securities has been halted as a result of decreases in the Dow Jones
Industrial Average (``DJIA'') of 250 or 400 points below the closing
value of the DJIA from the previous trading day.
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Finally, with respect to post-closing trading of stock options, the
Commission believes that Options Committee approval is a higher level
of review than the current standard in Rule 101 which merely requires
approval from two floor officials for such trading. This higher level
of review should ensure that post-closing trading occurs only where
appropriate under the rule.
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Specifically, with respect to the time for conducting opening rotations
in foreign currency options, Amendment No. 1 merely conforms the
proposed rule language to the intent expressed by the Exchange in its
original proposal. The Exchange, in its original proposal, represented
that a purpose of the proposed rule change was to establish that the
deadline for opening foreign currency options would be promptly
following the current time those options open for trading.\11\ The
Commission believes that the amendment to change ``at the times fixed
by the Exchange'' to ``promptly following the opening of trading'' more
accurately reflects this intent. Amendment No. 1 also reincorporates
language from the text of Rule 101 which the Exchange originally
proposed to delete. The effect of this portion of Amendment No. 1 is
merely to move an existing procedure from one rule to another. Based on
the foregoing, the Commission finds good cause for accelerating
approval of Amendment No. 1 to the proposed rule change.
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\11\See Exchange Act Release No. 32881, supra note 3.
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It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-Phlx-93-21) is hereby
approved.
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\12\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5677 Filed 3-10-94; 8:45 am]
BILLING CODE 8010-01-M
