[Federal Register Volume 61, Number 61 (Thursday, March 28, 1996)]
[Notices]
[Pages 13913-13915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7506]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37003; File No. SR-PHLX-95-68]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating To Exercise
Price Intervals for Index Options
March 21, 1996.
I. Introduction
On January 2, 1996, the Philadelphia Stock Exchange, Inc. (``PHLX''
or ``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``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 to amend PHLX Rule 1101A, ``Terms
of Option Contracts,'' to provide that the exercise (strike) price
interval for near-term index options generally will be $5, except: (1)
where the exercise price exceeds $500, the exercise price interval may
be $10; and (2) where the exercise price exceeds $1,000, the exercise
price interval may be $20. For out-of-the-money, far-term (fifth
month),\3\ or long-term index option series (long-term options or
``LEAPS''),\4\ the proposal provides that the exercise price interval
generally will be $25, except: (1) where the exercise price exceeds
$500, the exercise 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\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1955).
\3\ 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 National Over-the-Counter Index (``XOC'') had
the following months listed: October, November, December, March, and
June.
\4\ 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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Notice of the proposal appeared in the Federal Register on February
7, 1996.\5\ No comments were received on the proposed rule change.
\5\ See Securities Exchange Act Release No. 36796 (January 31,
1996), 61 FR 46599.
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II. Description of the Proposal
The PHLX proposes to amend PHLX Rule 1101A to incorporate new
exercise price intervals for index options. Currently, PHLX Rule
1101A(a) states that the Exchange shall determine fixed point intervals
of exercise prices for index options. According to the PHLX, the
interval for index options generally is $5,\6\ except in the far-term
series of broad-based index options.\7\ 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:
\6\ 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 USTOP 100 Index (``TPX'') options). The
PHLX notes that, generally, the strike price interval of an index
option is listed in the contract specifications for the option.
\7\ See PHLX Rule 1101A, Commentary .02. Commenatary .02
provides that exercise prices for index options shall be $5.00,
except exercise prices in the far-term series of XOC options, Value
Line Composite Index (``VLE'') options, Big Cap Index options and
TPX options shall be $25.00 unless there is demonstrated customer
interest at $5.00 intervals. 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.
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Near-term 5th month/
Index value 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 is 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.
[[Page 13914]]
Specifically, the Exchange proposes to list higher-priced index options
(above 500), as well as out-of-the money series, far-term (fifth month)
series and long-term options, at wider intervals in order to reduce the
number of exercise prices. Although most Exchange index options
currently are listed at 5-point intervals the PHLX has observed that $5
exercise price intervals are unnecessary for higher-priced index
options, far-term series, and long-term options. According to the PHLX,
narrower exercise price intervals generally are most useful where there
is little volatility and in lower-priced series. In addition, the PHLX
notes that limited trading volume occurs in the far-term series of
index options. Thus, the proposed reduction in exercise prices will be
concentrated in the series with the least trading interest.
For high-priced, out-of-the money and far-term series, where the
PHLX proposes to list exercise prices, generally, at intervals of $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 there is customer interest 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.
The Exchange believes that the ability to add $5 intervals in
response to customer interest is important because it will allow the
Exchange to respond to the needs of the marketplace and because it will
prevent the loss of specific trading opportunities. In addition, 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.
The PHLX states that the proposal will provide $25 intervals in the
fifth month and long-term options for most Exchange index options. In
addition, the proposal provides for wider exercise price intervals in
extraordinary circumstances to permit the PHLX to read to market
conditions.
In implementing the wider intervals, the PHLX will begin listing
exercise prices at the wider interval following the expiration after
Commission approval, listing only the exercise prices required by the
proposal. At the subsequent quarterly expiration, when the PHLX lists
new five-month and long-term options, the PHLX will list new series at
the wider intervals. For example, if the proposal were approved and
implemented in January, the PHLX would delist the far-term series
(i.e., September) if there was no open interest in the series. Complete
implementation of the proposal would begin at the next quarterly
expiration in March, when the PHLX lists the December series. 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. At the same time, the
effect on Exchange systems is likewise notable, with a reduction in
system usage and operational burdens. In this regard, the PHLX notes
that 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 that
symbol ``B'' to denote 310, but the 410 calls would also have used
the 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 operation 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 PHLX believes that the current
proposal achieves such a balance by reducing the number of exercise
prices and, thus, the associated systems and operational burdens, yet
retains trading strategies and investment opportunities by listing
wider intervals and providing the flexibility to widen or narrow such
intervals in response to investor requests or market conditions.
\10\ See Security 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).
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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.
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) in that the proposal is
designed to protect investors and the public interest and to remove
impediments to and perfect the mechanism of a free and open market.\11\
Specifically, the proposal will codify the Exchange's rules regarding
the exercise price interval for all index options and will allow the
PHLX to reduce the number of outstanding series listed for higher-
priced index options, far-term index options, out-of-the money index
options, and long-term index options by providing a wider exercise
price interval for those series.
\11\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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Because exercise prices for index options must be displayed on the
Exchange's trading floor, disseminated to outside vendors and monitored
by specialists, the Commission believes that the proposal should reduce
the operational burden associated with the
[[Page 13915]]
listing of exercise prices in inactive series of certain index options.
By reducing the number of listed exercise prices, the proposal may
improve the efficiency of quotation dissemination and speedy pricing of
index options, thereby helping the PHLX to maintain fair and orderly
options markets. The Commission also believes that the proposal should
help to eliminate the potential investor confusion associated with
wrap-around symbols.\12\ The Commission believes that the proposal
strikes a reasonable balance between the PHLX's interest in limiting
the number of outstanding exercise prices in inactive series and its
interest in accommodating the needs of investors. According to the
PHLX, market participants generally do not require $5 exercise price
intervals for higher-priced index options, far-term series, and long-
term options. In addition, the PHLX notes that there is limited trading
volume in far-term series of index options. Thus, the proposed
reduction in exercise prices will be concentrated in the series with
the least trading interest.
\12\ See note 9, supra.
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At the same time, the proposal provides the PHLX with the
flexibility to accommodate the needs of investors by allowing the
Exchange to list exercise prices at $5 intervals in response to
demonstrated customer interest or specialist request.\13\ This
flexibility will allow the Exchange to respond to the needs of the
marketplace and, in turn, will allow investors to establish options
positions that are tailored to meet their investment objectives. The
Commission believes that the customer request provision should help to
ensure the availability of options series that will provide investors
with a means to adequately hedge their portfolios and implement their
trading strategies. In addition, the PHLX has stated that the listing
of $25 intervals for far-term series will preserve key trading
strategies. The provision of the proposal allowing the PHLX to list
exercise prices at wider intervals will provide the Exchange with
additional flexibility in the listing of exercise prices.
\13\ 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. The
Commission expects the PHLX to monitor the listing of additional
strikes in order to ensure that new strikes are added only in
response to ``customer'' requests, as defined in the proposal, or in
response to a specialist's request.
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Finally, the Commission believes that the PHLX will implement the
proposal in an orderly manner. Specifically, the PHLX will begin
listing exercise prices at the wider interval following the expiration
after Commission approval of the proposed rule change. The PHLX will
also delist the far-term series if there is no open interest in the
series. In addition, after implementing 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.
IV. Conclusion
For the foregoing reasons, the Commission finds that the PHLX's
proposal is consistent with the requirements of the Act and the rules
and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (File No. SR-PHLX-95-68) is
approved.
\14\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
\15\ 17 CFR 200.30-3(a)(12) (1995).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7506 Filed 3-27-96; 8:45 am]
BILLING CODE 8010-01-M
