[Federal Register Volume 62, Number 105 (Monday, June 2, 1997)]
[Notices]
[Pages 29756-29758]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14283]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38671; File No. SR-PHLX-97-04]
Self-Regulatory Organizations; Order Partially Approving and
Granting Accelerated Approval of Amendment No. 2 to a Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Establishing a 4:02
p.m. Closing Time for Equity and Narrow-Based Index Options Trading,
and Modifying Option Trading Rotation Procedures
May 23, 1997.
I. Introduction
On January 8, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ On January 29, 1997, the Exchange filed Amendment No. 1
to the rule proposal.\3\ On April 4, 1997, the Exchange filed Amendment
No. 2 to the proposed rule change.\4\ On April 23, the Exchange filed
Amendment No. 3 to the proposed rule change.\5\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Theresa McCloskey, Exchange, to Janice Mitnick,
Commission, dated January 29, 1997. Amendment No. 1 is a technical
amendment, correcting rule language in Rule 1047, Commentary .03(c),
which was submitted as Exhibit B with the rule filing.
\4\ Letter from Philip H. Becker, Exchange, to Michael A.
Walinskas, Commission, dated April 4, 1997. Amendment No. 2 proposes
a 4:02 p.m. close of trading for narrow-based index options and
modifies option trading rotation procedures. Amendment No. 2
originally contained a proposal modifying Exchange index option
exercise cut-off procedures. However, this proposal was resubmitted
in Amendment No. 3, constituting a withdrawal of such proposal from
Amendment No. 2.
\5\ File No. SR-PHLX-97-04, Amendment No. 3, dated April 22,
1997. Amendment No. 3 proposes to amend Rule 1042A and Floor
Procedure Advice G-1 to change the index option exercise cut-off
time from 4:30 p.m. (or 15 minutes after the close of trading if
trading is closed at a time other than the regular close of trading)
to five minutes after the close of trading. The proposal also
deletes the current requirement that member organizations must
accept exercise instructions until 4:15 p.m. each business day.
---------------------------------------------------------------------------
[[Page 29757]]
Notice of the substance of the proposed rule change and Amendment
No. 1 was provided by issuance of a release \6\ and by publication in
the Federal Register.\7\ Notice of the substance of Amendment Nos. 2
and 3 was provided by issuance of a release \8\ and by publication in
the Federal Register.\9\ One comment letter was received.\10\ This
order partially approves the proposed rule change. Specifically, this
order approves the originally filed proposal that establishes a 4:02
p.m. close of trading for equity options, Amendment No. 1, a technical
amendment to the originally filed proposal, and Amendment No. 2, which
proposes a 4:02 close of trading for narrow-based index options and
modifies option trading rotation procedures.\11\
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 38218 (January 30,
1997).
\7\ 62 FR 5662 (February 6, 1997).
\8\ Securities Exchange Act Release No. 38554 (April 29, 1997).
\9\ 62 FR 24529 (May 5, 1997).
\10\ Letter from Michael Schwartz, Committee On Options
Proposals, dated January 10, 1997.
\11\ In partially approving the Exchange proposal, the
Commission is not approving at this time Amendment No. 3 to the
proposal. The comment period for Amendment No. 3 expires on May 26,
1997. See supra n. 9.
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to amend Rule 101 to close equity and narrow-
based index options trading at 4:02 p.m. Currently, both equity and
narrow-based index options trade until 4:10 p.m.
The Exchange also proposes to amend Rule 1047 to permit two floor
officials to approve a trading rotation after the normal close of
trading. Currently, authority to determine that a final trading
rotation is needed to assure a fair and orderly market rests with the
Options Committee.
The Exchange also proposes to amend Rules 1047 and 1047A to amend
the notification requirement that applies to trading rotations
conducted after the close of trading. Currently, notice of a trading
rotation held as a result of unusual market conditions must be
disseminated to the floor by the close of trading. This effectively
requires the Exchange to decide whether it is going to conduct a
trading rotation before the close of trading. The proposal eases this
strict provision by only requiring that advance notice of a rotation be
disseminated and that the rotation not commence until five minutes
after dissemination of the notice.
The Exchange also proposes to amend, pursuant to Amendment No. 3 to
the proposal, Rule 1042A and Floor Procedure Advice G-1 to change the
index option exercise cut-off time from 4:30 p.m. (or 15 minutes after
the close of trading if trading is closed at a time other than the
regular close of trading) to five minutes after the close of trading.
Thus, the exercise cut-off time applicable to narrow-based index
options (proposed to close at 4:02 p.m.) would be 4:07 p.m., and the
cut-off time applicable to broad-based index options (which close at
4:15 p.m.) would be 4:20 p.m. The proposal, pursuant to Amendment No.
3, also deletes the current requirement that member organizations must
accept exercise instructions until 4:15 p.m. each business day.
The Commission received one comment letter regarding this
proposal.\12\ The commenter generally supports a 4:02 p.m. close of
trading for equity and narrow-based index options.\13\ The commenter
also supports the Exchange's proposed Amendment No. 3, which would
amend the Exchange's narrow-based index exercise cut-off time to expire
five minutes after the close of trading.
---------------------------------------------------------------------------
\12\ See supra n. 10.
\13\ The American Stock Exchange, Inc. (``Amex''); Chicago Board
Options Exchange, Inc. (``CBOE''); Pacific Exchange, Inc. (``PCX'');
and New York Stock Exchange, Inc. (``NYSE'') have all amended their
rules to implement a 4:02 p.m. close for equity and narrow-based
index options. See Release No. 34-38640 (May 14, 1997) (order
approving Amex rule change), Release No. 34-38643 (May 14, 1997)
(order approving CBOE rule change), Release No. 34-38641 (May 14,
1994) (order approving NYSE rule change), and Release No. 34-38642
(May 14, 1997) (order approving PCX rule change).
---------------------------------------------------------------------------
III. Discussion
The Commission finds that those portions of the proposed rule
change that establish a 4:02 p.m. close of trading for equity and
narrow-based index options and modify option trading rotation practices
are consistent with the requirements of the Act, and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, Section 6(b)(5).\14\ Section 6(b)(5) requires,
among other things, that the rules of an exchange be designed to
promote just and equitable principles of trade, perfect the mechanism
of a free and open national market, and, in general, to further
investor protection and the public interest.
---------------------------------------------------------------------------
\14\ 15 U.S.C. Sec. 78f(b)(5). The Commission is not, at this
time, approving or making any findings with regard to Amendment No.
3 to the proposal.
---------------------------------------------------------------------------
The Commission believes that it is reasonable for the Exchange to
amend its rules to close trading in equity and narrow-based index
options at 4:02 p.m., versus the existing 4:10 p.m. close. Changing the
closing time for these options to 4:02 p.m. preserves the Exchange's
stated need to continue trading options for some period of time after
the close of trading in the underlying securities. The Exchange has
stated that this two minute extension from the close of the stock
markets will allow options traders to respond to late reports of
closing prices over the consolidated tape, thereby bringing options
quotes into line with the closing price of the underlying security. Due
to technological advances, these delays have now been reduced, but have
not been completely eliminated. The Exchange believes that two minutes
of options trading after the underlying equities close is sufficient to
bring options quotes into line with the closing price of the underlying
security.
In determining an appropriate closing time, the Exchange has also
considered the problems that might result when the Exchange remains
open after the close of the primary exchange for the underlying stocks.
The Exchange states that the existing 4:10 options trading close,
providing ten minutes of options trading after the underlying equities
have closed, often results in automatic executions of options at
outdated prices. The Exchange also states that, like equity options,
narrow-based index options are sensitive to changes in the underlying
equities prices. Further, the Exchange states that not all market
participants are able to respond quickly to changes in equity options
prices between 4:00 and 4:10 p.m.
Therefore, the Commission finds that a closing time of 4:02 p.m.
for equity and narrow-based index options is a reasonable means to
address the Exchange's desire to balance the need for some extended
trading period after the underlying markets have closed with the need
to prevent negative impact from equity and narrow-based index options
trading without the pricing benefit of continuing stock trading.
The Commission also believes that it is reasonable for two Exchange
floor officials to determine to commence a trading rotation due to
unusual market conditions, rather than the Options Committee. The
Exchange states such ``unusual market conditions'' include a situation
where an underlying stock has not stopped printing transaction prices
by the time of the options trading close. This change provides the
Exchange a more flexible decision making
[[Page 29758]]
mechanism for determining whether to conduct a trading rotation. A full
Options Committee determination may not be possible or practical under
many market circumstances. The Commission notes that the CBOE and the
Amex do not require full committee approval for conducting a trading
rotation.\15\
---------------------------------------------------------------------------
\15\ See CBOE Rule 6.2, Interpretations and Policies .02; and
Amex Rule 1, Commentary .02.
---------------------------------------------------------------------------
The Commission also believes that it is reasonable to amend the
rules of the Exchange to alter the notification procedure for trading
rotations to permit notice of such rotations to be disseminated after
the close of trading. Currently, notice of a trading rotation must be
disseminated to the floor by the close of trading. The Exchange's
proposal would require that a trading rotation not commence until five
minutes after dissemination of the notice of the rotation. The
Commission notes that the CBOE and the PCX require a five minute notice
period prior to a trading rotation and permit trading rotation notice
to be given after the close of trading.\16\
---------------------------------------------------------------------------
\16\See CBOE Rule 6.2, Interpretations and Policies .02; and PCX
Rule 6.64, Commentary .01.
---------------------------------------------------------------------------
It is contemplated that the Exchange will implement this rule
change on or about June 23, 1997.\17\
---------------------------------------------------------------------------
\17\ Phone conversation between Edith Hallahan, Exchange and
Janice Mitnick, Commission, on May 23, 1997.
---------------------------------------------------------------------------
The Exchange has requested that the portion of the proposed rule
change that establishes a 4:02 p.m. close of trading for narrow-based
index options and modifies option trading rotation practices be given
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.\18\
The Commission finds good cause for approving this portion of the
proposed rule change prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. The Commission
notes that it has approved a 4:02 p.m. close for equity and narrow-
based index options for the Amex, CBOE, NYSE, and PCX.\19\ The Amex,
CBOE and PCX rule filings were published in the Federal Register \20\
and were subject to a full notice and comment period. One comment
letter supporting the proposals was received.\21\ Further, as stated
above, the Commission notes that the proposal regarding option trading
rotation practices are similar to the current practices of the Amex and
PCX.\22\ Accordingly, the Commission believes, consistent with Section
6(b)(5) of the Act, that good cause exists to approve this portion of
the proposed rule change on an accelerated basis.
---------------------------------------------------------------------------
\18\ Letter from Philip H. Becker, Exchange, to Michael
Walinskas, Commission, dated May 22, 1997 (requesting acceleration
of narrow-based index options 4:02 p.m. close); phone conversation
between Edith Hallahan, Exchange and Janice Mitnick, Commission, on
May 23, 1997 (requesting acceleration of option trading rotation
practices provision).
\19\ See supra n.13.
\20\ See SR-AMEX-96-45, Release No. 34-38123 (January 6, 1997),
62 FR 1786 (January 13, 1997); SR-CBOE-96-71, Release No. 34-37988
(November 26, 1996), 61 FR 64405 (December 4, 1996); and SR-PSE-96-
41, Release No. 34-37920 (November 4, 1996), 61 FR 58434 (November
14, 1996).
\21\ See supra n.10.
\22\ See supra n.16.
---------------------------------------------------------------------------
IV. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act, and, in particular, Section 6 of
the Act.
It is therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that those portions of the proposed rule change that establish
a 4:02 p.m. close of trading for equity and narrow-based index options
and modify option trading rotation practices (SR-PHLX-97-04) are hereby
approved.
\23\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
---------------------------------------------------------------------------
\24\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14283 Filed 5-30-97; 8:45 am]
BILLING CODE 8010-01-M
