[Federal Register Volume 64, Number 105 (Wednesday, June 2, 1999)]
[Notices]
[Pages 29729-29731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13930]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41440; File No. SR-Phlx-98-09]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Approving Proposed Rule Change to Amend Exchange Rule 1101A and
Revise the Intervals Between Index Option Strike Prices
May 24, 1999.
I. Introduction
On February 5, 1998, the Philadelphia Stock Exchange, Inc.
(``Exchange'' or ``Phlx'') 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 that would revise Exchange Rule
1101A(a) to modify the strike price intervals for index options. The
proposed rule change was published for comment in the Federal Register
on May 13, 1998.\3\ The Commission did not receive any comments on the
proposal. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 39964 (May 6, 1998), 63
FR 26667 (May 13, 1998).
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II. Description of the Proposal
During recent years, the number of new option products and total
series listed by the national securities exchanges has significantly
risen. This growth in new options products has increased the number of
continuous quote changes disseminated by the exchanges to the Options
Price Reporting Authority (``OPRA'') \4\ and by OPRA to securities
information vendors. In an effort to curb the growth of strike price
dissemination and to more accurately reflect the strike prices
currently being listed, the Exchange proposes to amend Exchange Rule
1101A(a), ``Terms of Options Contracts,'' to revise the intervals
between index option strike (exercise) prices. The Exchange believes
the revisions will facilitate the prompt dissemination of quote
information and more accurately reflect the strike prices currently
being listed.
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\4\ OPRA is a National Market System Plan under Section 11A of
the Act that provides for the collection and dissemination of last
sale and quotation information on options that are traded on the
member exchanges. The five exchange markets that are members of the
OPRA Plan are the American Stock Exchange, Chicago Board Options
Exchange, New York Stock Exchange, Pacific Exchange, and Phlx.
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Presently, Exchange Rule 1101A(a) establishes a formula for strike
price intervals which takes into consideration the index value and time
remaining until expiration. The Rule establishes a stroke price
interval of $5, except: (i) Where the strike price exceeds $500, the
strike price interval may be $10; and (ii) where the strike price
exceeds $1,000, the interval may be $20. The Exchange may also
determine to list strike prices at wider intervals in ``out-of-the
money'' for far term series, generally $25, except: (i) Where the
strike price exceeds $500, the interval may be $50; and (ii) where the
strike price exceeds $1,000, the interval may be $100. Furthermore,
where strike price intervals would be greater than $5, the Exchange may
list additional strike prices at alternative $5 intervals in response
to demonstrated customer interest or specialist request.
The current version of Exchange Rule 1101A(a) was adopted in
1996,\5\ and was intended to improve the Exchange's strike price
dissemination policy. Based on its experience implementing Rule
1101A(a), the Exchange has determined to revise and simplify the Rule
for easier administration. The Exchange believes the revised Rule will
more accurately reflect the needs of the marketplace. The Exchange has
concluded that basing the strike price interval on an option's value
(in the case of options greater than $500 or $1000) has not proven
useful. The Exchange believes that widening the interval in far-term
series should help to reduce the number of outstanding series listed.
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\5\ See Securities Exchange Release No. 37003 (Mar. 21, 1996),
61 FR 13913 (Mar. 28, 1996).
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The Exchange's proposed rule change would establish new strike
price intervals of: (i) $5 for the three consecutive near-term months;
(ii) $10 for the fourth month; and (iii) $30 for the fifth month.
However, the Exchange would retain the ability to list additional
strike prices at alternative $5 intervals in response to demonstrated
customer interest or specialist request. The Exchange believes the
continued ability to add strike prices at alternative $5 intervals in
response to customer interest will maintain flexibility in the
marketplace and preserve specific trading opportunities.
The Exchange believes that listing far-term series at wider strike
price intervals should improve the efficiency of quotation
dissemination and facilitate speedy pricing by reducing the number of
listed strike prices. The Exchange predicts the immediate effect should
be a reduction in the number of index option strike prices.
Furthermore, the Exchange believes it will experience a
[[Page 29730]]
reduction in its systems capacity and usage as well as its operational
burdens. For instance, strike prices currently occupy trading floor
screen space and consume transmission line traffic to OPRA and outside
vendors that disseminate Exchange trading information. Lastly, the
Exchange believes the proposal will enhance the role of the specialist
in monitoring multitudes of strike prices.
III. Discussion
For the reasons discussed below, 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, with the requirements of
Section 6(b).\6\ Specifically, the Commission believes the proposed
rule change is consistent with the Section 6(b)(5) \7\ requirements
that the rules of an exchange market be designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, protect investors and the public interest.\8\
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
\8\ In approving the proposed rule change, the Commission has
considered the proposal's impact on efficiency, competition, and
capital information. 15 U.S.C. 78c(f).
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Compared to the equity securities that underlie many exchange-
traded derivative products, option contracts generate significant quote
volume because of the various contract months, differentiation between
puts and calls, and multiple strike prices. Although trading in option
contracts accounts for a small percentage of securities transactions in
the aggregate, some have estimated that options quotes--reflecting the
numerous classes and series--comprise more than 50% of all quote
traffic.\9\ In some cases, vendors lacking technological capacity have
resorted to screening options quotes and selectively disseminating
those quotes believed to be of most interest to customers.\10\
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\9\ See e.g., SEC's Lindsey to Host Meeting Tomorrow on Quote
Traffic, Wall Street Letter, June 8, 1998, at 6.
\10\ See Options Marts to oversee Selective Quoting, Wall Street
Letter, December 15, 1997, at 9. The screening usually occurs during
the first 15-20 minutes of the trading day when vendors receive a
wave of options quotes from the options exchanges.
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In addition, the number of new option products and total series
listed by the national securities exchanges has grown dramatically,
thereby increasing the number of continuous quote changes disseminated
by the exchanges to the OPRA.
The Commission believes the Exchange's proposal is reasonable and
will help to ameliorate quote traffic by reducing the number of index
option strike prices. In particular, the proposal will establish new
strike price intervals of: (i) $5 for the three consecutive near-term
months; (ii) $10 for the fourth month; and (iii) $30 for the fifth
month. The Exchange will retain the ability to list additional strike
prices at alternative $5 intervals in response to demonstrated customer
interest or specialist request.
The Commission believes the wider strike price intervals for the
fourth and fifth month series reasonably balances the Exchange's
interest in limiting the number of outstanding strike prices in less
active series with its interest in accommodating the needs of
investors. Generally, index option series nearest to expiration attract
most of the trading activity while those farther out tend to attract
less interest from customers and floor traders. Although far-term index
option series are more likely to have no open interest,\11\ their
quotes nonetheless contribute to the congestion. Therefore,
eliminating, some of the quotes for less active, far-term index option
series through wider strike price intervals will help to decrease quote
traffic without disrupting the active trading in near-term index option
series. By maintaining the $5 strike price interval for the three
consecutive near-term months, the Exchanger has ensured that the
revised strike price intervals will not affect the overwhelming
majority of index options trading that now regularly occurs in near-
term months. Thus, the proposed reduction of strike prices for index
options will be limited to the series with the least active trading
interest.
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\11\ According to some options industry studies, up to 40% of
listed options issues have no open interest. See Gregory Crawford,
No Easy Answers to US Options Quote Volume Problem, Reuters
Financial Service, May 4, 1997.
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The Commission notes that the revised strike price intervals will
apply only to index options and will not modify the strike price
intervals for equity or currency options traded on the Exchange. At the
present, the Exchange offers options on 14 different stock indexes.\12\
Although the quote traffic relating to a substantial segment of the
Exchange's options products will therefore remain unaffected by the
proposal,\13\ the Commission believes the Exchange's proposal is a
practical initiative that addresses the problem of increasing quote
traffic.
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\12\ The Exchange offers options on the following stock indexes:
Computer Box Maker Sector, KBW Bank Sector, Forest & Paper Products
Sector, Gold/Silver Sector, National Over-the-Counter Sector, Oil
Service Sector, OTC Prime Sector, Phone Sector, Semiconductor
Sector, SuperCap Sector, TheStreet.com Internet Sector, U.S. Top 100
Index, Utility Sector, and Value Line Composite Index.
\13\ In addition to offering options on 14 stock indexes, the
Exchange lists nearly 870 equity options and 100 currency pairs.
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To evaluate the impact of the proposal, the Exchange analyzed the
distribution of strike prices for several of its actively traded stock
indexes. The review indicates that in some cases the number of strike
prices can be expected to significantly drop as a result of the revised
intervals. For example, the number of strike prices for options on the
Gold/Silver Sector Index would fall from 75 to 59, a 21% reduction.
Likewise, the number of strike prices for options on the Oil Service
Sector Index would drop 17%, from 58 to 48.\14\ The Commission believes
the reduction in strike prices will help to alleviate the quote traffic
that currently flows from the Exchange.
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\14\See Letter to Michael Loftus, Attorney, Division of Market
Regulation, Commission, from Nandita Yagnik, Attorney, Exchange,
dated November 6, 1998. The Exchange's analysis further indicates
that the number of strike prices for options on the U.S. Top 100
Index would decline from 61 to 54, a 12% reduction.
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The Commission believes it is important that the Exchange will
retain the ability to list additional strike prices at alternative $5
intervals in response to demonstrated customer interest \15\ or
specialist request. The Commission believes the continued ability to
add strike prices at alternative $5 intervals will provide the Exchange
with the requisite flexibility to satisfy investor needs and respond to
customer interest in specific trading opportunities. Furthermore, the
customer request provision should help to ensure the availability of
options series that provide investors with a means to adequately hedge
their portfolios and implement trading strategies designed to meet
their investment objectives. The Commission expects the Exchange to
closely monitor the listing of additional strike prices at alternative
intervals to ensure that new strike prices are added only in response
to demonstrated customer interest or specialist request. Unless the
Exchange properly controls the addition of alternative strike prices,
the effectiveness of the proposal may be undermined if strike prices
proliferate
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without good cause (i.e., genuine customer interest or specialist
request).
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\15\ As defined in Exchange Rule 1101A, the term ``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 ROT
(Registered Options Trader) with respect to trading for the ROT's
own account.
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The Commission is confident that the Exchange's proposal will not
adversely affect or disrupt the current system of option quote
collection and dissemination. Specifically, OPRA has advised the
Commission that the Exchange's proposal would have no negative impact
on the operations of OPRA.\16\ In addition, OPRA stated that if the
other options exchanges adopted similar proposals, the number of strike
prices and the level of quote traffic would be reduced.
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\16\ See Letter to Michael Loftus, Attorney, Division of Market
Regulation, Commission, from Joseph P. Corrigan, Executive Director,
OPRA, dated September 10, 1998.
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The Commission believes the Exchange's proposal is consistent with
efforts undertaken to limit the unnecessary proliferation of option
strike prices.\17\ In recently approving 2\1/2\ point strike price
intervals for 200 exchange-listed equity options classes, the
Commission cited the need to balance an exchange's desire to
accommodate market participants by offering a wide array of investment
opportunities and the need to avoid unnecessary proliferation of
options series.\18\ The Commission believes the Exchange's proposal
achieves such a balance by reducing the number of index option strike
prices but also retaining varied investment opportunities through the
listing of alternative, customer-requested strike prices.
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\17\ For example, the American Stock Exchange delisted 250
inactively traded index option series in September, 1997, in an
attempt to reduce quote traffic. See Amex Delists Index Options
Series, Wall Street Letter, September 1, 1997, at 4.
\18\ See Securities Exchange Act Release No. 40662 (Nov. 12,
1998), 63 FR 64297 (Nov. 19, 1998) (joint order approving File Nos.
SR-Amex-98-21, SR-CBOE-98-29, SR-PCX-98-31, and SR-Phlx-98-26).
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Moreover, because strike prices for index options must be displayed
on the Exchange's trading floor, disseminated to outside vendors, and
monitored by specialists, the Commission believes the proposal should
reduce the systems and operational burdens associated with the listing
of strike prices in far-term series of index options. By reducing the
number of listed strike prices, the proposal should improve the
efficiency of quotation dissemination and speedy pricing of index
options, thereby helping the Exchange to maintain fair and orderly
options markets.
Finally, the Commission believes the Exchange will implement the
proposal in an orderly manner that will not disrupt current trading in
far-term options series. In particular, the Exchange will begin listing
index option strike prices at the new, wider intervals following the
first quarterly expiration after Commission approval of the proposed
rule change.\19\ Therefore, after the next quarterly expiration in
June, 1999, the Exchange will implement the proposal by listing strike
prices for far-term index option series at wider intervals. The
Commission expects the Exchange to issue a circular to members
informing them of the new strike price intervals and the scheduled date
of implementation. The Commission believes it is important that all
market participants be advised of the changes so they are provided with
sufficient time and notice to make any necessary adjustments to their
positions and strategies.
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\19\ Telephone conversation between Michael Loftus. Attorney,
Division of Market Regulation, Commission, and Nandita Yagnik,
Attorney, Exchange (Dec. 17, 1998). The Commission notes that this
practice is consistent with the one employed by the Exchange in 1996
to implement previous revisions to index option strike price
intervals. See Securities Exchange Act Release No. 37003 (Mar. 21,
1996), 61 FR 13913 (Mar. 28, 1996).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-Phlx-09) is approved.
\20\ 17315 U.S.C. 87s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-13930 Filed 6-1-99; 8:45 am]
BILLING CODE 8010-01-M
