[Federal Register Volume 62, Number 124 (Friday, June 27, 1997)]
[Notices]
[Pages 34731-34733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16913]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38752; File No. SR-Phlx-97-16]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Approving Proposed Rule Change Relating to Option Quote Spread
Parameters
June 20, 1997.
I. Introduction
On April 2, 1997, the Philadelphia Stock Exchange, Inc., (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') 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 relating to option quote spread parameters.
The proposed rule change was published for comment in Securities
Exchange Act Release No. 38576 (May 6, 1997), 62 FR 25985 (May 12,
1997). The Commission received no comment letters in response to the
proposal.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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II. Description of the Proposal
The purpose of the proposed rule change is to update the Exchange's
equity and index option quote spread parameters, in view of the
parameters applicable on other options exchanges. First, the Exchange
is proposing to eliminate the maximum quote spread of \1/8\, currently
applicable to options where the bid is less than $.50, such that the
maximum quote spread for options where the bid is less than $2.00 will
be \1/4\. This is identical to the quote
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spread parameters of the other options exchanges.\3\
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\3\ See Amex Rule 958(c)(i); CBOE Rule 8.7(b)(iv); NYSE Rule
758(b)(i)(c)(1); and PSE Rule 6.37(b)(1).
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Second, the proposal is intended to recognize that in certain
market conditions, the existing parameters are too restrictive and
should not apply. Specifically, for equity options only, the maximum
quote spread for in-the-money series\4\ where the market for the
underlying security is wider, the applicable parameter may be as wide
as the quotation for the underlying security on the primary market. For
instance, where the market for the underlying security is 20-21, and
the bid for an in-the-money options series is $7, the applicable
maximum quote spread is \1/2\, but under the proposed language, the
parameter would be $1, which is the spread in the underlying security.
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\4\ In-the-money series are defined as those series where, in
the case of a call option, the current market price of the stock is
higher than the strike price, or, in the case of a put, the current
market price of the stock is lower than the strike price.
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Previously, the other options exchanges adopted rules to allow the
quote spread for in-the-money series to reflect the quote spread for
the underlying security on the primary market.\5\ Phlx recently
determined that the increase in the number of multiply-traded options
necessitated amending Exchange rules to achieve consistency with the
rules of the other exchanges and to promote competition in multiply-
traded options.\6\ The Exchange believes that this proposal is a
reasonable response to such market conditions and consistent with the
rules of other exchanges.
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\5\ See Securities Exchange Act release Nos. 26924 (June 13,
1989), 54 FR 26284; 27235 (September 11, 1989), 54 FR 38580; 27471
(November 24, 1989), 54 FR 50299; 28218 (July 18, 1990), 55 FR 30058
(orders approving proposed rule changes by the Chicago Board Options
Exchange, American Stock Exchange, Pacific Stock Exchange, and New
York Stock Exchange, respectively, relating to certain options bid/
ask differentials).
\6\ Telephone conversation with Edith Hallihan, Phlx, and Peggy
Blake, Division of Market Regulation, Commission (June 17, 1997).
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The Exchange notes that a violation of the maximum quote spread
parameter may result in a fine pursuant to Options Floor Procedure
Advice (``Advice'')
F-6.\7\ Because the Exchange is proposing to amend an Advice to which a
fine pursuant to the minor rule plan applies, it follows that the minor
rule plan will incorporate this amendment.\8\ It should be noted,
however, that quote spread parameters are not applicable during fast
market conditions, pursuant to Floor Procedure Advice F-10,
Extraordinary Market Conditions, and different quote spread parameters
during such fast market conditions are not a violation of Advice F-
6.\9\
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\7\ Violations of Advice F-6 may result in the issuance of a
fine pursuant to the Exchange's minor rule violation enforcement and
reporting plan (``minor rule plan''). For fine schedule, see Exhibit
B of File No. SR-PHLX-97-16.
\8\ The Phlx's minor rule plan, codified in Phlx Rule 970,
contains floor procedure advices, such as Advice F-6, with
accompanying fine schedules. Exchange Act Rule 19d-1(c)(2)
authorizes national securities exchanges to adopt minor rule
violation plans for summary discipline and abbreviated reporting;
Exchange Act Rule 19d-1(c)(1) requires prompt filing with the
Commission of any final disciplinary actions. However, minor rule
violations not exceeding $2,500 are deemed not final, thereby
permitting periodic, as opposed to immediate, reporting.
\9\ Advice F-10 states that, in the interest of a fair and
orderly market, two floor officials may declare a ``fast market,''
during which displayed quotes are not firm and the volume guarantees
of Advice A-11 are not applicable; nevertheless, best efforts are
required to display quotes and fill orders.
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The Exchange believes that the proposed rule change is necessary in
light of competitive conditions, and consistent with Section 6(b)(5) of
the Act,\10\ in that it is designed to promote just and equitable
principles of trade, prevent fraudulent and manipulative acts and
practices, as well as to protect investors and the public interest.
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\10\ 15 U.S.C. Sec. 78f(b)(5).
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Specifically, the Exchange believes the proposal should facilitate
the market making function by adjusting the quote spread parameter to
reflect the market for the underlying security and current market
conditions, thereby promoting just and equitable principles of trade.
Although the proposed quote spread parameters may result in wider
quotes in certain circumstances, the Exchange believes that such quote
spread parameters are nevertheless reasonable, in line with other
options exchanges, and continue to perform a regulatory function in the
options marketplace, consistent with the objectives of the Act, by
preventing fraudulent and manipulative acts and practices and
protecting investors and the public interest.
III. Discussion
The Commission believes Phlx's proposed rule change is consistent
with Section 6(b)(5) of the Act.\11\ 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 system, and, in general--to further investor
protection and the public interest.\12\
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\11\ 15 U.S.C. Sec. 78f(b)(5).
\12\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. Sec. 78c(f).
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Phlx is proposing to eliminate the maximum quote spread of \1/8\
for equity and index options where the bid is less than $.50, resulting
in a maximum quote spread of \1/4\ of such options where the bid is
less than $2.00. The Commission believes the proposed rule change will
reduce investor confusion by bringing Phlx's rules into conformity with
the quote spread parameter rules of other options exchange. The
Commission believes such uniformity will result in less competitive
disparity among the options exchanges, thereby promoting just and
equitable principles of trade.
The Commission also believes it is reasonable to permit in-the-
money options quotations to reflect the quote spread for the underlying
security on the primary market. The other options exchanges have such
rules in place and the Commission believes that Phlx's adoption of an
identical rule will create consistency, eliminate confusion in trading
of equity options, and does not present any novel or unique regulatory
issues. Furthermore, the Commission believes that such a rule is
appropriate as it will facilitate Phlx's ability to compete in trading
of multiply-traded options by allowing Phlx the same opportunity as the
other options exchanges to widen quote spread parameters in equity
options to reflect the market in the underlying security. The
Commission notes that the proposal establishes maximum allowable quote
spread and this portion of the proposal applies solely to in-the-money
equity options. The Commission expects Phlx's to allow the use of the
maximum quote spreads only where market conditions justify their
application. Further, the Commission notes that under Phlx Rule 1014,
Obligations and Restrictions Applicable to Specialists and Registered
Options Traders, specialists' transactions should constitute a course
of dealings reasonably calculated to contribute to the maintenance of a
fair and orderly market. Accordingly, the Commission expects the Phlx
to monitor trading in in-the-money equity options affected by the
proposal to ensure that market makers are meeting their obligations to
maintain fair and orderly markets.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (File No. SR-Phlx-97-16) be and
hereby is approved.
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\13\ 15 U.S.C. Sec. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16913 Filed 6-26-97; 8:45 am]
BILLING CODE 8010-01-M
