94-13472. Self-Regulatory Organizations; Order Approving Proposed Rule Change by the American Stock Exchange, Inc., Relating to the Addition of Options Series at 2\1/2\ Point Strike Price Intervals for Major Market Index Options  

  • [Federal Register Volume 59, Number 106 (Friday, June 3, 1994)]
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    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 94-13472]
    
    
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    [Federal Register: June 3, 1994]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    
    [Release No. 34-34129 ; File No. SR-Amex-91-31]
    
     
    
    Self-Regulatory Organizations; Order Approving Proposed Rule 
    Change by the American Stock Exchange, Inc., Relating to the Addition 
    of Options Series at 2\1/2\ Point Strike Price Intervals for Major 
    Market Index Options
    
    May 27, 1994.
        On November 27, 1991, the American Stock Exchange, Inc. (``Amex'' 
    or ``Exchange'') filed with the Securities and Exchange Commission 
    (``SEC'' or ``Commission''), pursuant to Section 19(b) of the 
    Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
    thereunder,\2\ a proposed rule change to alter its strike price policy 
    in order to introduce near-the-money\3\ options series on the XMI at 
    2\1/2\-point strike (exercise) price intervals.\4\
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        \1\15 U.S.C. 78s(b)(1) (1982).
        \2\17 CFR 240.19b-4 (1993).
        \3\The Amex amended its proposal to define ``near-the-money'' as 
    a strike price within 10 points above or below the current value of 
    the Major Market Index (``XMI'' or ``Index''). Thus, if the XMI is 
    at 310, the proposal would allow the Exchange to list 2\1/2\ point 
    strikes between the range of 290 to 310. See Letter from Ellen T. 
    Kander, Special Counsel, Derivative Securities, Amex, to Yvonne 
    Fraticelli, Staff Attorney, Options Branch, Division of Market 
    Regulation (``Division''), Commission, dated March 4, 1993 (``March 
    4, 1993 Letter'').
        \4\On December 8, 1992, the Amex amended its filing to include a 
    memorandum from Charles H. Faurot, Amex, to Howard Baker, Amex, 
    dated December 2, 1992, which discusses the ability of the Options 
    Price Reporting Authority (``OPRA'') and market information vendors 
    to accommodate the additional strike prices provided for under the 
    proposal (``OPRA Capacity Statement''). See Letter from Ellen 
    Kander, Special Counsel, Derivative Securities, Amex, to Thomas 
    Gira, Branch Chief, Options Regulation, Division, Commission, dated 
    December 8, 1992.
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        Notice of the proposal was published for comment and appeared in 
    the Federal Register on January 15, 1993.\5\ No Comments were received 
    on the proposed rule change.
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        \5\See Securities Exchange Act Release No. 31710 (January 8, 
    1993), 58 FR 4720.
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        In 1983, when the Exchange began trading index options, options 
    series were introduced in 5-point strike price intervals for index 
    values up to 200 and 10-point increments for index values above 200. 
    Subsequently, the Exchange obtained Commission approval to list index 
    options with 5-point strike price intervals when the value of the 
    relevant index is above 200.\6\ The Amex continues to follow this 
    policy for all of the Exchange's index options with expirations up to 
    one year; for longer-term index options, the Exchange may have strike 
    price intervals as wide as 25 or 50 points.
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        \6\See Securities Exchange Act Release No. 21644 (January 9, 
    1985), 50 FR 2360 (order approving File No. SR-Amex-84-31).
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        The Amex proposes to amend its strike price policy to allow the 
    Exchange to list near-the-money options on the XMI at 2\1/2\-point 
    strike price intervals. The Amex has found that the current policy of 
    5-point strike intervals frequently results in in-the-money options 
    that are often ``too costly'' and out-of-the money options that yield 
    too little premium to attract uncovered or covered writers. The Amex 
    believes that the proposal to narrow strike price intervals by 
    increasing the number of available near-the-money strike prices will 
    enable customers to more finely tailor their options positions to 
    achieve their intended investment objectives. In addition, the Amex 
    believes that providing customers with greater opportunities and 
    flexibility will further enhance the depth and liquidity of the Amex's 
    index options markets.
        The Amex also believes, in connection with the reduction of the XMI 
    to one-half its previous value,\7\ that the addition of 2\1/2\-point 
    strike intervals for near-the-money options will satisfy requests by 
    investors to maintain the pre-split ``Index-to-strike price ratio'' 
    (e.g., from a 640 Index value with 5-point strike price intervals to a 
    320 Index value with 2\1/2\-point strike price intervals).
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        \7\See Securities Exchange Act Release No. 29798 (October 8, 
    1991), 56 FR 51976 (order approving File No. SR-Amex-91-18).
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        The Amex believes that the proposal will not result in a 
    proliferation of strike prices since the 2\1/2\-point intervals will 
    only be added to surround the XMI's current Index value. For this 
    purpose, 2\1/2\ point strikes would only be added 10 points above or 
    below the current Index value.\8\ In addition, the Amex represents that 
    listing near-the-money XMI options series at 2\1/2\ point price 
    intervals will not adversely impact the capacity of OPRA or market 
    information vendors. In this regard, the Amex notes that the OPRA 
    system was upgraded in early November 1992 to accommodate up to 300 
    messages per second (``MPS''). The Exchange believes that this capacity 
    is more than sufficient to accommodate the requirements of all OPRA 
    participants, including the proposed 2\1/2\ point strike prices for the 
    XMI, since the recent peaks in message traffic for all OPRA 
    participants combined have been in the range of 100-125 MPS. In 
    addition, the Amex believes that the additional options series 
    necessitated by the proposed 2\1/2\ point strike prices for the XMI 
    will have no impact on the ability of vendors to receive and process 
    data.\9\
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        \8\See March 4, 1993 Letter, supra note 3.
        \9\See OPRA Capacity Statement, supra note 4.
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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).\10\ Specifically, the 
    Commission believes that the proposed listing of 2\1/2\ point strike 
    price intervals for near-the-money XMI options will provide investors 
    with more flexibility in the trading of XMI options, thereby protecting 
    investors and furthering the public interest by allowing investors to 
    establish XMI options positions that are better tailored to meet their 
    investment objectives.
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        \10\15 U.S.C. 78f(6)(5) (1982).
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        The Commission also believes that the Amex's proposal strikes a 
    reasonable balance between the Exchange's need to accommodate the needs 
    of investors and the need to avoid the excessive proliferation of 
    options series. Specifically, the Commission believes that by limiting 
    the number of additional strikes to within 10 points above or below the 
    current Index value, the Amex's proposal permits a fairly small 
    absolute increase in the number of XMI strikes that may be outstanding 
    at any one time. Further, the Commission notes that the proposal sets 
    the maximum permissible number of additional 2\1/2\ point strikes; the 
    Amex retains discretion to list fewer strike prices than allowed.
        In addition, the Commission notes that the Amex has represented 
    that there is customer interest in 2\1/2\ strikes for near-the-money 
    XMI options. Specifically, the Exchange has stated that the existing 5-
    point strike intervals frequently result in in-the-money options that 
    are ``too costly'' and out-of-the money options that yield too little 
    premium to attract uncovered or covered writers. Moreover, the Amex 
    believes that the proposed 2\1/2\ point strike intervals will satisfy 
    requests by investors to maintain the pre-split ``Index-to-strike price 
    ratio'' of the XMI. In light of the investor interest in the 2\1/2\ 
    price strikes, and the proposal's limit on the number of strikes the 
    Amex may list, the Commission believes that the proposal should provide 
    the Amex with the flexibility to list additional strike prices in near-
    the-money XMI options in response to genuine customer interest and, at 
    the same time, appropriately limit the number of XMI options series 
    that may be outstanding at any one time. Finally, based on 
    representations from OPRA,\11\ the Commission is satisfied that the 
    Amex and OPRA will have adequate computer processing capacity to 
    accommodate the trading and quote dissemination demands of the 
    additional strike prices that may be listed under the proposal.
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        \11\See OPRA Capacity Statement, supra note 4.
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        In summary, the Commission believes that the benefits to be derived 
    from the proposal in accommodating the needs and objectives of 
    investors outweigh the possible adverse effects on market liquidity due 
    to the dispersion of trading interest in more XMI options series. In 
    making this determination, the Commission notes that the change is 
    limited to near-the-money series in XMI options only. Nevertheless, the 
    Commission expects the Amex to monitor additional strikes added under 
    this proposal to ensure that there are no detrimental effects on the 
    market for XMI options.
        It is therefore ordered, pursuant to section 19 (b) (2) of the Act, 
    \12\ that the proposed rule change (File No. SR-Amex-91-31) is 
    approved.
    
        \12\15 U.S.C. 78s(b) (2) (1982).
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        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. 94-13472 Filed 6-2-94; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
06/03/1994
Department:
Securities and Exchange Commission
Entry Type:
Uncategorized Document
Document Number:
94-13472
Pages:
0-0 (1 pages)
Docket Numbers:
Federal Register: June 3, 1994, Release No. 34-34129, File No. SR-Amex-91-31