[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18025]
[[Page Unknown]]
[Federal Register: July 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34401; File No. SR-PHLX-94-28]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to the Quote
Spread Parameters for National Over-the-Counter Index (``XOC'') Options
July 19, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 13,
1994, the Philadelphia Stock Exchange, Inc. (``PHLX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Currently, PHLX Rule 1014, ``Obligations and Restrictions
Applicable to Specialists and Registered Options Traders,'' and PHLX
Floor Procedure Advice (``Advice'') F-6, ``Option Quote Spread
Parameters,'' establish a maximum quote spread of $1.00 for index
options with bids of $20.00 or more. The PHLX proposes to amend its
rules to establish the following maximum quote spreads for National
Over-the-Counter Index (``XOC'') options: $2.00 for XOC options with
bids of $20.00 to less than $40.00; and $3.00 for XOC options with bids
of $40.00 or more.
The text of the proposed rule change is available at the Office of
the Secretary, PHLX, and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections (A), (B), and (C) below,
of the most significant aspects of such statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The PHLX proposes to amend the quote spread parameters (bid/ask
differential) applicable to XOC options. The current parameters appear
in PHLX Rule 1014(c) as well as Advice F-6. The PHLX proposes to widen
the quote spread parameters applicable to higher-priced quotations for
XOC options as follows: $2.00 for XOC options with bids of $20.00 to
less than $40.00; and $3.00 for XOC options with bids of $40.00 or
more.
The PHLX states that quote spread parameters, also referred to as
bid/ask differentials, govern the width of market quotations;\1\
specifically, the maximum widths between the bid and ask for PHLX
options are mandated by PHLX Rule 1014(c). Although specific parameters
appear in PHLX Rule 1014(c), this rule also permits the Exchange to
establish differentials other than those listed for one or more series
or classes of options. The Exchange notes that although a violation of
the maximum quote spread may result in a fine,\2\ the quote spreads are
not applicable during fast market conditions, pursuant to Advice F-10,
``Extraordinary Market Conditions (Fast Markets).''\3\
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\1\For example, if the maximum quote spread for an XOC option is
\1/2\ where the bid is $6.00, then the following is an acceptable
quotation: 6-6-\1/2\.
\2\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.
\3\Advice F-10 states that in the interest of maintaining a fair
and orderly market under unusual trading conditions, two floor
officials may declare a ``fast market,'' during which displayed
quotes are not firm and the volume guarantees of Advice A-11,
``Responsibility to Make Ten-Up Markets,'' are not applicable;
nevertheless, specialists and trading crowds are required to use
best efforts to update quotes and fill incoming orders in accordance
with Advice A-11.
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Currently, the bid/ask differentials applicable to equity and index
options are identical; with respect to higher-priced premiums, where
the bid is $20.00 or more, the quote spread parameter is $1.00. The
PHLX states that recent volatility in the XOC resulted in temporary
floor official relief, pursuant to Advice F-6,\4\ being granted to the
XOC crowd allowing for the proposed wider quotation. The Exchange
proposes to codify these wider quote spread parameters for higher-
priced XOC series.
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\4\Advice F-6 states that relief from the established bid/ask
differentials may be granted upon the receipt of approval of two
floor officials.
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The purpose of the wider quotations is to reflect the wider bid/ask
differential in the over-the-counter (``OTC'') securities underlying
the XOC. In order to hedge XOC exposure, positions in these OTC
securities are typically purchased and sold. According to the Exchange,
the aggregate bid/ask differential for the XOC's component securities
is often greater than $5.00 wide.\5\
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\5\The bid/ask differential in the underlying securities is
determined by adding the bids for such securities and dividing by
100 (the number of securities comprising the XOC) to arrive at the
composite bid; to arrive at a composite, or average, offer, the
offers for the underlying securities are similarly added together
and divided by 100.
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The wider bid/ask differential particularly problematic with
respect to higher-priced option series because the higher bids
represent a greater premium dollar value and thus more risk.
Accordingly, the Exchange proposes to widen the XOC quote spread
parameter applicable to higher-priced series only. The Exchange
believes that this limitation is appropriate because a $40.00 bid, for
example, represents a $4,000 premium. The Exchange notes that the XOC
series priced at $20.00 or less are most often chosen for investment by
public customers (i.e., ``customers'' who are not associated with
broker-dealer organizations or subject to discretionary authorization
by assisted persons of broker-dealers).
The PHLX received one letter stating that wider quote spread
parameters for XOC options will not benefit public customers and may
discourage public customers from purchasing index options on the
Exchange.\6\ In response to the March 24 Letter, the PHLX indicates
that the Exchange's Committee on Options considered the quote spread
parameters established by the Chicago Board Options Exchange, Inc. for
its Nasdaq 100 Index. In addition, the PHLX notes that the XOC trading
crowd has increased its minimum volume guarantee to 20 contracts for
public customer orders in series with previous-close bid values of
$10.00 or less.\7\
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\6\Letter from Barry J. Weisberg, CFP, Vice President, Financial
Consultant, Smith Barney Shearson, to Gerald O'Connell, Vice
President, Market Surveillance, PHLX, dated March 24, 1994 (``March
24 Letter'').
\7\Letter from Gerald O'Connell, Vice President, Market
Surveillance, PHLX, to Barry J. Weisberg, CFP, Vice President,
Financial Consultant, Smith Barney Shearson, dated April 29, 1994.
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The Exchange believes that the proposed rule change 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, prevent fraudulent and manipulative acts and
practices, as well as to protect investors and the public interest,
because widening higher-priced XOC quote spread parameters should
facilitate hedging, and, in turn, liquidity.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The PHLX does not believe that the proposed rule change will impose
any inappropriate burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
One written comment in opposition to the change was received from a
registered representative of Smith Barney Shearson.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reason for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(a) by order approve such proposed rule change, or
(b) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by August 15, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18025 Filed 7-22-94; 8:45 am]
BILLING CODE 8010-01-M
