[Federal Register Volume 61, Number 184 (Friday, September 20, 1996)]
[Notices]
[Pages 49515-49517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24168]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37688; File No. SR-Phlx-96-39]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to the
Selective Quoting Facility for Foreign Currency Options
September 16, 1996.
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 August
20, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule as described in Item 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
The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend the
foreign currency option (``FCO'') Selective Quoting Facility (``SQF''),
embodied in Rule 1012, Commentary .04 and Floor Procedure Advice
(``Advice'') F-18, FCO Expiration Months and Strike Prices--Selective
Quoting Facility, to designate two in-the-money strikes and six out-of-
the-money strikes for both puts and calls as active.
The SQF establishes criteria to determine whether the bid/ask
quotation for each FCO series is eligible for transmission to the
Options Price Reporting Authority (``OPRA'') for off-floor
dissemination to securities data vendors. Currently, the SQF, a feature
of the Exchange's Auto-Quote system, categorizes certain FCO strikes as
``non-update'' or ``inactive'' strikes, which are disseminated with the
OPRA indicator ``I'' and zeroes (e.g., 000-000), in lieu of a market.
In contrast, ``update'' or ``active'' strikes include, at minimum: (1)
Around-the-money strikes in near-term American style options, and (2)
strikes with open interest that have traded within the previous five
days. Around-the-money strikes were recently \1\ defined as those with
an approximate 10, 20, 30, 40 and 50 delta.\2\ Active strikes may also
be added at the initiative of the Exchange or in
[[Page 49516]]
response to a request by the Specialist or an FCO Floor Official.
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\1\ Securities Exchange Act Release No. 36636 (December 26,
1995) (File No. SR-Phlx-95-62).
\2\ ``Delta'' is a measure of how much an option premium changes
in relation to changes in the underlying. For example, a 50 delta
represents that for every one point move in the spot price of an
underlying foreign currency, the option moves \1/2\.
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When a series is inactive, those bids and offers are no longer
updated in the Exchange's Auto-Quote system for dissemination. However,
if interest is then voiced in any such series, it can be activated
immediately upon establishment of a quote in that series. Inactive
strikes with open interest (that have not traded in the previous five
days) are quoted once at the close of trading each day for purposes of
mark-to-market valuation. Because inactive series are not continuously
updated and disseminated, quotation processing times are reduced such
that quotes respecting active strikes are updated and disseminated to
customers much more quickly.
At this time, the Exchange proposes that the Selective Quoting
Facility be updated to reflect that certain around-the-money and
longer-term strikes can be set as active. Specifically, two in-the-
money strikes and six out-of-the-money strikes for both puts and calls
will be set as the active around-the-money strikes each day.
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, or 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
1. Purpose
The purpose of the proposal is to codify certain system
enhancements pertaining to the SQF into the governing Rule and Advice.
Implemented in 1994,\3\ the SQF was intended to reduce the number of
strike prices being continuously updated and disseminated, thus
resulting in more timely and accurate FCO quote displays. Specifically,
designating as inactive those series that are away-from-the-money or
not recently traded eliminates quote changes in those series that have
the least amount of investor interest, thus reducing the dissemination
delays caused by thousands of quote changes in volatile trading
periods.
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\3\ Securities Exchange Act Release No. 33067 (October 19,
1993), 58 FR 57658 (October 26, 1993) (File No. SR-Phlx-92-23).
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The Exchange amended the SQF last year \4\ to reduce the number of
strikes considered active by: (1) Eliminating from the definition of
active strikes those series with open interest that have not traded
within the previous five trading days, but nevertheless requiring a
closing quotation; (2) ``de-activating'' strikes intra-day that no
longer fit the definition of active; and (3) redefining around-the-
money active strikes as the five options with an approximate 10, 20,
30, 40 and 50 delta, instead of those four above and four below the
spot price. This change was precipitated by volatility in the foreign
currency markets causing dramatic fluctuation in foreign currency
exchange rates, and, in turn, the addition of many strike prices to
accommodate the new trading ranges of the underlying currencies.
Therefore, the changes were intended to alleviate this burden and to
improve the timeliness and accuracy of FCO quotes.
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\4\ See, supra note 1.
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In building system enhancements to implement this change, testing
revealed that the delta-based around-the-money strikes did not most
accurately capture around-the-money interest and was not the most
efficient or simple method of determining those strikes, as originally
contemplated by the FCO floor. The Exchange had previously sought to
define active strikes using deltas, in order to correspond to the
terminology used by traders and to capture strikes of certain
volatilities, which was an improvement upon having a set number. During
testing, it was determined that the definition of around-the-money
strikes be revisited, resulting in the proposal at hand.
The proposal at hand redefines around-the-money active strikes as
two in-the-money strikes and six out-of-the-money strikes for both puts
and calls. The purpose of this change is to more accurately reflect the
most active series for dissemination of the most significant and
meaningful quotes. FCO floor representatives determined that the 10-50
delta range did not necessarily incorporate such strikes. Each morning,
under the proposal, the SQF would set eight calls and eight puts for
each FCO expiration month. Previously, under the delta-based method, at
least ten series were activated, and, in certain cases, more than five
strikes out-of-the-money were required to capture the 50 delta and less
than five captured the 50 delta in-the-money. Thus, based on specialist
experience, the ``two in the six out-of-the-money'' definition garners
those strikes that are active daily and have the most trading interest.
Furthermore, preliminary testing revealed that 10% fewer strikes in the
sample were activated under the new definition. Therefore, the Exchange
does not believe that the number of resulting strikes should differ
significantly from the delta-based method. The actual number for each
FCO depends upon the fluctuations in the underlying currency. Likewise,
the Exchange believes that the ``two in and six out'' method is easier
to discern for customers, floor traders, Exchange staff, and vendors
alike.
Rule 1012, Commentary .04 establishes the minimum strikes to be
activated, thus permitting the Exchange to designate other strikes as
active. In this regard, the Exchange proposes to add the language ``at
minimum'' to the Advice, for consistency with Rule 1012. In
implementing the ability to activate other strikes, the Exchange has
also designated as active all expiration months (except long-term) and
around-the-money European style options. Activating expiration months
other than the first three months became necessary due to complex
system needs related to disseminating implied volatility levels using
an outside vendor. Activation of around-the-money strikes is currently
needed in all months to continue disseminating these levels under
existing system configurations. With respect to end-of-month FCOs, only
the first three expiration months are currently activated. Further,
European style options are treated the same as American style options
by the SQF system, such that the around-the-money definition activates
the same strikes. The Exchange notes that these changes were
implemented by FCO Committee representatives to facilitate the smooth
operation of the SQF, and this proposal codifies this result by adding
the permissive language from the Rule into the Advice.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 \5\ of the Act in general, and in particular, with
Section 6(b)(5),\6\ in that it is designed to promote just and
equitable principles of trade, prevent fraudulent and manipulative acts
and practices, to foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in securities, as well as to
protect investors and the
[[Page 49517]]
public interest. Specifically, the Exchange believes the proposal
promotes just and equitable principles of trade by facilitating
speedier dissemination of FCO markets. Although the proposal may, but
does not necessarily, result in a greater number of active strikes, the
Exchange believes that any additional activation of strikes is
necessary to ensure that SQF dissemination includes truly active
strikes. Thus, the proposal balances the need to prevent excessive
quote disseminations with preserving meaningful dissemination of FCO
quotes. The proposal is also designed to facilitate coordination
between the Exchange, the Options Clearing Corporation (``OCC''), OPRA
and securities information vendors. A quote will always be disseminated
when a trade occurs in a previously-inactive series and quotes in
inactive series can always be requested from the trading crowd,
consistent with the protection of investors and the public interest. In
sum, the Phlx believes that the proposed changes to the SQF should
facilitate the specialists' ability to focus on active series, which
should, in turn, result in tighter, more liquid markets, consistent
with Section 6(b)(5).
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\5\ 15 U.S.C. 78f.
\6\ 15 U.S.C. 78f(b)(50).
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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
No written comments were either solicited or received.
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 reasons for so finding or (ii) as to
which the Phlx 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 in the
Commission's Public Reference Section, 450 Fifth Street, NW,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the Phlx. All
submissions should refer to File No. SR-Phlx-96-39 and should be
submitted by October 11, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-24168 Filed 9-19-96; 8:45 am]
BILLING CODE 8010-01-M
