[Federal Register Volume 59, Number 106 (Friday, June 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13472]


[[Page Unknown]]

[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