[Federal Register Volume 59, Number 121 (Friday, June 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-15360]


[[Page Unknown]]

[Federal Register: June 24, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34233; File No. SR-Phlx-94-26]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 to the Proposed Rule Change by the Philadelphia Stock Exchange, Inc. 
Relating to the Listing of Long-Term Options, and $25.00 Strike Price 
Intervals for Far-Term Options Series, on the Big Cap Index

June 17, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 10, 1994, the 
Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the Phlx. On June 14, 1994, the Exchange filed Amendment 
No. 1 to the proposed rule change.\2\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\In Amendment No. 1, the Phlx requested that the Commission 
approve on an accelerated basis the portion of the Phlx's proposal 
relating to the listing of series of long-term options. See Letter 
from Michele R. Weisbaum, Associate General Counsel, Phlx, to Thomas 
McManus, Staff Attorney, Division of Market Regulation, Commission, 
dated June 13, 1994.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx, pursuant to Rule 19b-4 under the Act,\3\ proposes to 
amend Phlx Rule 1101A to allow the Phlx to list option strike prices in 
the far-term series (nine months to expiration) of the Big Cap Index 
(``Index'') at $25.00 intervals, unless there is demonstrated customer 
interest in $5.00 strike price intervals, as well as to list and trade 
long-term options (``LEAPS'') on the Index. The text of the proposed 
rule change is available at the Office of the Secretary, the Phlx, and 
at the Commission.
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    \3\17 CFR 240.19b-4 (1993).
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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 Phlx 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 Phlx 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

    On April 28, 1994, the Commission approved the Exchange's proposal 
to list and trade options on the Index.\4\ Pursuant to Phlx Rule 1101A, 
the Exchange has the ability to list options on the Index with strike 
prices at $5.00 intervals. In December 1993, the Commission approved 
the Exchange's proposal to list the far-term options series (i.e., nine 
months to expiration) of the National Over-the-Counter Index (``XOC'') 
and the Value Line Index (``VLE'') at $25.00 strike price intervals, 
unless there is ``demonstrated customer interest'' in $5.00 strike 
price intervals.\5\ The Exchange had submitted its proposal regarding 
the XOC and VLE because trading data had indicated that there was 
limited volume in the far-term series of those indexes, and stated that 
its proposal would reduce the number of strikes listed in inactively-
traded options series. At the time, XOC and VLE were the only broad-
based indexes traded on the Exchange. Options on the Index, which is 
also broad-based, have been trading since May 17, 1994. The Exchange 
expects to list far-term options series (the March 1995 series) at the 
June expiration. Based on its experience with similar broad-based 
indexes, the Exchange believes it is likely that the volume in these 
far-term options series will be limited, although there is no evidence 
to that effect at this time.
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    \4\See Securities Exchange Act Release No. 33973 (April 28, 
1994), 59 FR 23245 (May 5, 1994).
    \5\See Securities Exchange Act Release No. 33301 (December 8, 
1993), 58 FR 65611 (December 15, 1993). Phlx Rule 1101A(c), 
Commentary .02, defines ``demonstrated customer interest'' to 
include institutional (firm), corporate, or customer interest 
expressed directly to the Exchange or through the customer's floor 
brokerage unit, but not interest expressed by a Registered Options 
Trader (``ROT'') with respect to trading for the ROT's own account. 
See also infra note 6.
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    By only listing the far-term Index options series at $25.00 strike 
price intervals instead of at $5.00 intervals, the Exchange will be 
able to reduce the number of new strikes that would have to be 
displayed on screens on the trading floor, disseminated to outside 
vendors, and monitored by the Exchange's specialists. The Exchange 
anticipates that options overlying the Index will trade similarly to 
options on other broad-based indexes. The Exchange believes that the 
far-term Index options series will be relatively inactive, and that 
bids and offers for the options at close intervals within that series 
often will be substantially similar because of low volatility levels. 
The Exchange does not believe that significant market opportunities 
will be lost if fewer strike prices are listed in the far-term series.
    If experience in trading options on the Index proves to warrant 
$5.00 strike price intervals in the far-term series by evidence of 
institutional (firm), corporate, or legitimate customer (not ROT) 
interest expressed directly to the Exchange or through the customer's 
floor brokerage unit, the Exchange will list additional $5.00 strike 
prices in those far-term series.\6\ Further, when there is six months 
remaining until expiration, the intervening strike prices will be 
listed at $5.00 intervals.
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    \6\The $5.00 strike prices that can be added as a result of 
demonstrated customer interest must be reasonably close to the Index 
value, pursuant to Phlx Rule 1012(a)(i) (which is applicable to 
stock index options by virtue of Phlx Rule 1000A(a)). See infra note 
10 for discussion of the term ``reasonably close.''
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    Since no trading records exist yet to prove that additional far-
term Index options at $5.00 intervals will be inactively-traded, the 
Exchange will monitor carefully the trading in those far-term series, 
as well as customer' reactions, to assure that more strikes are not of 
interest to those customers.
    The Exchange is requesting accelerated approval for the above 
described portion of the proposed rule change, since the first far-term 
series are proposed to be listed at June expiration (June 20, 1994). 
The Exchange believes that good cause exists for accelerating approval 
for this portion of the proposal, since this proposal is designed to 
treat the Index similarly to other broad-based indexes traded on the 
Phlx.
    In addition to the foregoing, because Phlx Rule 1101A(b)(iii) 
generally provides the Exchange with the ability to list and trade 
LEAPS on stock indexes, the Exchange also requests that the Commission 
grant accelerated approval of the portion of the proposed rule change 
relating to the listing of series of LEAPS on the Index.
    The Exchange believes the proposed rule change is consistent with 
Section 6 of the Act, and, in particular, Section 6(b)(5),\7\ in that 
it will foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, and processing information with respect 
to and facilitating transactions in securities, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, protect investors and the public 
interest.
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    \7\15 U.S.C. Sec. 78s(b)(5) (1988).
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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 solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Phlx has requested that the proposed rule change be given 
accelerated effectiveness pursuant to section 19(b)(2) of the Act.
    The Commission finds that this 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). Specifically, the 
Commission believes that the portion of the proposed rule change 
relating to the listing of $25.00 strike price intervals is designed to 
protect investors and the public interest and to remove impediments to 
and perfect the mechanism of a free and open market, by allowing the 
Phlx to reduce the number of outstanding far-term Index options series 
in which there is limited investor interest, while preserving the 
Exchange's ability to list additional far-term options series in 
response to genuine customer requests. Because the strike prices for 
the far-term Index options series must be displayed on the Exchange's 
trading floor, disseminated to outside vendors, and monitored by 
specialists, the Commission believes that the listing of far-term Index 
options at $25.00 strike price intervals, rather than $5.00 intervals, 
should reduce the operational burden associated with the listing of 
strike prices in inactive series of Index options. In addition, the 
Commission believes that the proposal should help to eliminate 
potential investor confusion associated with the ``wrap-around,'' when 
all 26 characters used to indicate the strike price have been taken and 
additional strike prices must be listed with a different root symbol.
    The Commission believes that this portion of the Exchange's 
proposal strikes a reasonable balance between the Exchange's interest 
in limiting the number of outstanding strike prices in inactive far-
term series and its interest in accommodating the needs of investors. 
In this regard, the Commission notes that the Phlx has stated that the 
listing of strike prices at $25.00 intervals in far-term Index options 
series should preserve key trading strategies. In addition, the 
Commission believes that the provision allowing the Exchange to list 
additional far-term series at $5.00 intervals in response to genuine 
customer requests should provide the Exchange with the flexibility to 
meet the needs of investors and, in turn, should allow investors to 
establish options positions that are tailored to meet their investment 
objectives.\8\ The Commission further believes that the customer 
request provision should help to ensure the availability of Index 
options series that will provide investors with a means to hedge their 
portfolios adequately and implement their trading strategies.\9\
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    \8\See supra note 6.
    \9\The Commission expects the Exchange to monitor the listing of 
additional strikes in order to ensure that new strikes are added 
only in response to ``customer'' requests.
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    The Commission notes that Exchange rules require that strike prices 
for each series of Index options shall be fixed at a price per share 
which is reasonably close to the Index value at or about the time such 
series of options is first opened for trading.\10\
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    \10\See Phlx Rule 1012(a)(i). The Commission interprets the term 
``reasonably close'' to mean that the strike price can be within no 
more than the lesser of (i) 50 points of the Index value at or about 
the time the Index option series begins trading, or (ii) 15 percent 
of such Index value.
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. In light of the 
Exchange's intention to list far-term Index options series on June 20, 
1994, accelerating effectiveness of this proposal will permit the 
change to become effective as soon as possible. Further, this proposal 
is substantially similar to the Exchange's proposal that was approved 
by the Commission in December 1993, relating to the listing of $25.00 
strike price intervals on XOC and VLE options series. That proposal was 
published for the full 21-day comment period, and no comments were 
received. In addition, because Phlx Rule 1101A(b)(iii) generally 
permits the Exchange to list series of LEAPS on stock indexes, the 
Commission finds that the portion of the proposed rule change relating 
to the listing of series of LEAPS on the Index presents no new 
regulatory issues. Accordingly, the Commission believes that it is 
consistent with the Act to approve this proposed rule change on an 
accelerated basis.

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, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. Copies of such filing also will be available for 
inspection and copying at the principal office of the Phlx. All 
submissions should refer to File No. SR-Phlx-94-26 and should be 
submitted by July 15, 1994.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-Phlx-94-26), as 
amended, is approved.

    \11\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-15360 Filed 6-23-94; 8:45 am]
BILLING CODE 8010-01-M