[Federal Register Volume 59, Number 136 (Monday, July 18, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-17317] [[Page Unknown]] [Federal Register: July 18, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-34349; File No. SR-PHLX-93-38] Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment Nos. 1 and 2 by the Philadelphia Stock Exchange, Inc., Relating to the Intra-Day Addition of Strike Prices July 11, 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 November 16, 1993, 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 and II below, which Items have been prepared by the self- regulatory organization.\1\ The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\On March 30, 1994, the PHLX submitted a letter deleting a provision which would have allowed the Exchange to add new strike prices under extraordinary circumstances. See Letter from Gerald D. O'Connell, Vice President, Market Surveillance, PHLX, to Sharon Lawson, Assistant Director, Division of Market Regulation (``Division''), Commission, dated March 30, 1994 (``Amendment No. 1''). Amendment No. 1 also clarified that new strikes may be added in response to bona fide off-floor customer interest, and defined customer interest to ``include institutional (firm), corporate or customer interest expressed directly to the PHLX or through the customer's floor brokerage unit, but not interest expressed by a registered options trader (``ROT'') with respect to trading in the ROT's own account. On June 23, 1994, the PHLX submitted a letter deleting a provision which would have allowed the Exchange to list additional strike prices when there is significant volatility in the price of the underlying instrument. See Letter from Gerald D. O'Connell, First Vice President, PHLX, to Sharon Lawson, Assistant Director, Division, Commission, dated June 23, 1994 (``Amendment No. 2''). Amendment No. 2 also states that strike prices added under the proposal must be consistent with PHLX Rules 1101A, ``Terms of Option Contracts,'' and 1012, ``Series of Options Open for Trading.'' In addition, the PHLX clarified its proposal by noting that the purpose of the proposal is to allow the Exchange to add strike prices intra- day in order to respond to market changes. The PHLX states that the proposal will not affect the number of strike prices which the Exchange will list, and that the determination of which strike prices will be added will continue to be governed by Exchange Rules 1012 and 1101A. See Letter from Gerald D. O'Connell, Vice President, Market Surveillance, PHLX, to Sharon Lawson, Assistant Director, Division, Commission, dated March 1, 1994 (``March 1 Letter''). On July 7, 1994, the PHLX submitted a letter requesting accelerated approval of the proposal. See Letter from Gerald D. O'Connell, First Vice President, PHLX, to Michael Walinskas, Branch Chief, Options Regulation, Division, dated July 7, 1994 (``July 7 Letter''). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The PHLX proposes to amend its rules to adopt Floor Procedure Advice (``Advice'') F-22, ``Intra-Day Addition of Strike Prices,'' to establish a procedure for the listing of new option series on an intra- day basis, with the approval of the appropriate floor committee chairperson or his designee. Specifically, under proposed Advice F-22, the PHLX may list new strikes under the following circumstances: (1) There is bona fide off-floor customer interest in effecting a sizable transaction at a strike price at or within five points of the price of the underlying instrument; or (2) there has been an operational error in not adding a requested exercise strike price. 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 Currently, the addition of strike prices, which is governed by PHLX Rules 1012, ``Series of Options Open for Trading,'' and 1101A, ``Terms of Option Contracts,'' is determined by the movement of the underlying stock, index, or foreign currency, such that strike prices reasonably close to the value of the underlying security are listed for trading. When the Exchange plans to add a new strike price, a memorandum is distributed to the trading floor as well as over electronic systems notifying the membership and their customers of the new strike. Generally, the new strike price is available for trading on the day following such notification. The PHLX states that, increasingly, it has become necessary, due to market conditions as well as customer and specialist requests, to add new strike prices within the same day with the approval of a floor official and Exchange staff. In such instances, notification is given and the strike can often become available for trading the same day. The PHLX's proposal is intended to codify a written procedure for these instances to facilitate compliance as well as to help to ensure that notification is properly given. The Exchange proposes to incorporate the proposed procedure into the form of an advice to make it available to the trading floor in the Exchange's Floor Procedure Handbook. Proposed Advice F-22 would apply to the equity option, index option and foreign currency option trading floors. In order to provide the guidance necessary to determine when and how the same-day addition of a new strike price is effected, the PHLX has incorporated certain standards into proposed Advice F-22. For example, the proposed Advice provides that where the Exchange has erroneously failed to list a strike price, an intra-day addition would be appropriate. In addition, the proposed Advice provides that an off- floor customer request to list a strike at or within five points of the price of the underlying stock, or within a comparable amount of ``ticks,'' in the case of a foreign currency option, in order to effect a sizeable transaction, would warrant an intra-day addition. Moreover, the approval of the chairperson of the appropriate floor committee, or his designee, would be required to list an intra-day strike under the proposed Advice. Proposed Advice F-22 also requires that prior notice of any such intra-day addition be disseminated for the benefit of off- floor firms and customers. 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, 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 public interest. Specifically, the Exchange believes that the adoption of proposed Advice F-22 should codify the procedure for adding new strike prices intra-day so that the procedure may be referred to by PHLX member organizations and implemented uniformly. (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 received or requested. 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 because the proposal codifies the Exchange's existing procedures for adding intra-day strikes.\2\ --------------------------------------------------------------------------- \2\See July 7 Letter, supra note 1. --------------------------------------------------------------------------- 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).\3\ Specifically, the Commission believes that the proposal will protect investors and further the public interest by clarifying the Exchange's procedures for adding intra-day strike prices and by ensuring that notice of a new intra-day strike price is disseminated to the Exchange's options members before the new strike is listed. --------------------------------------------------------------------------- \3\15 U.S.C. 78f(6)(5) (1982) --------------------------------------------------------------------------- The Commission also believes that the PHLX'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. In this regard the Commission notes that the proposal allows the PHLX to list only intra-day strikes at or within five points of the underlying instrument, (strikes that normally would be added the next day), only if there is bona fide customer interest\4\ in the additional strikes or to correct an operational error, in addition to requiring the approval of the appropriate floor committee chairman or his designee. Moreover, the PHLX proposes to list only those additional intra-day strikes which are ``reasonably close'' to the price of the underlying instrument, consistent with PHLX Rules 1012 and 1101A.\5\ The Commission believes that these requirements provide the Exchange with the flexibility to list additional intra-day strike prices in response to genuine customer interest or to correct an operational error while, at the same time, appropriately limiting the number of options series that may be outstanding at any one time. The Commission notes that the proposal, which is a codification of the Exchange's current practice, is designed to affect only the timing of the listing of additional strikes without affecting the number of strike prices the Exchange lists.\6\ --------------------------------------------------------------------------- \4\The proposal defines 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 an ROT with respect to trading for the ROT's own account.'' See Amendment No. 1, supra note 1. \5\See Amendment No. 2, supra note 1. \6\See March 1 Letter, supra note 1. --------------------------------------------------------------------------- The Commission expects the PHLX to monitor the additional intra-day strikes listed under the proposal to ensure that the strikes are added in response to a bona fide customer request or to correct an operational error, and are consistent with Exchange Rules 1012 and 1101A. 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 because the proposal codifies the Exchange's existing policy for the addition of intra-day strike prices and is a clarification of the PHLX's current rule for adding strikes. The Commission finds good cause for approving Amendment Nos. 1 and 2 because they make the proposal consistent with the Exchange's current policy for listing intra-day strike prices and clarify that intra-day strikes listed under the proposal must be consistent with PHLX Rules 1012 and 1101A. Accordingly, the Commission believes that granting accelerated approval of the proposed rule change is appropriate and consistent with Section 6 of the Act. 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 8, 1994. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\7\ that the proposed rule change (File No. SR-PHLX-93-38) is approved. --------------------------------------------------------------------------- \7\15 U.S.C. 78s(b)(2) (1982). For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\8\ --------------------------------------------------------------------------- \8\17 CFR 200.30-3(a)(12) (1993). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-17317 Filed 7-15-94; 8:45 am] BILLING CODE 8010-01-M