[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