[Federal Register Volume 60, Number 142 (Tuesday, July 25, 1995)]
[Notices]
[Pages 38073-38075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18219]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35993; File Nos. SR-Phlx-95-08, SR-Amex-915-12, SR-PSE-
95-07, SR-CBOE-95-19, SR-NYSE-95-12]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Changes by the Philadelphia Stock Exchange, Inc., the American Stock 
Exchange, Inc., the Pacific Stock Exchange, Inc., the Chicago Board 
Options Exchange, Inc., and the New York Stock Exchange, and Amendment 
No. 1 by the Chicago Board Options Exchange, Inc., Amendment No. 1 by 
the Pacific Stock Exchange, Inc., Amendment No. 1 by the New York Stock 
Exchange, and Amendments Nos. 1 and 2 by the Philadelphia Stock 
Exchange, Inc., and Notice of Filing and Order Granting Accelerated 
Approval of Amendment No. 3 by the Philadelphia Stock Exchange, Inc., 
Amendment No. 2 by the Pacific Stock Exchange, Inc., Amendment No. 2 by 
the Chicago Board Options Exchange, Inc., and Amendment No. 1 by the 
American Stock Exchange, Inc., to Adopt a 2\1/2\ Point Strike Price 
Pilot Program

July 19, 1995.

I. Introduction

    On February 6, March 8, March 8, March 15, and March 22, 1995, 
respectively, the Philadelphia Stock Exchange, Inc. (``Phlx''), the 
American Stock Exchange, Inc. (``Amex''), the Pacific Stock Exchange, 
Inc. (``PSE''), the Chicago Board Options Exchange, Inc. (``CBOE''), 
and the New York Stock Exchange (``NYSE'') (collectively the 
``Exchanges'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ proposed rule changes to adopt a pilot program, whereby 
the Exchanges may select a certain number of their listed options for 
inclusion in a twelve month pilot program for the listing of strike 
prices at 2\1/2\ point intervals.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    On March 10, 1995, the Phlx submitted to the Commission Amendment 
No. 1 to its proposal.\3\ On March 24, March 27, March 29 and March 29, 
1995, the PSE, the CBOE, the Phlx, and the NYSE submitted Amendment 
Nos. 1, 1, 2, and 1, respectively, to their proposals.\4\ On June 14, 
June 14, June 30, and July 6, the Phlx, the PSE, the CBOE, and the Amex 
submitted Amendments Nos. 3, 2, 2, and 1, respectively, to their 
proposals.\5\

    \3\ The Phlx submitted Amendment No. 1 to add the phrase ``or 
greater'' to the last clause of the text in Phlx Rule 1012, 
Commentary .05, in order to be consistent with CBOE Rule 5.5, 
Interpretation .01, in that strike price intervals may be $10 ``or 
greater'' where the strike price is $200 or more. See Letter from 
Gerald O'Connell, First Vice President, Market Regulation and 
Trading Operations, Phlx, to Michael Walinskas, Branch Chief, Office 
of Market Supervision (``OMS''), Division of Market Regulation 
(``Market Regulation''), Commission, dated March 10, 1995 (``Phlx 
Letter, dated March 10, 1995'').
    \4\ The PSE, the CBOE, the Phlx, and the NYSE submitted 
amendments in order to codify the extended duration of the pilot 
program from six to twelve months. See Letters from Timothy 
Thompson, Attorney, CBOE, dated March 27, 1995 (``CBOE Letter, dated 
March 27, 1995''), Michael Pierson, Senior Attorney, PSE, dated 
March 24, 1995 (``PSE Letter, dated March 24, 1995''), to John 
Ayanian, Attorney, OMS, Market Regulation, Commission, and Letters 
from Gerald O'Connell, First Vice President, Phlx, dated March 29, 
1995 (``Phlx Letter, dated March 29, 1995''), and Daniel Parker 
Odell, Assistant Secretary, NYSE, dated March 29, 1995 (``NYSE 
Letter, dated March 29, 1995''), to Michael Walinskas, Branch Chief, 
OMS, Market Regulation, Commission.
    The Amex also submitted a clarifying amendment to extend the 
pilot program from six to twelve months, but did not codify the 
duration of the pilot program in its rules. See Letter from Claire 
McGrath, Special Counsel, Amex, to Michael Walinskas, Branch Chief, 
OMS, Market Regulation, Commission, dated April 3, 1995 (``Amex 
Letter, dated April 3, 1995'').
    The NYSE also submitted Amendment No. 1 to amend the text of 
proposed Supplementary Material .30(f) and .30(f)(i) to NYSE Rule 
703 to list 2\1/2\ strike prices for 14 options, instead of 11 
options as originally stated.
    \5\ The Phlx, PSE, CBOE, and Amex propose to amend their filings 
to conform with NYSE's proposal, in that the Exchanges would not 
require the listing of 2\1/2\ point strikes for all expiration 
months in selected option classes. See Letters from Gerald 
O'Connell, First Vice President, Market Regulation and Trading Floor 
Operations, Phlx, dated June 14, 1995 (``Phlx Letter, dated June 14, 
1995''), David Semak, Vice President, Regulation, PSE, dated June 
14, 1995 (``PSE Letter, dated June 14, 1995''), and Claire McGrath, 
Special Counsel, Amex, dated July 6, 1995 (``Amex Letter, dated July 
6, 1995'') to Michael Walinskas, Branch Chief, OMS, Market 
Regulation, Commission. See also Letter from Timothy Thompson, 
Attorney, CBOE, to John Ayanian, Attorney, OMS, Market Regulation, 
Commission, dated June 30, 1995 (``CBOE Letter, dated June 30, 
1995'').
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    Notices of the Exchanges' proposals and Amendment No. 1 to the 
CBOE's proposal, Amendment No. 1 to the PSE's proposal, Amendment Nos. 
1 and 2 to the Phlx's proposal, and Amendment No. 1 to the NYSE's 
proposal were published for comment in the Federal Register on May 12, 
1995.\6\ No comments were received on the proposals.\7\ This order 
approves the proposed rule changes, as amended.

    \6\ See Securities Exchange Act Release No. 35680 (May 5, 1995), 
60 FR 25752 (May 12, 1995).
    \7\ Before the proposals were published for comment, the 
Committee on Options Proposals (``COOP'') indicated that it favors 
the Exchanges' proposed 2\1/2\ point strike pilot program. See 
Letter from Michael Schwartz, Chairman, COOP, to Jonathan Katz, 
Secretary, Commission, dated April 5, 1995.
II. Description of the Proposals

    The Exchanges have submitted a joint proposal regarding the listing 
of 2\1/2\ point strike prices for selected equity options on a pilot 
basis. The pilot program would operate for a twelve-month period 
commencing on Monday, July 24, 1995, which is the Monday following the 
July 1995 expiration. Currently, the Exchanges list strike prices for 
equity options at 5 point intervals, where the strike price is between 
$25 and $200.\8\

    \8\ See Securities Exchange Act Release No. 21985 (April 25, 
1985), 50 FR 18595 (May 1, 1985) (Approving File Nos. SR-Phlx-85-9 
and SR-PSE-85-9, amending both exchanges' policies regarding strike 
price intervals to conform to those of the other options exchanges); 
see also Securities Exchange Act Release No. 21929 (April 10, 1985), 
50 FR 15258 (April 17, 1985) (File Nos. SR-CBOE-85-1 and SR-Amex-85-
6).
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    The Exchanges propose to list selected options trading at a strike 
price greater than $25 but less than $50 \9\ (i.e., 27\1/2\, 32\1/2\, 
37\1/2\, 42\1/2\ and 47\1/2\ \10\ at 2\1/2\ 

[[Page 38074]]
point intervals. The Exchanges would generally list 2\1/2\ point strike 
prices in selected options for all expiration months on all 
participating exchanges, but not for long-term options (LEAPS).\11\ 
Pursuant to the pilot program, the Exchanges would be permitted to use 
such 2\1/2\ point strike price intervals for a joint total of up to 100 
option issues. Each exchange may select 10 options plus a percentage of 
the remaining 50 options equal to that exchange's pro rata share of the 
total number of equity options listed by the Exchanges.\12\ If an 
exchange chooses a multiply-traded option for its allotment, any other 
exchange trading that option would be allowed to subsequently list 2\1/
2\ point strike prices wihtout having such listing count toward that 
other exchange's allotted amount.

    \9\ Proposed NYSE Rule 703, Supplementary Material .30(f) states 
that selected options may be listed at 2\1/2\ point strike price 
intervals ``if the strike price for that series is greater than 
$25.00, but is less than or equal to $50.00.'' While the NYSE has 
proposed slightly different language to make the proposed rule 
consistent with other NYSE rules, the NYSE proposal allows for the 
listing of 2\1/2\ point strike prices at 27\1/2\, 32\1/2\, 37\1/2\, 
42\1/2\ and 47\1/2\ in accordance with the terms of the pilot 
program. Telephone conversation between Gary Katz, Managing 
Director, Options and Index Products, NYSE, and John Ayanian, 
Attorney, OMS, Market Regulation, Commission, on May 2, 1995.
    The Phlx and Amex submitted clarifying amendments to their 
proposals to indicate that the pilot program does not apply to 
options classes where the underlying stock is trading between $25 
and $50, rather it includes equity options trading at a strike price 
between $25 and $50. See Letter from Gerald D. O'Connell, First Vice 
President, Market Regulation and Trading Operations, to Michael 
Walinskas, Branch Chief, OMS, Market Regulation, Commission, dated 
June 14, 1995 (``Phlx Letter, dated June 14, 1995''). See also Amex 
Letter, dated July 6, 1995, supra note 6.
    \10\ The applicable strike price codes will be Y 27\1/2\; Z 
32\1/2\; U 37\1/2\; V 42\1/2\; and W 47\1/2\. The CBOE, Amex, and 
NYSE submitted clarifying amendments to their proposals to indicate, 
among other things, that each exchange intends to use these strike 
price codes for the additional strike price intervals. See Letter 
from Timothy Thompson, Attorney, CBOE, to John Ayanian, Attorney, 
OMS, Market Regulation, Commission, dated May 4, 1995 (``CBOE 
Letter, dated May 4, 1995''). See also Letters from Claire McGrath, 
Special Counsel, Amex, dated June 6, 1995 (``Amex Letter, dated June 
6, 1995''), and James E. Buck, Senior Vice President, NYSE, dated 
June 15, 1995 (``NYSE Letter, dated June 15, 1995''), to Michael 
Walinskas, Branch Chief, OMS, Market Regulation, Commission.
    \11\ The Exchanges do not propose to require the listing of 2\1/
2\ point strikes for all expiration months in selected option 
classes. See NYSE Letter, dated June 15, 1995, supra note 10. See 
also Phlx Letter, dated June 14, 1995; PSE Letter, dated June 14, 
1995; CBOE Letter, dated June 30, 1995; and Amex Letter, dated July 
6, 1995, supra note 6.
    \12\ The actual allotment of option issues for each exchange is: 
CBOE (28), Amex (22), Phlx (18), PSE (18), and NYSE (14). The Amex 
submitted a clarifying amendment to indicate that its allotment of 
option issues pursuant to the pilot program is 22. See Amex Letter, 
dated June 6, 1995, supra note 10. See also NYSE Letter, dated March 
29, 1995, supra note 4.
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    When more than one exchange selects a multiply-traded option for 
its allotment, the Options Clearing Corporation (``OCC'') will 
determine which exchange will be deemed to have selected the option 
according to the following procedures. The Exchanges have agreed that 
an exchange (``Selecting Exchange'') intending to list 2\1/2\ point 
strikes on an option will inform OCC of its selection by submitting a 
notice (``Selection Notice'') to OCC between the hours of 8:30 a.m. and 
12:00 Noon (Central Time). In the event that more than one exchange 
submits a Selection Notice to the OCC for the same multiply-traded 
option, the exchange which first submits a Section Notice to the OCC 
will be deemed to be the Selecting Exchange for that option. Such 
option will count toward the allotment of the Selecting Exchange, but 
not toward the allotment of any other exchange submitting a Selection 
Notice under the terms of the pilot program.\13\

    \13\ See Letter from James C. Yong, First Vice President and 
General Counsel, Options Clearing Corporation (``OCC''), to Michael 
Walinskas, Branch Chief, OMS, Market Regulation, Commission, dated 
July 6, 1995 (``OCC Letter, dated July 6, 1995'').
    In implementing the proposals, the Exchanges note that the pilot 
program effectively adds five additional strike prices to each of the 
applicable classes of equity options, thereby creating a significant 
number of new strikes, including both puts and calls for all four 
listed expiration months.\14\ The Exchanges believe that limiting the 
pilot program to 100 selected equity options is a reasonable 
alternative to adding 2\1/2\ point strike price intervals for all 
equity options trading at a strike price greater than $25 but less than 
$50. Further, the Exchanges believe that the allocated number of 
options limits the number of new strike prices while providing 
important investment opportunities for selected options.\15\ 
Additionally, both the Exchanges \16\ and the Options Price Reporting 
Authority (``OPRA''),\17\ represent that each will have adequate 
computer processing capacity to accommodate the additional strike 
prices.

    \14\ The Exchanges submitted clarifying amendments to their 
proposals to indicate that the maximum number of allotted new 
strikes created as a result of this pilot program for each exchange 
is: CBOE (1,120); Amex (880); Phx (720); PSE (720); and NYSE (560). 
See Letter from Michael Pierson, Senior Attorney, Market Regulation, 
PSE, to John Ayanian, Attorney, OMS, Market Regulation, Commission, 
dated May 11, 1995, and Letter from Gerald O'Connell, First Vice 
President, Market Regulation and Trading Operations, Phlx, to 
Michael Walinskas, Branch Chief, OMS, Market Regulation, Commission, 
dated May 16, 1995. See also CBOE Letter, dated May 4, 1995; Amex 
Letter, dated June 6, 1995; and NYSE Letter, dated June 15, 1995, 
supra note 10. These figures do not include LEAPs or new strikes 
created from multiply-traded options simultaneously selected by more 
than one exchange in accordance with the terms of the pilot program.
    \15\ The Amex notes in its proposal that certain low volatility 
stocks of highly capitalized companies usually trade in fairly 
narrow price ranges. Amex further notes that options on such stocks 
generally have limited trading activity since in-the-money options 
sell for little more than intrinsic value and out-of-the-money 
options yield little premium income to attract uncovered or covered 
writers. (See File No. SR-Amex-95-12).
    The NYSE notes in its proposal that it anticipates selecting its 
allotment from among those options that overlie less volatile 
stocks. The NYSE believes that the market for options that overlie 
low volatility stocks will benefit from the pilot program because 
options series with strike prices that are closer to the price of 
the underlying stock will be available. Consequently, expanded 
options strategies will be available to investors. (See File No. SR-
NYSE-95-12).
    \16\ See Letters from Michael Pierson, Senior Attorney, Market 
Regulation, PSE, dated June 6, 1995 (``PSE Capacity Statement''), 
and Edward Provost, Senior Vice President, CBOE, dated June 5, 1995 
(``CBOE Capacity Statement''), to John Ayanian, Attorney, OMS, 
Market Regulation, Commission. See also Memorandum from Donna 
Gervasi, Phlx, to Gerald O'Connell, First Vice President, Market 
Regulation and Trading Floor Operations, Phlx, dated June 8, 1995, 
which is enclosed in letter from Gerald O'Connell, dated June 8, 
1995 (``Phlx Capacity Statement''), and Letter from Wendy Hoffman, 
Amex, dated June 23 (``Amex Capacity Statement''), to Michael 
Walinskas, Branch Chief, OMS, Market Regulation, Commission. See 
also NYSE Letter, dated June 15, 1995, supra note 10.
    \17\ See Letter from Joseph P. Corrigan, Executive Director, 
OPRA, to Michael Walinskas, Branch Chief, OMS, Market Regulation, 
Commission, dated June 27, 1995 (``OPRA Capacity Statement'').
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    Further, the Exchanges believe that the addition of 2\1/2\ point 
strike price intervals will stimulate customer interest by creating 
greater trading opportunity and flexibility. The Exchanges believe that 
2\1/2\ point strikes will provide customers the ability to more closely 
tailor investment strategies to the precise movement of the underlying 
security. The Exchanges also believe that an increase in customer 
interest will, in turn, enhance the depth and liquidity of the markets 
in the selected equity options.

III. Commission Finding and Conclusions

    The Commission finds that the proposed rule changes are 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).\18\ Specifically, the 
Commission believes that the proposed listing of 2\1/2\ point strike 
price intervals in selected equity options on a pilot basis will 
provide investors with more flexibility in the trading of equity 
options with a strike price greater than $25 but less than $50, thereby 
furthering the public interest by allowing investors to establish 
equity options positions that are better tailored to meet their 
investment objectives. The Commission also believes that the Exchanges' 
proposal strikes a reasonable balance between the Exchanges' desire to 
accommodate market participants by offering a wide array of investment 
opportunities and the need to avoid excessive proliferation of options 
series. The Commission expects the Exchanges to monitor the applicable 
equity options activity closely to detect any proliferation of illiquid 
options series resulting from the narrower strike price intervals and 
to act promptly to remedy this situation should it occur.

    \18\ 15 U.S.C. 78f(b)(5).
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    In addition, based on the representations from OPRA, the Commission 
believes that adequate computer processing capacity to accommodate the 
additional strike prices is currently available.\19\ The Exchanges also 
represent that their current systems capacities are sufficient to meet 
the expected demands of the additional strike prices.\20\ Nevertheless, 
the Commission requests that the Exchanges monitor the trading volume 

[[Page 38075]]
associated with the additional options series listed as a result of the 
pilot program and the effect of these additional series on the capacity 
of the Exchanges', OPRA's, and vendors' automated systems.

    \19\ See OPRA Capacity Statement, supra note 17.
    \20\ See PSE Capacity Statement, Phlx Capacity Statement, Amex 
Capacity Statement, and CBOE Capacity Statement, supra note 16. See 
also NYSE Letter, dated June 15, 1995, supra note 10.
    The Commission notes that the Exchanges intend to commence this 
pilot program on July 24, 1995.\21\ In the event an exchange desires to 
extend the pilot program beyond the twelve month period, it should 
submit a report to the Commission before May 31, 1996. The report 
should cover the ten month period from July 24, 1995 to May 20, 1996, 
and should include data and written analysis on the open interest and 
trading volume in affected series, and delisted options series (for all 
strike price intervals) on the selected pilot program option classes. 
The exchange should also discuss any capacity problems that may have 
arisen during the pilot program and provide any other data it believes 
is relevant to the analysis of the pilot program.

    \21\ See OCC Letter, dated July 6, 1995, supra note 13.
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    In sum, the Commission finds the Exchanges' proposal to implement a 
twelve month pilot program to list 2\1/2\ point strike price intervals 
in selected equity options with strike prices between $25 and $50 
should provide investors with more flexibility to establish equity 
options positions that may be better tailored to meet their investment 
objectives.
    The Commission finds good cause for approving Amendment Nos. 3, 2, 
2, and 1, respectively, to the Phlx's, the CBOE's, the PSE's, and 
Amex's proposals, prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, the amendments conform other exchanges' proposals with 
the NYSE's proposal, in that the Exchanges will not be required to list 
2\1/2\ point strikes for all expiration months in selected option 
classes. The Commission notes that the NYSE proposal was subject to a 
full notice and comment period, and no comments were received.
    Accordingly, the Commission believes that it is consistent with 
Section 6(b)(5) of the Act to approve Amendment Nos. 3, 2, 2, and 1, 
respectively, to the Phlx, PSE, CBOE, and Amex proposals on an 
accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 3, 2, 2, and 1, respectively, to 
the Phlx, PSE, CBOE, and Amex proposals. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., 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, 
N.W., Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal offices of the Exchanges. All 
submissions should refer to File Nos. SR-Phlx-95-08, SR-PSE-95-07, SR-
CBOE-95-19, and SR-Amex-95-12 and should be submitted by [insert date 
21 days after the date of this publication].

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule changes (SR-Phlx-95-08, SR-Amex-95-12, 
SR-PSE-95-07, SR-CBOE-95-19, and SR-NYSE-95-12), as amended, are 
approved through July 15, 1996.

    \22\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\ 

    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18219 Filed 7-24-95; 8:45 am]
BILLING CODE 8010-01-M