[Federal Register Volume 61, Number 2 (Wednesday, January 3, 1996)]
[Notices]
[Pages 209-211]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-00038]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36636; International Series Release No. 910; File No. 
SR-PHLX-95-62]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to the 
Selective Quoting Facility for Foreign Currency Options

December 26, 1995.

I. Introduction

    On September 18, 1995, the Philadelphia Stock Exchange, Inc. 
(``PHLX'' or ``Exchange'') 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\ a proposed rule change to amend the Selective Quoting 
Facility (``SQF'') for foreign currency options (``FCOs'') to reduce 
the number of FCO strike prices which the Exchange must make available 
for continuous dissemination to the public throughout the trading day.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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    Notice of the proposed rule change was published for comment and 
appeared in the Federal Register on November 24, 1995.\3\ No comments 
were received on the proposal.

    \3\ See Securities Exchange Act Release No. 36473 (November 9, 
1995), 60 FR 58124.
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II. Description of the Proposal

    The SQF, contained in Commentary .04 to PHLX Rule 1012, ``Series of 
Options Open for Trading,'' and Floor Procedure Advice (``Advice'') F-
18, ``FCO Expiration Months and Strike Prices,'' is a feature of the 
Exchange's Auto-Quote system which establishes criteria to determine 
whether the bid/ask quotation for each FCO series is eligible for 
processing through the Options Price Reporting Authority (``OPRA'') for 
off-floor dissemination to vendors. The SQF categorizes each FCO series 
as either an ``update strike'' or a ``non-update strike.'' ``Non-
update'' or ``inactive'' strikes are disseminated with the OPRA 
indicator ``I'' and zeroes (e.g., 000-000) in lieu of a market. When a 
series is added to the inactive category, those bids and offers are no 
longer updated in the Exchange's Auto-Quote system for dissemination. 
Because inactive series are not continuously updated and disseminated, 
quotation processing times are shortened so that quotes of interest are 
updated and disseminated to customers more quickly. According to the 
PHLX, approximately 40% of the Exchange's 10,000 FCO strike prices are 
currently inactive.
    Update strikes, for which PHLX quotes must be made available for 
continuous dissemination to the public throughout the trading day 
currently include, at the minimum: (1) the four strike prices below and 
the four strike prices above the underlying price for American-style 
options \4\ with expiration dates of the three nearest mid-month 
expirations and the three nearest month-end expirations; and (2) any 
other European-style \5\ or American-style series where there is open 
interest as of the commencement of that date. In addition, update 
series may be activated intra-day at the initiative of the PHLX or in 
response to a request from either the respective specialist or from an 
FCO floor official.

    \4\ An American-style option can be exercised on any business 
day prior to its expiration date and on its expiration date.
    \5\ A European-style option can only be exercised during a 
specified period before it expires.
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    The PHLX proposes to amend Exchange Rule 1012, Commentary .04 and 
Advice F-18 to (1) categorize series 

[[Page 210]]
which maintain open interest but have not traded within the previous 
five days as nonupdate series; and (2) amend the definition of update 
series to include the approximately 10, 20, 30, 40 and 50 delta \6\ 
strikes below and above the underlying price rather than the four 
strike prices above and below the underlying price. The proposal to 
amend the definition of update series to include the approximately 10, 
20, 30, 40, and 50 delta strikes below and above the underlying price 
will not result in additional strike price intervals; rather, it will 
identify the existing strike prices which will be classified as update 
series.\7\ Because deltas change, the designation of active strikes 
will also be changed automatically throughout the trading day.

    \6\ Delta is a measure of how an option premium changes in 
relation to the price of the underlying instrument. For example, a 
delta of 50 means that for every one point move in the spot price of 
an underlying foreign currency, the option premium moves \1/2\.
    \7\ Telephone conversation between Edith Hallahan, Special 
Counsel, Regulatory Services, PHLX, and Yvonne Fraticelli, Attorney, 
Office of Market Supervision, Division of Market Regulation, 
Commission, on October 6, 1995.
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    According to the PHLX, recent volatility in the foreign currency 
markets has caused fluctuating and dramatic movements in foreign 
currency exchange rates.\8\ This volatility has resulted in the 
addition of more strike prices as the spot price moves to accommodate 
the new trading ranges of the underlying currencies. The Exchange 
believes that these market conditions impose an onerous burden on FCO 
specialists to maintain updated markets in strike prices for which, on 
occasion, there is little or no customer interest. The purpose of the 
proposal is to alleviate this burden and, thus, to improve the 
timeliness and accuracy of FCO quotes in which there is apparent 
customer interest. By eliminating quote change disseminations in series 
with no probable public investor interest, the proposal will reduce 
dissemination delays caused by thousands of quote changes in volatile 
trading periods.

    \8\ The PHLX notes that these conditions have been particularly 
pronounced for Japanese yen options. See Securities Exchange Act 
Release No. 36539 (November 30, 1995), 60 FR 62910 (December 7, 
1995) (File No. SR-PHLX-95-47) (order approving proposed rule change 
to widen the quote spread parameters for Japanese yen options).
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    According to the PHLX, categorizing series which maintain open 
interest but have not traded within the previous five days as non-
update series will eliminate a significant number of quote changes, 
because in many series a small number of FCO positions create open 
interest, which remains without fluctuation or additional trading 
volume. The PHLX notes that public customers, like all market 
participants, continue to be protected by the SQF feature which 
requires a quotation to be disseminated before a trade can be 
entered.\9\ In addition, the PHLX believes that the proposal protects 
public investors because one quote will be disseminated at the end of 
the trading day for any inactive series with open interest. The purpose 
of this quote is to provide option holders with an indication of the 
market for that option as well as to provide the Options Clearing 
Corporation (``OCC'') with a closing value to mark the market for 
margin and capital purposes.\10\

    \9\ See Securities Exchange Act Release No. 33067 (October 19, 
1993), 58 FR 57458 (October 26, 1993) (order approving File No. SR-
PHLX-92-23) (``SQF Approval Order''). In the SQF Approval Order, the 
Commission noted that public customers are protected by the feature 
of the SQF which requires a quotation to be disseminated after an 
options series is activated but before a trade can be entered.
    \10\ See PHLX Rule 722(e)(i). See also SEC Rule 15c3-1.
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    The proposal also redefines active strikes as those with an 
approximately 10, 20, 30, 40, or 50 delta around the underlying price. 
According to the PHLX, the purpose of this change is to categorize 
strike prices in the terminology used by FCO market participants. The 
PHLX notes that, in some instances, the fourth strike price below the 
spot price could be a 30 delta option, so that the activated around-
the-money series would not include a 40 or 50 delta option. The 
Exchange believes that it is important to define strike prices with a 
delta up to 50 as update series because these represent the most 
active, volatile options, for which the dissemination of quotes is 
meaningful.
    The PHLX recognizes that redefining active strikes in terms of a 
delta figure may result in a greater number of strikes. Further, the 
Exchange notes that the delta associated with a strike changes as the 
spot price changes, different strikes will become the 10-50 delta 
strikes, and, thus, the active series. Therefore, the PHLX proposes to 
amend the SQF to ``de-activate'' strikes intra-day that are no longer 
around-the-money based on a delta change.\11\ The PHLX will update and 
disseminate new around-the-money strikes in response to market changes.

    \11\ Under the proposal, a strike that is no longer around-the-
money based on a delta change may qualify as an update strike if 
there is open interest in the series and the series has traded 
within the previous five trade dates.
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    Thus, the Exchange believes that enhancing the SQF should address 
the strike price and quote change situation in a volatile FCO market. 
The PHLX estimates that the proposal will reduce the number of strike 
prices currently disseminated each day by approximately 15%, or 1,000 
strikes, which will improve the Exchange's ability to provide timely 
and accurate quotes, including quotes in new FCO products that may be 
traded on the Exchange in the future.
    The Exchange believes that the proposal 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, 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 proposal should promote just and equitable principles of trade 
by facilitating speedier dissemination of FCO markets. The PHLX states 
that the proposal is also designed to facilitate coordination between 
the Exchange and the OCC, OPRA, and securities information vendors. 
Finally, the PHLX believes that the proposed changes to the SQF should 
facilitate the specialists' ability to focus on active series, which 
should, in turn, result in tighter, more liquid markets, consistent 
with Section 6(b)(5).

III. Discussion

    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).\12\ The Commission 
believes that the proposed amendments to the SQF will result in more 
timely and accurate FCO quote displays in series of known or probable 
interest to public customers. Moreover, the Commission believes that 
the proposal will increase the efficiency of the PHLX's option data 
transmission lines and increase the speed of the dissemination of FCO 
quotes to public investors in the series of most interest to market 
participants, thereby helping the PHLX to maintain fair and orderly 
options markets.\13\

    \12\ 15 U.S.C. Sec. 78f(b)(5) (1988 & Supp. V 1993).
    \13\ The PHLX estimates that the proposal will reduce the number 
of FCO strike prices currently disseminated each day by 
approximately 15%, or 1,000 strikes.
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    Specifically, the PHLX proposes to categorize series with open 
interest that have not traded within the previous five days as non-
update series. According to the Exchange, in many series a small 

[[Page 211]]
number of FCO positions creates open interest, which remains without 
fluctuation or additional trading volume; the PHLX believes that 
classifying series with open interest that have not traded within the 
previous five days as non-update series will eliminate a significant 
number of quote changes. This, in turn, should decrease FCO quotation 
processing times so that active quotes are updated and disseminated 
more quickly to public investors.
    In addition, the PHLX proposes to amend the definition of update 
series to include the approximately 10, 20, 30, 40, and 50 delta 
strikes below and above the underlying price. The delta associated with 
a strike changes as the spot price changes, so that different strikes 
become the approximately 10-50 delta strikes and, thus, the active 
series. According to the PHLX, strike prices with a delta up to 50 
represent the most active, volatile options, for which the 
dissemination of quotations is meaningful. Because the proposal 
provides that the approximately 10-50 delta strikes above and below the 
underlying price will be classified as update series, it benefits 
investors and helps the PHLX to maintain fair and orderly markets by 
allowing for the updating and dissemination of the quotations that are 
most useful to FCO market participants.
    The PHLX proposes further to de-activate strikes intra-day that no 
longer fit the definition of active, thus eliminating quote change 
disseminations in series of improbable public investor interest and 
helping the PHLX to provide timely and accurate FCO quotes in series of 
interest to investors.\14\ At the time, the Exchange proposes to update 
and disseminate strikes which become active due to market changes, 
thereby helping to ensure that the most active FCO strikes are updated 
and disseminated throughout the trading day.

    \14\ A strike that is no longer around-the-money based on a 
delta change may qualify as an update strike if there is open 
interest in the series and the series has traded within the previous 
five trading days. In addition, update series may be activated 
intra-day at the PHLX's initiative or in the response to a request 
from a specialist or an FCO floor official.
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    In addition, the Commission believes that the proposal protects 
market participants by providing for the dissemination of one bid/ask 
quote at the end of each trading day for non-update series with open 
interest. This quote will provide option holders with an indication of 
the market for that option and will provide the OCC with a closing 
value to mark the market for margin and capital purposes.
    The Commission continues to believe, as it has concluded 
previously,\15\ that the SQF, as amended, will not create an advantage 
to FCO participants on the trading floor with respect to the trading of 
options series not disseminated to the public. Public customers are 
protected by the feature of the SQF which requires a quotation to be 
disseminated after an options series is activated but before a trade 
can be entered. Accordingly, a participant who is physically on the 
trading floor will learn of the specialist's market for a given options 
series when the series is activated and a quote is published, nearly 
identical in time to a potential customer watching a vendor screen off-
floor.

    \15\ See SQF Approval Order, supra note 9.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the PHLX's 
proposal to amend the SQF is consistent with the requirements of the 
Act and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-PHLX-95-62) is approved.

    \16\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\

    \17\17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-00038 Filed 1-2-96; 8:45 am]
BILLING CODE 8010-01-M