[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series is added to the inactive category, those bids and offers are no
longer updated in the Exchange's Auto-Quote system for dissemination.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