[Federal Register Volume 61, Number 61 (Thursday, March 28, 1996)]
[Notices]
[Pages 13913-13915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7506]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37003; File No. SR-PHLX-95-68]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating To Exercise 
Price Intervals for Index Options

March 21, 1996.

I. Introduction

    On January 2, 1996, 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 PHLX Rule 1101A, ``Terms 
of Option Contracts,'' to provide that the exercise (strike) price 
interval for near-term index options generally will be $5, except: (1) 
where the exercise price exceeds $500, the exercise price interval may 
be $10; and (2) where the exercise price exceeds $1,000, the exercise 
price interval may be $20. For out-of-the-money, far-term (fifth 
month),\3\ or long-term index option series (long-term options or 
``LEAPS''),\4\ the proposal provides that the exercise price interval 
generally will be $25, except: (1) where the exercise price exceeds 
$500, the exercise price interval may be $50; and (2) where the 
exercise price exceeds $1,000, the exercise price interval may be $100. 
In addition, where the exercise price interval is greater than $5, the 
PHLX may list exercise prices at $5 intervals in response to 
demonstrated customer interest or a specialist request. The proposal 
also allows the PHLX to list exercise prices at wider intervals.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1955).
    \3\ Under PHLX Rule 1101A(b), the Exchange may list index option 
series of up to four cycle months and up to three consecutive 
months. According to the PHLX, most index options currently have 
five months trading at a given time, consisting of three cycle/
quarterly series and two consecutive month series. For example, as 
of September 1995, the National Over-the-Counter Index (``XOC'') had 
the following months listed: October, November, December, March, and 
June.
    \4\ Under PHLX Rule 1101A(b)(iii), the Exchange may list long-
term options with up to 60 months until expiration. See Securities 
Exchange Act Release No. 35616 (April 17, 1995), 60 FR 20135 (April 
24, 1995) (order approving File No. SR-PHLX-95-11).
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    Notice of the proposal appeared in the Federal Register on February 
7, 1996.\5\ No comments were received on the proposed rule change.

    \5\ See Securities Exchange Act Release No. 36796 (January 31, 
1996), 61 FR 46599.
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II. Description of the Proposal

    The PHLX proposes to amend PHLX Rule 1101A to incorporate new 
exercise price intervals for index options. Currently, PHLX Rule 
1101A(a) states that the Exchange shall determine fixed point intervals 
of exercise prices for index options. According to the PHLX, the 
interval for index options generally is $5,\6\ except in the far-term 
series of broad-based index options.\7\ The PHLX proposes to widen the 
exercise price interval for all index options in accordance with a 
formula which takes into consideration the index value and time until 
expiration. Specifically, the PHLX proposes to list the following 
exercise price intervals for index options:

    \6\ See e.g., Securities Exchange Act Release No. 35591 (April 
11, 1995), 60 FR 19423 (April 18, 1995) (order approving File No. 
SR-PHLX-95-07) (listing of USTOP 100 Index (``TPX'') options). The 
PHLX notes that, generally, the strike price interval of an index 
option is listed in the contract specifications for the option.
    \7\ See PHLX Rule 1101A, Commentary .02. Commenatary .02 
provides that exercise prices for index options shall be $5.00, 
except exercise prices in the far-term series of XOC options, Value 
Line Composite Index (``VLE'') options, Big Cap Index options and 
TPX options shall be $25.00 unless there is demonstrated customer 
interest at $5.00 intervals. Commentary .02 states that, for 
purposes of the commentary, demonstrated customer interest includes 
institutional (firm), corporate or customer interest expressed 
directly to the Exchange or through the customer's floor brokerage 
unit, but not interest expressed by a Registered Options Trader 
(``ROT'') with respect to trading for the ROT's own account.

------------------------------------------------------------------------
                                                 Near-term    5th month/
                  Index value                     strikes       LEAPS   
------------------------------------------------------------------------
500 or less...................................           $5          $25
500 to 999....................................           10           50
1,000 or more.................................           20          100
------------------------------------------------------------------------

    Where the exercise price interval is wider than $5, the Exchange 
proposes to list (fill-in) exercise prices at $5 intervals in response 
to demonstrated customer interest or a specialist request.
    The purpose of the proposal is to list index options with exercise 
prices at wider intervals, which should reduce the number of index 
option exercise prices listed on the Exchange.

[[Page 13914]]
Specifically, the Exchange proposes to list higher-priced index options 
(above 500), as well as out-of-the money series, far-term (fifth month) 
series and long-term options, at wider intervals in order to reduce the 
number of exercise prices. Although most Exchange index options 
currently are listed at 5-point intervals the PHLX has observed that $5 
exercise price intervals are unnecessary for higher-priced index 
options, far-term series, and long-term options. According to the PHLX, 
narrower exercise price intervals generally are most useful where there 
is little volatility and in lower-priced series. In addition, the PHLX 
notes that limited trading volume occurs in the far-term series of 
index options. Thus, the proposed reduction in exercise prices will be 
concentrated in the series with the least trading interest.
    For high-priced, out-of-the money and far-term series, where the 
PHLX proposes to list exercise prices, generally, at intervals of $25 
(or at intervals of $50 where the exercise price exceeds $500 or 
intervals of $100 where the exercise price exceeds $1,000), the PHLX 
proposes to list series at intervals as narrow as $5 in response to 
demonstrated customer interest or specialist request. This proposal is 
similar to existing PHLX Rule 1101A, Commentary .02, which permits the 
far-term series of broad-based index options to be listed at $25 
intervals, unless there is customer interest for a $5 interval. For 
purposes of the proposal, demonstrated customer interest includes 
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. This limitation and definition of customer interest is 
intended to ensure that only legitimate customer requests lead to the 
listing of exercise prices at narrower intervals.
    The Exchange believes that the ability to add $5 intervals in 
response to customer interest is important because it will allow the 
Exchange to respond to the needs of the marketplace and because it will 
prevent the loss of specific trading opportunities. In addition, the 
$25 interval preserves key trading strategies because it often 
represents a 2\1/2\ point index movement, which is similar to a stock 
trading at $25 with the option traded at 2\1/2\ point exercise price 
intervals.
    The PHLX states that the proposal will provide $25 intervals in the 
fifth month and long-term options for most Exchange index options. In 
addition, the proposal provides for wider exercise price intervals in 
extraordinary circumstances to permit the PHLX to read to market 
conditions.
    In implementing the wider intervals, the PHLX will begin listing 
exercise prices at the wider interval following the expiration after 
Commission approval, listing only the exercise prices required by the 
proposal. At the subsequent quarterly expiration, when the PHLX lists 
new five-month and long-term options, the PHLX will list new series at 
the wider intervals. For example, if the proposal were approved and 
implemented in January, the PHLX would delist the far-term series 
(i.e., September) if there was no open interest in the series. Complete 
implementation of the proposal would begin at the next quarterly 
expiration in March, when the PHLX lists the December series. Upon 
implementation of the proposal, the Exchange will list far-term series 
at wider intervals until there are less than six months remaining until 
expiration, when intervening exercise prices will be listed at narrower 
intervals.\8\

    \8\ For example, because each quarter a far-term series with 
nine months until expiration is listed, after December expiration, a 
September option is listed. After March expiration, the September 
option is no longer the far-term series, as a December option is 
added, so that the intervening strike prices would be added to the 
December series.
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    The Exchange believes that listing higher-priced index options, 
far-term series and long-term options at wider intervals should improve 
the efficiency of quotation dissemination and speedy pricing by 
reducing the number of listed exercise prices. At the same time, the 
effect on Exchange systems is likewise notable, with a reduction in 
system usage and operational burdens. In this regard, the PHLX notes 
that exercise prices occupy trading floor screen space and line traffic 
to outside vendors for dissemination. Further, the role of the 
specialist in monitoring multitudes of exercise prices should be 
simplified.
    With respect to operational burdens, the Exchange expects that 
reducing the number of exercise prices should also reduce the instances 
of wrap-around symbols.\9\ The use of wrap-around symbols, although 
common, increases operational burdens, complicates screen displays and 
potentially confuses investors viewing vendor screens.

    \9\ A wrap-around occurs when the strike price codes A-T 
indicating the strike price of an option (from 5 to 100) have been 
used and additional strike prices require listing the option with a 
different root symbol. For example, KBW October 310 calls use that 
symbol ``B'' to denote 310, but the 410 calls would also have used 
the symbol. Thus, the October 410 calls are traded under the symbol 
BKV JB.
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    The Exchange believes that the proposal is an important 
contribution to the effort to limit the number of operation exercise 
prices. In recently approving 2\1/2\ point exercise prices on a pilot 
basis for equity options, the Commission cited the need to balance an 
exchange's desire to accommodate market participation by offering a 
wide array of investment opportunities and the need to avoid 
proliferation of option series.\10\ The PHLX believes that the current 
proposal achieves such a balance by reducing the number of exercise 
prices and, thus, the associated systems and operational burdens, yet 
retains trading strategies and investment opportunities by listing 
wider intervals and providing the flexibility to widen or narrow such 
intervals in response to investor requests or market conditions.

    \10\ See Security Exchange Act Release No. 35993 (July 19, 
1995), 60 FR 38073 (July 25, 1995) (order approving File Nos. SR-
PHLX-95-08, SR-Amex-95-12, SR-PSE-95-07, SR-CBOE-95-19, and SR-PSE-
95-12).
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    For these reasons, 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, remove impediments to and perfect the 
mechanism of a free and open market, and protect investors and the 
public interest by eliminating excessive strike prices, thereby 
improving quotation dissemination capabilities, while maintaining 
investors' flexibility to better tailor index option trading to meet 
their investment objectives.

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) in that the proposal is 
designed to protect investors and the public interest and to remove 
impediments to and perfect the mechanism of a free and open market.\11\ 
Specifically, the proposal will codify the Exchange's rules regarding 
the exercise price interval for all index options and will allow the 
PHLX to reduce the number of outstanding series listed for higher-
priced index options, far-term index options, out-of-the money index 
options, and long-term index options by providing a wider exercise 
price interval for those series.

    \11\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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    Because exercise prices for index options must be displayed on the 
Exchange's trading floor, disseminated to outside vendors and monitored 
by specialists, the Commission believes that the proposal should reduce 
the operational burden associated with the

[[Page 13915]]
listing of exercise prices in inactive series of certain index options. 
By reducing the number of listed exercise prices, the proposal may 
improve the efficiency of quotation dissemination and speedy pricing of 
index options, thereby helping the PHLX to maintain fair and orderly 
options markets. The Commission also believes that the proposal should 
help to eliminate the potential investor confusion associated with 
wrap-around symbols.\12\ The Commission believes that the proposal 
strikes a reasonable balance between the PHLX's interest in limiting 
the number of outstanding exercise prices in inactive series and its 
interest in accommodating the needs of investors. According to the 
PHLX, market participants generally do not require $5 exercise price 
intervals for higher-priced index options, far-term series, and long-
term options. In addition, the PHLX notes that there is limited trading 
volume in far-term series of index options. Thus, the proposed 
reduction in exercise prices will be concentrated in the series with 
the least trading interest.

    \12\ See note 9, supra.
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    At the same time, the proposal provides the PHLX with the 
flexibility to accommodate the needs of investors by allowing the 
Exchange to list exercise prices at $5 intervals in response to 
demonstrated customer interest or specialist request.\13\ This 
flexibility will allow the Exchange to respond to the needs of the 
marketplace and, in turn, will allow investors to establish options 
positions that are tailored to meet their investment objectives. The 
Commission believes that the customer request provision should help to 
ensure the availability of options series that will provide investors 
with a means to adequately hedge their portfolios and implement their 
trading strategies. In addition, the PHLX has stated that the listing 
of $25 intervals for far-term series will preserve key trading 
strategies. The provision of the proposal allowing the PHLX to list 
exercise prices at wider intervals will provide the Exchange with 
additional flexibility in the listing of exercise prices.

    \13\ For purposes of the proposal, demonstrated customer 
interest includes 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. The 
Commission expects the PHLX to monitor the listing of additional 
strikes in order to ensure that new strikes are added only in 
response to ``customer'' requests, as defined in the proposal, or in 
response to a specialist's request.
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    Finally, the Commission believes that the PHLX will implement the 
proposal in an orderly manner. Specifically, the PHLX will begin 
listing exercise prices at the wider interval following the expiration 
after Commission approval of the proposed rule change. The PHLX will 
also delist the far-term series if there is no open interest in the 
series. In addition, after implementing the proposal, the Exchange will 
list far-term series at wider intervals until there are less than six 
months remaining until expiration, when intervening exercise prices 
will be listed at narrower intervals.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the PHLX's 
proposal 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,\14\ that the proposed rule change (File No. SR-PHLX-95-68) is 
approved.

    \14\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\

    \15\ 17 CFR 200.30-3(a)(12) (1995).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7506 Filed 3-27-96; 8:45 am]
BILLING CODE 8010-01-M