[Federal Register Volume 61, Number 184 (Friday, September 20, 1996)]
[Notices]
[Pages 49515-49517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24168]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37688; File No. SR-Phlx-96-39]


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

September 16, 1996.
    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 August 
20, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule as described in Item 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

    The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend the 
foreign currency option (``FCO'') Selective Quoting Facility (``SQF''), 
embodied in Rule 1012, Commentary .04 and Floor Procedure Advice 
(``Advice'') F-18, FCO Expiration Months and Strike Prices--Selective 
Quoting Facility, to designate two in-the-money strikes and six out-of-
the-money strikes for both puts and calls as active.
    The SQF establishes criteria to determine whether the bid/ask 
quotation for each FCO series is eligible for transmission to the 
Options Price Reporting Authority (``OPRA'') for off-floor 
dissemination to securities data vendors. Currently, the SQF, a feature 
of the Exchange's Auto-Quote system, categorizes certain FCO strikes as 
``non-update'' or ``inactive'' strikes, which are disseminated with the 
OPRA indicator ``I'' and zeroes (e.g., 000-000), in lieu of a market. 
In contrast, ``update'' or ``active'' strikes include, at minimum: (1) 
Around-the-money strikes in near-term American style options, and (2) 
strikes with open interest that have traded within the previous five 
days. Around-the-money strikes were recently \1\ defined as those with 
an approximate 10, 20, 30, 40 and 50 delta.\2\ Active strikes may also 
be added at the initiative of the Exchange or in

[[Page 49516]]

response to a request by the Specialist or an FCO Floor Official.
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    \1\ Securities Exchange Act Release No. 36636 (December 26, 
1995) (File No. SR-Phlx-95-62).
    \2\ ``Delta'' is a measure of how much an option premium changes 
in relation to changes in the underlying. For example, a 50 delta 
represents that for every one point move in the spot price of an 
underlying foreign currency, the option moves \1/2\.
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    When a series is inactive, those bids and offers are no longer 
updated in the Exchange's Auto-Quote system for dissemination. However, 
if interest is then voiced in any such series, it can be activated 
immediately upon establishment of a quote in that series. Inactive 
strikes with open interest (that have not traded in the previous five 
days) are quoted once at the close of trading each day for purposes of 
mark-to-market valuation. Because inactive series are not continuously 
updated and disseminated, quotation processing times are reduced such 
that quotes respecting active strikes are updated and disseminated to 
customers much more quickly.
    At this time, the Exchange proposes that the Selective Quoting 
Facility be updated to reflect that certain around-the-money and 
longer-term strikes can be set as active. Specifically, two in-the-
money strikes and six out-of-the-money strikes for both puts and calls 
will be set as the active around-the-money strikes each day.

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, or 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

1. Purpose
    The purpose of the proposal is to codify certain system 
enhancements pertaining to the SQF into the governing Rule and Advice. 
Implemented in 1994,\3\ the SQF was intended to reduce the number of 
strike prices being continuously updated and disseminated, thus 
resulting in more timely and accurate FCO quote displays. Specifically, 
designating as inactive those series that are away-from-the-money or 
not recently traded eliminates quote changes in those series that have 
the least amount of investor interest, thus reducing the dissemination 
delays caused by thousands of quote changes in volatile trading 
periods.
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    \3\ Securities Exchange Act Release No. 33067 (October 19, 
1993), 58 FR 57658 (October 26, 1993) (File No. SR-Phlx-92-23).
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    The Exchange amended the SQF last year \4\ to reduce the number of 
strikes considered active by: (1) Eliminating from the definition of 
active strikes those series with open interest that have not traded 
within the previous five trading days, but nevertheless requiring a 
closing quotation; (2) ``de-activating'' strikes intra-day that no 
longer fit the definition of active; and (3) redefining around-the-
money active strikes as the five options with an approximate 10, 20, 
30, 40 and 50 delta, instead of those four above and four below the 
spot price. This change was precipitated by volatility in the foreign 
currency markets causing dramatic fluctuation in foreign currency 
exchange rates, and, in turn, the addition of many strike prices to 
accommodate the new trading ranges of the underlying currencies. 
Therefore, the changes were intended to alleviate this burden and to 
improve the timeliness and accuracy of FCO quotes.
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    \4\ See, supra note 1.
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    In building system enhancements to implement this change, testing 
revealed that the delta-based around-the-money strikes did not most 
accurately capture around-the-money interest and was not the most 
efficient or simple method of determining those strikes, as originally 
contemplated by the FCO floor. The Exchange had previously sought to 
define active strikes using deltas, in order to correspond to the 
terminology used by traders and to capture strikes of certain 
volatilities, which was an improvement upon having a set number. During 
testing, it was determined that the definition of around-the-money 
strikes be revisited, resulting in the proposal at hand.
    The proposal at hand redefines around-the-money active strikes as 
two in-the-money strikes and six out-of-the-money strikes for both puts 
and calls. The purpose of this change is to more accurately reflect the 
most active series for dissemination of the most significant and 
meaningful quotes. FCO floor representatives determined that the 10-50 
delta range did not necessarily incorporate such strikes. Each morning, 
under the proposal, the SQF would set eight calls and eight puts for 
each FCO expiration month. Previously, under the delta-based method, at 
least ten series were activated, and, in certain cases, more than five 
strikes out-of-the-money were required to capture the 50 delta and less 
than five captured the 50 delta in-the-money. Thus, based on specialist 
experience, the ``two in the six out-of-the-money'' definition garners 
those strikes that are active daily and have the most trading interest. 
Furthermore, preliminary testing revealed that 10% fewer strikes in the 
sample were activated under the new definition. Therefore, the Exchange 
does not believe that the number of resulting strikes should differ 
significantly from the delta-based method. The actual number for each 
FCO depends upon the fluctuations in the underlying currency. Likewise, 
the Exchange believes that the ``two in and six out'' method is easier 
to discern for customers, floor traders, Exchange staff, and vendors 
alike.
    Rule 1012, Commentary .04 establishes the minimum strikes to be 
activated, thus permitting the Exchange to designate other strikes as 
active. In this regard, the Exchange proposes to add the language ``at 
minimum'' to the Advice, for consistency with Rule 1012. In 
implementing the ability to activate other strikes, the Exchange has 
also designated as active all expiration months (except long-term) and 
around-the-money European style options. Activating expiration months 
other than the first three months became necessary due to complex 
system needs related to disseminating implied volatility levels using 
an outside vendor. Activation of around-the-money strikes is currently 
needed in all months to continue disseminating these levels under 
existing system configurations. With respect to end-of-month FCOs, only 
the first three expiration months are currently activated. Further, 
European style options are treated the same as American style options 
by the SQF system, such that the around-the-money definition activates 
the same strikes. The Exchange notes that these changes were 
implemented by FCO Committee representatives to facilitate the smooth 
operation of the SQF, and this proposal codifies this result by adding 
the permissive language from the Rule into the Advice.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 \5\ of the Act in general, and in particular, with 
Section 6(b)(5),\6\ 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

[[Page 49517]]

public interest. Specifically, the Exchange believes the proposal 
promotes just and equitable principles of trade by facilitating 
speedier dissemination of FCO markets. Although the proposal may, but 
does not necessarily, result in a greater number of active strikes, the 
Exchange believes that any additional activation of strikes is 
necessary to ensure that SQF dissemination includes truly active 
strikes. Thus, the proposal balances the need to prevent excessive 
quote disseminations with preserving meaningful dissemination of FCO 
quotes. The proposal is also designed to facilitate coordination 
between the Exchange, the Options Clearing Corporation (``OCC''), OPRA 
and securities information vendors. A quote will always be disseminated 
when a trade occurs in a previously-inactive series and quotes in 
inactive series can always be requested from the trading crowd, 
consistent with the protection of investors and the public interest. In 
sum, 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).
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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(50).
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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

    No written comments were either solicited or received.

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 reasons for so finding or (ii) as to 
which the Phlx 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 in the 
Commission's Public Reference Section, 450 Fifth Street, NW, 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the Phlx. All 
submissions should refer to File No. SR-Phlx-96-39 and should be 
submitted by October 11, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-24168 Filed 9-19-96; 8:45 am]
BILLING CODE 8010-01-M