[Federal Register Volume 62, Number 86 (Monday, May 5, 1997)]
[Notices]
[Pages 24529-24531]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11605]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38554; File No. SR-Phlx-97-04]


Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 
2 and 3 to a Proposed Rule Change by the Philadelphia Stock Exchange, 
Inc., Establishing a 4:02 p.m. Closing Time for Equity and Narrow-Based 
Index Options Trading, and Modifying the Index Option Exercise Cut-off 
Time

April 29, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on April 4, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') Amendment No. 2 to the proposed rule change.\3\ On 
April 23, the Exchange filed Amendment No. 3 to the proposed rule 
change. The proposed rule change, as amended, is described in Items 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 Amendment Nos. 2 and 3 from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change, including Amendment No. 1, was 
previously noticed in the Federal Register. See 62 FR 5662 (February 
6, 1997). Amendment No. 1 is a technical amendment to the rule 
filing. See letter from Theresa McCloskey, Exchange to Janice 
Mitnick, Commission, dated January 29, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    In the original rule filing, as amended by Amendment No. 1, the 
Exchange proposes to amend the rules of the Exchange to close equity 
options trading at 4:02 p.m. In Amendment No. 2, the Exchange proposes 
to amend Rule 101 to adopt a 4:02 p.m. trading close for narrow based 
index options \4\ and amend Rule 1047 to permit two floor officials to 
approve a trading rotation after the normal close of trading.
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    \4\ Rule 1042A, 1047A and 1101A(c), and Floor Procedure Advice 
G-2 will also be amended to conform to a 4:02 p.m. close for the 
narrow-based index options.
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    In Amendment No. 3, the Exchange proposes to amend Rule 1042A and 
Floor Procedure Advice G-1 (``Advice G-1'') to change the index option 
exercise cut-off time from 4:30 p.m. (or 15 minutes after the close of 
trading if it occurs at a time other than the regular close of trading) 
to five minutes after the close of trading. Thus, the exercise cut-off 
time applicable to narrow-based (industry) index options proposed to 
close at 4:02 p.m. would be 4:07 p.m., and the cut-off time applicable 
to broad-based (market) index options closing at 4:15 p.m. would be 
4:20 p.m. The proposal also deletes the current requirement that member 
organizations must accept exercise instructions until 4:15 p.m. each 
business day.
    The text of the proposed rule change is available at the Office Of 
the Secretary, Phlx, and at the Commission.

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, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, Proposed Rule Change

1. Purpose
    Since 1978, equity options have traded ten minutes longer than the 
primary market. At that time, significant delays in the reporting of 
stock prices were common; therefore, the additional ten minute period 
was necessary to receive final stock prices. These delays have now been 
reduced due to technological advances. Currently, the extra time period 
for options trading after closing prices are reported in the underlying 
equities results in equity options and narrow-based index options \5\ 
trading without the pricing benefit of continuing stock trading. The 
additional ten minutes also results in repeated automatic executions at 
outdated options prices. Further, not all market participants are able 
to respond

[[Page 24530]]

quickly to changes in options prices between 4 and 4:10 p.m. In 
summary, the Exchange, in balancing the benefits of an extended trading 
session with the difficulties of trading after the underlying stock has 
closed, has determined that the benefits do not outweigh the 
difficulties; therefore, a 4:02 p.m. close for equity and narrow-based 
index options is appropriate.
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    \5\ Like equity options, narrow-based index options are 
sensitive to changes in the underlying equities prices. Telephone 
conversation between Edith Hallahan, Exchange and Janice Mitnick, 
Commission on April 28, 1997. See also Amendment No. 2.
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    The purpose of the rule change is to reduce the amount of time 
equity and narrow-based index options trade after the close of the 
primary market for the underlying security. Under the proposal, there 
will be a two minute time period for equity and narrow-based index 
options traders and investors to respond to late reports of closing 
security prices and, where warranted, to bring closing equity and 
narrow-based index option prices in line with stock prices. The 
proposed changes establish a 4:02 p.m. close for equity and narrow-
based index options, and expressly except broad-based index options. 
Broad-based index options will continue to trade until 4:15 p.m.
    Phlx proposes, pursuant to Amendment No. 2, to permit two floor 
officials to approve a trading rotation due to unusual market 
conditions. Currently, Rule 1047, Commentary .03(b) provides that the 
Options Committee may determine to commence a trading rotation (even 
resulting in transactions after the normal close of trading) due to 
unusual market conditions. Where an underlying stock has not stopped 
printing transaction prices by 4:10 p.m. (or, as proposed, 4:02 p.m.), 
this would be considered and unusual market condition, and a rotation 
may be needed in order to establish closing prices.
    Notice of such a trading rotation must currently be disseminated to 
the trading floor by the close of trading (4:10 p.m.). It may be 
impractical to expect floor officials to be able to approve a final 
rotation at the close and also have this information disseminated 
within the same minute. It may become even more impractical with a 4:02 
p.m. close. Thus, the Exchange proposes that notice of the rotation 
need not be required by the close. The rule will still require that 
notice of the rotation be disseminated and that the rotation not 
commence until five minutes \6\ after such dissemination. Although the 
comparable American Stock Exchange, Inc. (``Amex'') provision currently 
requires that notice of a rotation must be disseminated to the trading 
floor by 4:10 p.m.,\7\ the Chicago Board Options Exchange, Inc. 
(``CBOE'') and Pacific Stock Exchange (``PCX'') merely require that 
rotations after 3:30 p.m. be announced to the trading floor, and 
rotations after the normal close of trading not commence until five 
minutes after notice is disseminated.\8\
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    \6\ Currently, Rule 1047, Commentary .03(b) requires that a 
trading rotation not commence until 10 minutes after the notice is 
disseminated. The rule filing proposes to shorten the 10 minutes to 
5 minutes.
    \7\ See Amex Rule 1, Commentary .02(2).
    \8\ See CBOE Rule 6.2, Interpretations and Policies .02; PCX 
Rule 6.64, Commentary .01.
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    Amendment No. 3 proposes to change the index option exercise cut-
off time by amending Rule 1042A and Advice G-1. Currently, Rule 1042A 
requires that a memorandum to exercise any American style index option 
must be received or prepared by the Phlx member organization no later 
than 4:30 p.m. (or 15 minutes after the close of trading, if trading is 
closed at a time other than the regular close of trading).\9\ Further, 
Rule 1042A(a)(ii) requires the submission of an Exercise Advice Form to 
the Exchange when exercising American style index option contracts.\10\
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    \9\ Securities Exchange Act Release No. 37077 (April 5, 1996), 
61 FR 16156 (April 11, 1996) (SR-Phlx-95-86).
    \10\ These requirements are currently not in effect on the last 
business day before expiration, pursuant to Rule 1042A(b). Nor are 
they applicable to European-style index options, which by definition 
cannot be exercised prior to expiration.
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    After proposing the 4:02 p.m. close for narrow-based index options 
in Amendment No. 2, Phlx re-examined the reference in Rule 1042A that 
provides a 4:30 p.m. cut-off time for American-style narrow-based index 
options. The Exchange now proposes an exercise cut-off time of five 
minutes after the close of trading for all narrow-based index options. 
The purpose of this proposal is to re-establish a cut-off time similar 
to that of the other options exchanges.
    The Exchange is also proposing to amend Rule 1042A to delete the 
requirement that member organizations must accept exercise instructions 
until 4:15 p.m. each business day. Under the proposal, member 
organizations can establish earlier cut-off times. The purpose of this 
change is to reflect, similarly to the other options exchanges, that 
member organizations may determine how to best comply with the 
Exchange's exercise cut-off time.
2. Statutory Basis
    The proposed rule change 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, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, as 
well as to protect investors and the public interest, consistent with 
Section 6(b)(5).

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    One written comment was received.\11\
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    \11\ See letter to John F. Wallace, Chairman, Phlx, from Jeffrey 
S. Yass, Susquehanna Investment Group, dated April 9, 1997.
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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 self-regulatory organization 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 Amendment Nos. 2 and 3. 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. Sec. 552, will be available for inspection and 
copying at the Commission's Public Reference

[[Page 24531]]

Room. Copies of such filing will also be available for inspection and 
copying at the principal office of the Exchange. All submissions should 
refer to File No. SR-Phlx-97-04, and should be submitted by May 27, 
1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-11605 Filed 5-2-97; 8:45 am]
BILLING CODE 8010-01-M