[Federal Register Volume 62, Number 91 (Monday, May 12, 1997)]
[Notices]
[Pages 25985-25986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12352]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38576; File No. SR-Phlx-97-16]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Relating To Option Quote 
Spread Parameters

May 6, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),1 notice is hereby given that on April 2, 1997, 
the Philadelphia Stock Exchange Inc., (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by Phlx. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to Rule 19b-4 of the Act,2 Phlx proposes to 
amend the maximum bid/ask differentials (i.e., quote spread parameters) 
applicable to equity and index options. Specifically, the Exchange 
proposes to amend Rule 1014 (c)(i)(A) and Floor Procedure Advice 
(``Advice'') F-6, Option Quote Parameters, by eliminating the \1/8\ 
maximum quote spread currently applicable to options where the bid is 
less than $.50. As a result, the maximum quote spread for equity and 
index options where the bid is less than $2.00 will be \1/4\.
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    \2\ 17 CFR 240.19b-4.
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    The Exchange also proposes to adopt a provision enabling the 
maximum quote spread in an equity option to be widened with regard to 
in-the-money series where the market for the underlying security is 
wider than the differentials set forth in the chart below. For such 
series, the bid/ask differential may be as wide as the quotation for 
the underlying security on the primary market.
    The following chart summarizes the proposed option quote spread 
parameters with additions italicized and deletions in brackets:

------------------------------------------------------------------------
                                                                 Maximum
                         Equity option                            quote 
                                                                 spread 
------------------------------------------------------------------------
Less than [$.50...............................................   [\1/8\]
$.50 to less than] $2.00......................................     \1/4\
$2.00 to less than $5.00......................................     \3/8\
$5.00 to less than $10.00.....................................     \1/2\
$10.00 to less than $20.00....................................     \3/4\
$20.00 and greater............................................         1
------------------------------------------------------------------------

    The bid/ask differentials stated above shall not apply to in-the-
money series where the market for the underlying security is wider than 
the differentials set forth above. For such series, the bid/ask 
differentials may be as wide as the quotation for the underlying 
security on the primary market.
    The complete text of the proposed rule change is attached as 
Exhibit B to file No. SR-Phlx-97-16.3
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    \3\ Complete copies of the proposed rule change and Exhibit B 
are available for review at the primary office of the Phlx, and in 
the Public Reference Room at the Commission.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Phlx included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Phlx 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, the Proposed Rule Change

    Quote spread parameters govern the width of market quotations, 
establishing a maximum width based on the option bid.\4\ Currently, 
Rule 1014(c)(i)(A) and Advice F-6 contain the quote spread parameters 
applicable to equity and index options.
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    \4\ For example, if the maximum quote spread for an equity 
option is \1/4\, then the following is an acceptable quotation: 1\1/
4\--1\1/2\.
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    This proposal is intended to update the Exchange's option quote 
spread parameters, in view of the parameters applicable on other option 
exchanges. The first aspect of the proposal is to eliminate the maximum 
quote spread of \1/8\, currently applicable to options where the bid is 
less than $.50, such that the maximum quote spread for options where 
the bid is less than $2.00 will be \1/4\. This is identical to the 
quote spread parameters of the other options exchanges.\5\
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    \5\ See e.g., Amex Rule 958(c)(i); and CBOE Rule 8.7(b)(iv).
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    Second, the proposal is intended to recognize that in certain 
market conditions, the existing parameters are too restrictive and 
should not apply. More specifically, for equity options only, the 
maximum quote spread for in-the-money series \6\ where the market for 
the underlying security is wider, the applicable parameter may be as 
wide as the quotation for the underlying security on the primary 
market. For instance, where the market for the underlying security is 
20-21, and the bid for an in-the-money series is $7, the applicable 
maximum quote spread should be \1/2\, but under the proposed language, 
the parameter would be $1, which is the spread in the underlying 
security. The Exchange believes that this proposal is a reasonable 
response to market conditions and consistent with the rules of other 
exchanges.\7\
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    \6\ In-the-money series are defined as those series where, in 
the case of a call option, the current market price of the stock is 
higher than the strike price, or, in the case of a put, the current 
market price of the stock is lower than the strike price.
    \7\ See supra note 5.
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    The Exchange notes that a violation of the maximum quote spread 
parameter may result in a fine pursuant to Options Floor Procedure 
Advice (``Advice'') F-6.\8\ Because the Exchange is proposing to amend 
an Advice to which a fine pursuant to the minor rule applies, it 
follows that the minor rule plan will incorporate this amendment.\9\ It 
should be noted, however, that quote spread parameters are not 
applicable during fast market conditions, pursuant to Floor Procedure 
Advice F-10, Extraordinary Market Conditions, and

[[Page 25986]]

different quote spread parameters are not a violation of Advice F-
6.\10\
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    \8\ Violations of Advice F-6 may result in the issuance of a 
fine pursuant to the Exchange's minor rule violation enforcement and 
reporting plan (``minor rule plan''). For fine schedule, see Exhibit 
B of File No. SR-PHLX-97-16.
    \9\ The Phlx's minor rule plan, codified in Phlx Rule 970, 
contains floor procedure advices, such as Advice F-6, with 
accompanying fine schedules. Exchange Act Rule 19d-1(c)(2) 
authorizes national securities exchanges to adopt minor rule 
violation plans for summary discipline and abbreviated reporting; 
Exchange Act Rule 19d-1(c)(1) requires prompt filing with the 
Commission of any final disciplinary actions. However, minor rule 
violations not exceeding $2,500 are deemed not final, thereby 
permitting periodic, as opposed to immediate, reporting.
    \10\ Advice F-10 states that, in the interest of a fair and 
orderly market, two floor officials may declare a ``fast market,'' 
during which displayed quotes are not firm and the volume guarantees 
of Advice A-11 are not applicable; nevertheless, best efforts are 
required to display quotes and fill orders.
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    The Exchange believes that the proposed rule change is necessary in 
light of competitive conditions, and consistent with Section 6(b)(5) of 
the Act,\11\ in that it is designed to promote just and equitable 
principles of trade, prevent fraudulent and manipulative acts and 
practices, as well as protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes the proposal should facilitate 
the market making function by adjusting the quote spread parameter to 
reflect the market for the underlying security and current market 
conditions, thereby promoting just and equitable principles of trade. 
Although the proposed quote spread parameters may result in wide quotes 
in certain circumstances, the Exchange believes that such quote spread 
parameters are nevertheless reasonable, in line with other options 
exchanges, and continue to perform a regulatory function in the options 
marketplace, which is consistent with the objectives of the Act, by 
preventing fraudulent and manipulative acts and practices and 
protecting investors and the public interest.

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

    Comments were neither solicited nor 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 or 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 
inspections and copying at the principal office of Phlx. All 
submissions should refer to File No. SR-Phlx-97-16 and should be 
submitted by June 2, 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. 97-12352 Filed 5-9-97; 8:45 am]
BILLING CODE 8010-01-M