[Federal Register Volume 62, Number 105 (Monday, June 2, 1997)]
[Notices]
[Pages 29756-29758]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14283]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38671; File No. SR-PHLX-97-04]


Self-Regulatory Organizations; Order Partially Approving and 
Granting Accelerated Approval of Amendment No. 2 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 Option Trading Rotation Procedures

May 23, 1997.

I. Introduction

    On January 8, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ On January 29, 1997, the Exchange filed Amendment No. 1 
to the rule proposal.\3\ On April 4, 1997, the Exchange filed Amendment 
No. 2 to the proposed rule change.\4\ On April 23, the Exchange filed 
Amendment No. 3 to the proposed rule change.\5\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Theresa McCloskey, Exchange, to Janice Mitnick, 
Commission, dated January 29, 1997. Amendment No. 1 is a technical 
amendment, correcting rule language in Rule 1047, Commentary .03(c), 
which was submitted as Exhibit B with the rule filing.
    \4\ Letter from Philip H. Becker, Exchange, to Michael A. 
Walinskas, Commission, dated April 4, 1997. Amendment No. 2 proposes 
a 4:02 p.m. close of trading for narrow-based index options and 
modifies option trading rotation procedures. Amendment No. 2 
originally contained a proposal modifying Exchange index option 
exercise cut-off procedures. However, this proposal was resubmitted 
in Amendment No. 3, constituting a withdrawal of such proposal from 
Amendment No. 2.
    \5\ File No. SR-PHLX-97-04, Amendment No. 3, dated April 22, 
1997. Amendment No. 3 proposes to amend Rule 1042A and Floor 
Procedure 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 
trading is closed at a time other than the regular close of trading) 
to five minutes after the close of trading. The proposal also 
deletes the current requirement that member organizations must 
accept exercise instructions until 4:15 p.m. each business day.

---------------------------------------------------------------------------

[[Page 29757]]

    Notice of the substance of the proposed rule change and Amendment 
No. 1 was provided by issuance of a release \6\ and by publication in 
the Federal Register.\7\ Notice of the substance of Amendment Nos. 2 
and 3 was provided by issuance of a release \8\ and by publication in 
the Federal Register.\9\ One comment letter was received.\10\ This 
order partially approves the proposed rule change. Specifically, this 
order approves the originally filed proposal that establishes a 4:02 
p.m. close of trading for equity options, Amendment No. 1, a technical 
amendment to the originally filed proposal, and Amendment No. 2, which 
proposes a 4:02 close of trading for narrow-based index options and 
modifies option trading rotation procedures.\11\
---------------------------------------------------------------------------

    \6\ Securities Exchange Act Release No. 38218 (January 30, 
1997).
    \7\ 62 FR 5662 (February 6, 1997).
    \8\ Securities Exchange Act Release No. 38554 (April 29, 1997).
    \9\ 62 FR 24529 (May 5, 1997).
    \10\ Letter from Michael Schwartz, Committee On Options 
Proposals, dated January 10, 1997.
    \11\ In partially approving the Exchange proposal, the 
Commission is not approving at this time Amendment No. 3 to the 
proposal. The comment period for Amendment No. 3 expires on May 26, 
1997. See supra n. 9.
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to amend Rule 101 to close equity and narrow-
based index options trading at 4:02 p.m. Currently, both equity and 
narrow-based index options trade until 4:10 p.m.
    The Exchange also proposes to amend Rule 1047 to permit two floor 
officials to approve a trading rotation after the normal close of 
trading. Currently, authority to determine that a final trading 
rotation is needed to assure a fair and orderly market rests with the 
Options Committee.
    The Exchange also proposes to amend Rules 1047 and 1047A to amend 
the notification requirement that applies to trading rotations 
conducted after the close of trading. Currently, notice of a trading 
rotation held as a result of unusual market conditions must be 
disseminated to the floor by the close of trading. This effectively 
requires the Exchange to decide whether it is going to conduct a 
trading rotation before the close of trading. The proposal eases this 
strict provision by only requiring that advance notice of a rotation be 
disseminated and that the rotation not commence until five minutes 
after dissemination of the notice.
    The Exchange also proposes to amend, pursuant to Amendment No. 3 to 
the proposal, Rule 1042A and Floor Procedure 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 trading is closed 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 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 index options (which close at 
4:15 p.m.) would be 4:20 p.m. The proposal, pursuant to Amendment No. 
3, also deletes the current requirement that member organizations must 
accept exercise instructions until 4:15 p.m. each business day.
    The Commission received one comment letter regarding this 
proposal.\12\ The commenter generally supports a 4:02 p.m. close of 
trading for equity and narrow-based index options.\13\ The commenter 
also supports the Exchange's proposed Amendment No. 3, which would 
amend the Exchange's narrow-based index exercise cut-off time to expire 
five minutes after the close of trading.
---------------------------------------------------------------------------

    \12\ See supra n. 10.
    \13\ The American Stock Exchange, Inc. (``Amex''); Chicago Board 
Options Exchange, Inc. (``CBOE''); Pacific Exchange, Inc. (``PCX''); 
and New York Stock Exchange, Inc. (``NYSE'') have all amended their 
rules to implement a 4:02 p.m. close for equity and narrow-based 
index options. See Release No. 34-38640 (May 14, 1997) (order 
approving Amex rule change), Release No. 34-38643 (May 14, 1997) 
(order approving CBOE rule change), Release No. 34-38641 (May 14, 
1994) (order approving NYSE rule change), and Release No. 34-38642 
(May 14, 1997) (order approving PCX rule change).
---------------------------------------------------------------------------

III. Discussion

    The Commission finds that those portions of the proposed rule 
change that establish a 4:02 p.m. close of trading for equity and 
narrow-based index options and modify option trading rotation practices 
are consistent with the requirements of the Act, and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, Section 6(b)(5).\14\ Section 6(b)(5) requires, 
among other things, that the rules of an exchange be designed to 
promote just and equitable principles of trade, perfect the mechanism 
of a free and open national market, and, in general, to further 
investor protection and the public interest.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. Sec. 78f(b)(5). The Commission is not, at this 
time, approving or making any findings with regard to Amendment No. 
3 to the proposal.
---------------------------------------------------------------------------

    The Commission believes that it is reasonable for the Exchange to 
amend its rules to close trading in equity and narrow-based index 
options at 4:02 p.m., versus the existing 4:10 p.m. close. Changing the 
closing time for these options to 4:02 p.m. preserves the Exchange's 
stated need to continue trading options for some period of time after 
the close of trading in the underlying securities. The Exchange has 
stated that this two minute extension from the close of the stock 
markets will allow options traders to respond to late reports of 
closing prices over the consolidated tape, thereby bringing options 
quotes into line with the closing price of the underlying security. Due 
to technological advances, these delays have now been reduced, but have 
not been completely eliminated. The Exchange believes that two minutes 
of options trading after the underlying equities close is sufficient to 
bring options quotes into line with the closing price of the underlying 
security.
    In determining an appropriate closing time, the Exchange has also 
considered the problems that might result when the Exchange remains 
open after the close of the primary exchange for the underlying stocks. 
The Exchange states that the existing 4:10 options trading close, 
providing ten minutes of options trading after the underlying equities 
have closed, often results in automatic executions of options at 
outdated prices. The Exchange also states that, like equity options, 
narrow-based index options are sensitive to changes in the underlying 
equities prices. Further, the Exchange states that not all market 
participants are able to respond quickly to changes in equity options 
prices between 4:00 and 4:10 p.m.
    Therefore, the Commission finds that a closing time of 4:02 p.m. 
for equity and narrow-based index options is a reasonable means to 
address the Exchange's desire to balance the need for some extended 
trading period after the underlying markets have closed with the need 
to prevent negative impact from equity and narrow-based index options 
trading without the pricing benefit of continuing stock trading.
    The Commission also believes that it is reasonable for two Exchange 
floor officials to determine to commence a trading rotation due to 
unusual market conditions, rather than the Options Committee. The 
Exchange states such ``unusual market conditions'' include a situation 
where an underlying stock has not stopped printing transaction prices 
by the time of the options trading close. This change provides the 
Exchange a more flexible decision making

[[Page 29758]]

mechanism for determining whether to conduct a trading rotation. A full 
Options Committee determination may not be possible or practical under 
many market circumstances. The Commission notes that the CBOE and the 
Amex do not require full committee approval for conducting a trading 
rotation.\15\
---------------------------------------------------------------------------

    \15\ See CBOE Rule 6.2, Interpretations and Policies .02; and 
Amex Rule 1, Commentary .02.
---------------------------------------------------------------------------

    The Commission also believes that it is reasonable to amend the 
rules of the Exchange to alter the notification procedure for trading 
rotations to permit notice of such rotations to be disseminated after 
the close of trading. Currently, notice of a trading rotation must be 
disseminated to the floor by the close of trading. The Exchange's 
proposal would require that a trading rotation not commence until five 
minutes after dissemination of the notice of the rotation. The 
Commission notes that the CBOE and the PCX require a five minute notice 
period prior to a trading rotation and permit trading rotation notice 
to be given after the close of trading.\16\
---------------------------------------------------------------------------

    \16\See CBOE Rule 6.2, Interpretations and Policies .02; and PCX 
Rule 6.64, Commentary .01.
---------------------------------------------------------------------------

    It is contemplated that the Exchange will implement this rule 
change on or about June 23, 1997.\17\
---------------------------------------------------------------------------

    \17\ Phone conversation between Edith Hallahan, Exchange and 
Janice Mitnick, Commission, on May 23, 1997.
---------------------------------------------------------------------------

    The Exchange has requested that the portion of the proposed rule 
change that establishes a 4:02 p.m. close of trading for narrow-based 
index options and modifies option trading rotation practices be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.\18\ 
The Commission finds good cause for approving this portion of the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. The Commission 
notes that it has approved a 4:02 p.m. close for equity and narrow-
based index options for the Amex, CBOE, NYSE, and PCX.\19\ The Amex, 
CBOE and PCX rule filings were published in the Federal Register \20\ 
and were subject to a full notice and comment period. One comment 
letter supporting the proposals was received.\21\ Further, as stated 
above, the Commission notes that the proposal regarding option trading 
rotation practices are similar to the current practices of the Amex and 
PCX.\22\ Accordingly, the Commission believes, consistent with Section 
6(b)(5) of the Act, that good cause exists to approve this portion of 
the proposed rule change on an accelerated basis.
---------------------------------------------------------------------------

    \18\ Letter from Philip H. Becker, Exchange, to Michael 
Walinskas, Commission, dated May 22, 1997 (requesting acceleration 
of narrow-based index options 4:02 p.m. close); phone conversation 
between Edith Hallahan, Exchange and Janice Mitnick, Commission, on 
May 23, 1997 (requesting acceleration of option trading rotation 
practices provision).
    \19\ See supra n.13.
    \20\ See SR-AMEX-96-45, Release No. 34-38123 (January 6, 1997), 
62 FR 1786 (January 13, 1997); SR-CBOE-96-71, Release No. 34-37988 
(November 26, 1996), 61 FR 64405 (December 4, 1996); and SR-PSE-96-
41, Release No. 34-37920 (November 4, 1996), 61 FR 58434 (November 
14, 1996).
    \21\ See supra n.10.
    \22\ See supra n.16.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act, and, in particular, Section 6 of 
the Act.
    It is therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that those portions of the proposed rule change that establish 
a 4:02 p.m. close of trading for equity and narrow-based index options 
and modify option trading rotation practices (SR-PHLX-97-04) are hereby 
approved.

    \23\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
---------------------------------------------------------------------------

    \24\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14283 Filed 5-30-97; 8:45 am]
BILLING CODE 8010-01-M