[Federal Register Volume 62, Number 124 (Friday, June 27, 1997)]
[Notices]
[Pages 34731-34733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16913]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38752; File No. SR-Phlx-97-16]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to Option Quote Spread 
Parameters

June 20, 1997.

I. Introduction

    On April 2, 1997, the Philadelphia Stock Exchange, Inc., (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') 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 relating to option quote spread parameters. 
The proposed rule change was published for comment in Securities 
Exchange Act Release No. 38576 (May 6, 1997), 62 FR 25985 (May 12, 
1997). The Commission received no comment letters in response to the 
proposal.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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II. Description of the Proposal

    The purpose of the proposed rule change is to update the Exchange's 
equity and index option quote spread parameters, in view of the 
parameters applicable on other options exchanges. First, the Exchange 
is proposing 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

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spread parameters of the other options exchanges.\3\
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    \3\ See Amex Rule 958(c)(i); CBOE Rule 8.7(b)(iv); NYSE Rule 
758(b)(i)(c)(1); and PSE Rule 6.37(b)(1).
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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. Specifically, for equity options only, the maximum 
quote spread for in-the-money series\4\ 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 options series is $7, the applicable 
maximum quote spread is \1/2\, but under the proposed language, the 
parameter would be $1, which is the spread in the underlying security.
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    \4\ 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.
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    Previously, the other options exchanges adopted rules to allow the 
quote spread for in-the-money series to reflect the quote spread for 
the underlying security on the primary market.\5\ Phlx recently 
determined that the increase in the number of multiply-traded options 
necessitated amending Exchange rules to achieve consistency with the 
rules of the other exchanges and to promote competition in multiply-
traded options.\6\ The Exchange believes that this proposal is a 
reasonable response to such market conditions and consistent with the 
rules of other exchanges.
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    \5\ See Securities Exchange Act release Nos. 26924 (June 13, 
1989), 54 FR 26284; 27235 (September 11, 1989), 54 FR 38580; 27471 
(November 24, 1989), 54 FR 50299; 28218 (July 18, 1990), 55 FR 30058 
(orders approving proposed rule changes by the Chicago Board Options 
Exchange, American Stock Exchange, Pacific Stock Exchange, and New 
York Stock Exchange, respectively, relating to certain options bid/
ask differentials).
    \6\ Telephone conversation with Edith Hallihan, Phlx, and Peggy 
Blake, Division of Market Regulation, Commission (June 17, 1997).
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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.\7\ Because the Exchange is proposing to amend an Advice to which a 
fine pursuant to the minor rule plan applies, it follows that the minor 
rule plan will incorporate this amendment.\8\ 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 different quote spread parameters 
during such fast market conditions are not a violation of Advice F-
6.\9\
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    \7\ 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.
    \8\ 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.
    \9\ 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,\10\ in that it is designed to promote just and equitable 
principles of trade, prevent fraudulent and manipulative acts and 
practices, as well as to protect investors and the public interest.
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    \10\ 15 U.S.C. Sec. 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 wider 
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, consistent with the objectives of the Act, by 
preventing fraudulent and manipulative acts and practices and 
protecting investors and the public interest.

III. Discussion

    The Commission believes Phlx's proposed rule change is consistent 
with Section 6(b)(5) of the Act.\11\ 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 system, and, in general--to further investor 
protection and the public interest.\12\
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    \11\ 15 U.S.C. Sec. 78f(b)(5).
    \12\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. Sec. 78c(f).
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    Phlx is proposing to eliminate the maximum quote spread of \1/8\ 
for equity and index options where the bid is less than $.50, resulting 
in a maximum quote spread of \1/4\ of such options where the bid is 
less than $2.00. The Commission believes the proposed rule change will 
reduce investor confusion by bringing Phlx's rules into conformity with 
the quote spread parameter rules of other options exchange. The 
Commission believes such uniformity will result in less competitive 
disparity among the options exchanges, thereby promoting just and 
equitable principles of trade.
    The Commission also believes it is reasonable to permit in-the-
money options quotations to reflect the quote spread for the underlying 
security on the primary market. The other options exchanges have such 
rules in place and the Commission believes that Phlx's adoption of an 
identical rule will create consistency, eliminate confusion in trading 
of equity options, and does not present any novel or unique regulatory 
issues. Furthermore, the Commission believes that such a rule is 
appropriate as it will facilitate Phlx's ability to compete in trading 
of multiply-traded options by allowing Phlx the same opportunity as the 
other options exchanges to widen quote spread parameters in equity 
options to reflect the market in the underlying security. The 
Commission notes that the proposal establishes maximum allowable quote 
spread and this portion of the proposal applies solely to in-the-money 
equity options. The Commission expects Phlx's to allow the use of the 
maximum quote spreads only where market conditions justify their 
application. Further, the Commission notes that under Phlx Rule 1014, 
Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders, specialists' transactions should constitute a course 
of dealings reasonably calculated to contribute to the maintenance of a 
fair and orderly market. Accordingly, the Commission expects the Phlx 
to monitor trading in in-the-money equity options affected by the 
proposal to ensure that market makers are meeting their obligations to 
maintain fair and orderly markets.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-Phlx-97-16) be and 
hereby is approved.
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    \13\ 15 U.S.C. Sec. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16913 Filed 6-26-97; 8:45 am]
BILLING CODE 8010-01-M