[Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
[Notices]
[Pages 29287-29288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14023]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40007; File No. SR-PHLX-98-12]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. to Trade Options in Narrower Increments

May 19, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 22, 1998, the 
Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Exchange has designated the proposed rule change as constituting a 
``non-controversial'' rule change under paragraph (e)(6) of Rule 19b-4 
under the Act \2\ which renders the proposal effective upon receipt of 
this filing by the Commission.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 17 15 U.S.C. 78s(b)(1).
    \2\ CFR 240.19b-4(e)(6).
    \3\ The Exchange has represented that the proposed rule change: 
(i) Will not significantly affect the protection of investors or the 
public interest; (ii) will not impose any significant burden on 
competition; and (iii) will not become operative for 30 days after 
the date of this filing, unless otherwise accelerated by the 
Commission. The Exchange also has provided at least five business 
days notice to the Commission of its intent to file this proposed 
rule change, as required by Rule 19b-4(e)(6) under the Act. Id.
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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 permit 
Phlx index and equity options to be traded in narrower increments. 
Specifically, Rule 1034 is proposed to be amended to give the Board of 
Governors the authority to establish the minimum trading increments for 
index and equity options contracts.
    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, the Proposed Rule Change

1. Purpose
    Currently, Rule 1034 provides that the minimum fractional change 
for options trading under $3.00 is one-sixteenth and for options 
trading at $3.00 or higher, one-eighth. In the case of LEAPS \4\ on the 
Value Line Composite Index, Rule 1034 provides that the minimum 
fractional change is one-eighth point in option contracts trading at 
$5.00 per index option or higher, and one-sixteenth point in option 
contracts trading below $5.00 per index option. In response to recent 
industry events,\5\ the Exchange has determined that Rule 1034 be 
changed to permit Phlx index and equity options to be traded in 
narrower increments. Specifically, Rule 1034 is proposed to be amended 
to give the Board of Governors the authority to establish the minimum 
trading increments for index and equity option contracts. Until such 
time as the Board of Governors determines to use its authority to 
establish the minimum fractional shares, current standards will apply.
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    \4\ See Phlx Rule 1101A(b)(iii).
    \5\ See Securities Exchange Act Release Nos. 38571 (May 5, 
1997), 62 FR 25682 (May 9, 1997) (Order approving SR-Amex-97-14, 
relating to trading equity securities in sixteenths); 38678 (May 27, 
1997), 62 FR 30363 (June 3, 1997) (Order approving SR-NASD-97-27, 
relating to trading certain equity securities in sixteenths); 38897 
(August 1, 1997), 62 FR 42847 (August 8, 1997) (Order approving SR-
NYSE-97-21, relating to trading equity securities in sixteenths); 
and 38779 (June 26, 1997), 62 FR 36328 (July 7, 1997) (Order 
approving SR-Phylx-97-27, relating to trading equity securities in 
sixteenths).
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    The proposal is intended to achieve uniformity with the rules of 
other options exchanges.\6\ The amendments should also improve the 
Exchange's ability to promptly response to market changes in trading 
increments. The proposal will allow the Exchange to revise its minimum 
fractional changes quickly in response to changes adopted in the 
minimum trading increments in the markets for securities underlying 
Phlx options or to changes in the minimum trading increments for one of 
the other options exchanges. When the Board of Governors determines to 
change the trading increments, the Exchange will designate such change 
as a stated policy, practice, or interpretation with respect to the 
administration of Rule 1034 within the meaning of subparagraph (3)(A) 
of subsection 19(b) of the Act and will file a rule change for 
immediate effectiveness upon filing with the Commission.
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    \6\ See Securities Exchange Act Release Nos. 39734 (March 9, 
1998), 63 FR 12846 (March 16, 1998) (Order approving SR-Amex-97-41, 
relating to trading options in narrower increments); 39736 (March 9, 
1998), 63 FR 12851 (March 16, 1998) (Order approving SR-CBOE-97-49, 
relating to trading options in narrower increments); and 39735 
(March 9, 1998), 63 FR 12852 (March 16, 1998) (Order approving SR-
PCX-97-39, relating to trading options in narrower increments).
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    The Exchange notes that there has been a movement within the 
securities

[[Page 29288]]

industry to reduce the minimum trading and quotation increments for 
equity securities imposed by the various self-regulatory 
organizations.\7\ As derivative securities, the price of options are 
determined in reference to the underlying securities. Consequently, the 
Exchange believes that where practicable, the Exchange should have 
minimum increments comparable to those applicable to the securities 
underlying the Phlx options.
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    \7\Supra, note 2.
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    The Exchange also believes that the proposed rule change would give 
the Exchange the flexibility to follow the suit of the principal 
exchanges for the underlying securities without having to update its 
rules continually, but at the same time would give the Exchange the 
flexibility it needs to deviate from the minimum increments established 
by the principal markets for the underlying securities in the event 
that the Phlx's systems were not immediately able to handle such 
increments. The Exchange, therefore, believes the quality of the market 
for Phlx options will be enhanced by allowing more accurate pricing of 
Phlx options.
    Further, the Exchange is proposing to retitle Rule 1034 ``Minimum 
Trading Increments'' for consistency with other exchange's rules. The 
Exchange is also proposing to add express reference to index options 
for clarity, noting that Rule 1034 currently applies to index options 
pursuant to Rule 1000A(a). Lastly, the Exchange is proposing to delete 
Commentary .01 regarding the minimum trading increment for Value Line 
LEAPs. If needed, any such new product-specific trading increment could 
be adopted pursuant to the paragraph proposed to be renumbered as Rule 
1034 (iii), which provides that different increments may be fixed by 
the Exchange. The proposal should extend the benefits of trading in a 
narrower increment to Phlx options, which should, in turn, promote more 
accurate pricing of options and tighter quotations.
2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with Section 6 of the Act \8\ in general, and in particular, with 
Section 6(b)(5),\9\ 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 by permitting narrower minimum trading 
increments in Phlx options. The proposal is also consistent with 
Section 11A of the Act,\10\ in that it promotes competition among the 
exchanges and market makers.\11\
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k-1.
    \11\ In approving these rules, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    This proposed rule filing has been filed by the Exchange as a 
``non-controversial'' rule change pursuant to Section 19(b)(3)(A)(i) of 
the Act \12\ and subparagraph (e)(6) of Rule 19b-4 thereunder.\13\ 
Consequently, because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative until May 23, 1998, more than 30 days 
from April 22, 1998, the date on which it was filed, and the Exchange 
provided the commission with written notice of its intent to file the 
proposed rule change at least five days prior to the filing date, it 
has become effective pursuant to Section 19(b)(3)(A) of the act and 
Rule 19b-4(6) thereunder.
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    \12\ 15 U.S.C. 78s(b)(3)(A)(i).
    \13\17 CFR 240.19b-4(e)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing; including whether the proposed rule 
change is consistent with the Act. 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 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Phlx.
    All submissions should refer to File No. SR-PHLX-98-12 and should 
be submitted by June 18, 1998.

    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. 98-14023 Filed 5-27-98; 8:45 am]
BILLING CODE 8010-01-M