[Federal Register Volume 63, Number 223 (Thursday, November 19, 1998)]
[Notices]
[Pages 64297-64299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30891]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40662; File Nos. SR-AMEX-98-21; SR-CBOE-98-29; SR-PCX-
98-31; and SR-PHLX-98-26]


Self-Regulatory Organizations; American Stock Exchange, Inc., 
Chicago Board Options Exchange, Inc., Pacific Exchange, Inc. and 
Philadelphia Stock Exchange, Inc.; Order Approving Proposed Rule Change 
and Amendments Thereto Relating to Expansion and Permanent Approval of 
the 2\1/2\ Point Strike Price Pilot Program

November 12, 1998.

I. Introduction

    On June 17, 1998, the American Stock Exchange, Inc. (``AMEX''); on 
June 30, 1998, the Chicago Board Options Exchange, Inc. (``CBOE''); on 
June 19, 1998, the Pacific Exchange, Inc. (``PCX''); and on July 1, 
1998, the Philadelphia Stock Exchange, Inc. (``PHLX'') (referred to 
individually as ``Exchange'' and collectively as ``Exchanges'') 
submitted to the Securities and Exchange Commission (``Commission''), 
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 to 
extend and subsequently expand and

[[Page 64298]]

permanently approve the 2\1/2\ Point Strike Price Pilot Program.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The AMEX submitted to the Commission Amendment No. 1 to its 
proposed rule change on July 13, 1998.\3\ The CBOE submitted to the 
Commission Amendment No. 1 to its proposal on July 15, 1998.\4\ The PCX 
submitted to the Commission Amendment No. 1 to its proposed rule change 
on July 7, 1998,\5\ and Amendment No. 2 to its proposal on July 10, 
1998.\6\ The PHLX submitted to the Commission Amendment No. 1 to its 
proposed rule change on July 2, 1998,\7\ and Amendment No. 2 to its 
proposal on July 8, 1998.\8\
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    \3\ See Letter from Scott G. Van Hatten, Legal Counsel, AMEX, to 
Richard Strasser, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated July 10, 1998 (``AMEX Amendment 
No. 1'').
    \4\ See Letter from Timothy H. Thompson, Director--Regulatory 
Affairs, CBOE, to Deborah Flynn, Attorney, Division, Commission, 
dated July 14, 1998 (``CBOE Amendment No. 1'').
    \5\ See Letter from Robert P. Pacileo, Staff Attorney, PCX, to 
Deborah L. Flynn, Attorney, Division, Commission, dated July 2, 1998 
(``PCX Amendment No. 1'').
    \6\ See Letter from Robert P. Pacileo, Staff Attorney, PCX, to 
Deborah L. Flynn, Attorney, Division, Commission, dated July 8, 1998 
(``PCX Amendment No. 2'').
    \7\ See Letter from Linda S. Christie, Counsel, PHLX, to Michael 
Walinskas, Deputy Associate Director, Division, Commission, dated 
July 1, 1998 (``PHLX Amendment No. 1'').
    \8\ See Letter from Linda S. Christie, Counsel, PHLX, to Michael 
Walinskas, Deputy Associate Director, Division, Commission, dated 
July 7, 1998 (``PHLX Amendment No. 2'').
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    On July 24, 1998, the proposed rule change and amendments were 
published for comment in the Federal Register \9\ and the Commission 
granted accelerated approval to the portion of the proposal relating to 
the extension of the 2\1/2\ Point Strike Price Pilot Program for a six-
month period ending on January 15, 1999, or until the Commission 
approves the request to expand the program and approve it permanently, 
whichever occurs first. The Commission received no comments on the 
proposal. This order approves the portions of the proposed rule change, 
as amended, relating to the expansion and permanent approval of the 
2\1/2\ Point Strike Price Pilot Program.
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    \9\ Securities Exchange Act Release No. 40226 (July 17, 1998) 63 
FR 39916.
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II. Description of the Proposal

    The 2\1/2\ Point Strike Price Pilot Program enables the Exchanges 
to each list a specified number of options trading at a strike price 
greater than $25 but less than $50 at 2\1/2\ point intervals. The 
Commission approved the original 2\1/2\ Point Strike Price Pilot 
Program proposed by the Exchanges and the New York Stock Exchange 
(``NYSE''), which is no longer a participant in the program, on July 
19, 1995.\10\ Pursuant to the original pilot program, the Exchanges, 
including the NYSE, were permitted to use 2\1/2\ point strike price 
intervals for a joint total of up to 100 option issues. Currently, each 
participating Exchange is allocated a whole number of classes based on 
the sum of the following: (1) one quarter of the first 50 issues; and 
(2) a percentage of the remaining 50 classes determined by each 
Exchange's pro rata share of the total number of equity option listings 
as of July 1, 1997.\11\ In addition, the options originally selected by 
the NYSE, which have not been subsequently decertified or delisted, 
continue to be eligible for the pilot program, but are not counted 
against any Exchange's allotment. However, these classes may not be 
replaced by another selection in the event a class becomes ineligible 
or is decertified.
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    \10\ See Securities Exchange Act Release No. 35993, 60 FR 38073 
(July 25, 1995) (order approving File Nos. SR-PHLX-95-08; SR-AMEX-
95-12; SR-PSE-95-07; SR-CBOE-95-19, and SR-NYSE-95-12).
    \11\ The actual allotment of options issues for each Exchange as 
of July 1997 is: CBOE (31), AMEX (25), PHLX (23), and PCX (21). 
However, each Exchange may trade at 2\1/2\ point strike price 
intervals any multiply listed option selected by another Exchange 
for inclusion in the 2\1/2\ Point Strike Price Pilot Program.
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    Because the program is limited to 100 option classes industry-wide 
and because each Exchange is allocated a specific number of option 
classes, some of the Exchanges have had to refuse requests to add 
option classes to the program. As a result, the Exchanges are proposing 
to expand the program from 100 to 200 eligible option classes. 
Generally, to provide for the orderly introduction of the new classes 
and insure that the Exchanges' systems capacity remains sufficient 
throughout the expansion, the Exchanges propose to add only 20 classes 
each calendar quarter for the 5 quarters following the Commission's 
grant of permanent approval of the program. Overall, each Exchange will 
be allocated a whole number of additional option classes based on the 
sum of the following: (1) one quarter of the first 50 issues; and (2) a 
percentage of the remaining 50 classes determined by each Exchange's 
pro rata share of the total number of equity option listings as of 
October 1, 1998.\12\ Each Exchange will receive its allocation of 
additional option classes over the 5 quarters following the 
Commission's grant of permanent approval of the program. In addition, 
the options originally selected by the NYSE, which have not been 
subsequently decertified or delisted, will continue to be eligible for 
the program, but are not counted against any Exchange's allotment.
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    \12\ Each Exchange will receive the following allocation of the 
additional 100 option classes: AMEX (26), CBOE (29), PCX (22) and 
PHLX (23). The total allotment of options issues for each Exchange 
as of October 1, 1999, will be as follows: AMEX (51), CBOE (60), PCX 
(43), and PHLX (46). See Letters from Timothy Thompson, Director--
Regulatory Affairs, CBOE, to Richard Strasser, Assistant Director, 
Division, Commission, dated November 5, 1998; Scott G. Van Hatten, 
Legal Counsel, AMEX, to Richard Strasser, Assistant Director, 
Division, Commission, dated November 4, 1998. Telephone 
conversations between Nandita Yagnik, Attorney, PHLX; Robert 
Pacileo, Attorney, PCX; and Terri Evans, Attorney, Division, 
Commission, on November 10, 1998.
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    The Exchanges also are proposing to make the 2\1/2\ Point Strike 
Price Pilot Program permanent based on the success of the pilot program 
over a three-year period. The Exchanges and the Options Price Reporting 
Authority (``OPRA'') represent that sufficient computer capacity is 
available to accommodate the proposed expansion and permanent approval 
of the 2\1/2\ Point Strike Price Pilot Program.\13\
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    \13\ See AMEX 19b-4 filing, AMEX-98-21, and Amendment No. 1, 
supra note 3; CBOE 19b-4 filing, CBOE-98-29; PCX Amendment No. 1, 
supra note 5; and PHLX 19b-4 filing, PHLX-98-26.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, relating to the expansion and permanent approval of 
the 2\1/2\ Point Strike Price Pilot Program is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\14\ Specifically, the 
Commission believes that the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act \15\ in that the expansion 
and permanent approval of the program should remove impediments to and 
perfect the mechanism of a free and open market in a manner consistent 
with the protection of investors and the public interest.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule`s impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that expanding the 2\1/2\ Point Strike 
Price Pilot Program by 100 option classes will provide investors with 
greater flexibility to tailor their positions in equity options with a 
strike price greater than $25 but less than $50. The Commission also 
believes that the proposed addition of 100 option classes to the 
program strikes a reasonable balance between the Exchange's desire to 
accommodate market participants by offering a wide array of investment 
opportunities and

[[Page 64299]]

the need to avoid unnecessary proliferation of options series.
    In addition, the Commission believes that permanent approval of the 
pilot program is now appropriate given the length of time the pilot 
program has been in place and its past success. The Commission notes 
that the Exchanges have not reported any significant problems with the 
pilot program since its inception nor has the Commission received 
adverse comments concerning the operation of the pilot program. The 
Commission notes that the Exchanges and OPRA have represented that 
sufficient computer processing capacity is available to accommodate the 
expansion and permanent approval of the 2\1/2\ Point Strike Price Pilot 
Program. The Commission expects the Exchanges to continue to monitor 
the applicable options activity closely to detect any proliferation of 
illiquid options series resulting from the narrower strike price 
intervals and any capacity problems. Further, the Commission expects 
the Exchanges to promptly remedy such problems should they arise.
    In the event the Exchanges propose to expand the program beyond the 
200 option classes currently proposed or eliminate the price limits for 
the 2\1/2\ point strike price intervals, the Exchanges must submit a 
report to the Commission as well as an Exchange Act Rule 19b-4 filing 
of such proposal. The report should cover the one-year period prior to 
the date of the proposal and should include data and written analysis 
on the open interest and trading volume in affected series, and 
delisted options series (for all strike price intervals) on the 
selected program option classes. The report also should discuss any 
capacity problems that may have arisen and any other data relevant to 
the analysis of the program, including an assessment of the 
appropriateness of the 2\1/2\ point strike price intervals for the 
options selected by the reporting exchange.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,16 that the proposed rule change (File Nos. SR-AMEX-98-
21; SR-CBOE-98-29; SR-PCX-98-31; and SR-PHLX-98-26), as amended, is 
approved.
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    \16\ 15 U.S.C. 78s(b)(2).


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.17
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30891 Filed 11-18-98; 8:45 am]
BILLING CODE 8010-01-M