[Federal Register Volume 69, Number 13 (Wednesday, January 21, 2004)]
[Notices]
[Pages 2959-2961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1213]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49074; File No. SR-Phlx-2003-72]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the Philadelphia Stock Exchange, Inc. To Reduce Strike 
Prices for Index Options

January 14, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 4, 2003, 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 the 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).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 1101A (``Terms of Option 
Contracts'') to provide that strike price intervals for index options 
\3\ shall be $2.50 for the three consecutive near-term months, $5 for 
the fourth month, and $10 for the fifth month. The text of the proposed 
rule change is available at the Office of the Secretary, the Phlx, and 
at the Commission.
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    \3\ Index options traded on the Exchange are also known as 
sector index options.
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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, the Phlx 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 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

1. Purpose
    The Phlx proposes to reduce strike price intervals of index 
options, thereby

[[Page 2960]]

providing added flexibility to customers trading index options.
    Currently, Phlx Rule 1101A provides that strike price intervals for 
index options shall be $5 for the three consecutive near-term months, 
$10 for the fourth month, and $30 for the fifth, and that the Exchange 
may determine to list strike prices at $5 intervals in response to 
demonstrated customer interest or a specialist request. The proposed 
rule change would significantly reduce the strike price intervals of 
index option products--to $2.50 for three consecutive near-term months, 
$5 for the fourth month, and $10 for the fifth month--and continue to 
allow the Exchange to list index price options at the new strike prices 
in response to customer and option specialist requests.
    The Phlx believes the proposed rule change is particularly 
necessary in current economic conditions. Over the past two years, the 
Exchange notes that stock prices in general have dropped and the prices 
of certain listed stocks suffered precipitous declines, resulting in a 
proliferation of stocks trading below $25 (``lowest-tier stocks'') at 
the Exchange. Many such lowest-tier stocks are the components of the 
largest index options traded on the Exchange. The Exchange states that 
at this time, for example, between 40% and 75% of the components of the 
three largest index options traded on the Exchange (XAU, the Phlx Gold/
Silver Index; OSX, the Phlx Oil Service Index; and SOX, the Phlx 
Semiconductor Index) are lowest-tier stocks. In addition, the Phlx 
states that the depressed prices of many of the components that make up 
these index options would require substantial price movement to move 
between the current $5, $10, and $30 strike price ranges.
    The Exchange believes that, given the current last prices of its 14 
index options from a range of approximately $86 to $531 as of December 
2, 2003,\4\ and annualized volatilities ranging from 14% to 39%, 11 of 
the Exchange's index options would not be statistically expected to: 
(a) On a daily basis move through the next higher or lower strike 
price, from the current minimum $5 strike price; (b) on a weekly basis 
move through more than one $5 strike price; or (c) on a monthly basis 
move through more than three $5 strike prices. The Phlx believes that 
many index options are not expected to move through a strike price 
range at all. Under the current Phlx Rule 1101A strike price structure, 
for example, seven index options are not expected to move through even 
one $5 strike price on a weekly basis, and two index options are not 
expected to move through a single $5 strike price on a monthly basis.
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    \4\ The Exchange notes that the last price of the highest-priced 
index, the Phlx/KBX Bank Index, at approximately $955, is almost 
twice that of the second-highest-priced index, the Phlx 
Semiconductor Index, and significantly higher-priced than the 
Exchange's 12 other indexes.
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    The minimum $5 strike price for index options in Phlx Rule 1101A 
results in many index options products expiring at or out-of-the-money. 
The Phlx believes that allowing $2.50 strikes in index options and 
reducing the current $10 and $30 strikes would give investors increased 
flexibility and an opportunity to trade options series that are more 
likely to expire in-the-money.
    Moreover, the Exchange believes that, according to Options Price 
Reporting Authority (``OPRA'') figures, there is sufficient OPRA system 
capacity to accommodate the Exchange's proposal. On a daily basis, for 
example, the OPRA participants (AMEX, CBOE, ISE, PCX, and Phlx) \5\ are 
using an average of less than 10,000 messages per second (``mps''), 
which is less than one third of the current total system capacity of 
32,000 mps.\6\ To date, the OPRA participants have yet to exceed 16,000 
mps for any extended period of time.\7\ Thus, the Phlx believes that 
implementing the proposed strike price changes to Phlx Rule 1101A 
should not have any significant negative impact on OPRA system 
capacity.
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    \5\ The OPRA participants are: American Stock Exchange LLC; 
Chicago Board Options Exchange, Inc.; International Securities 
Exchange, Inc.; and Pacific Exchange, Inc.
    \6\ The OPRA participants have recently voted to expand OPRA 
system capacity to 40,000 mps.
    \7\ According to OPRA's information processor, Securities 
Industry Information Corporation (``SIAC''), on September 30, 2003, 
the one-minute peak (total for all participants) was approximately 
15,069 mps, and the five-minute peak was approximately 12,639 mps.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \8\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \9\ in particular, in that it 
is designed to perfect the mechanism of a free and open market and the 
national market system, protect investors and the public interest and 
promote just and equitable principles of trade, by allowing the 
Exchange to list index options at strike price intervals of $2.50 for 
three consecutive near-term months, $5 for the fourth month, and $10 
for the fifth month, and thereby providing added flexibility to 
customers trading index options.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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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

    No written comments were either solicited or 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 of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which 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, 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 20549-0609. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-Phlx-2003-72. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in 
hardcopy or by e-mail but not by both methods. 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 Room. Copies of such filing will also be available for 
inspection and copying at

[[Page 2961]]

the principal office of the Phlx. All submissions should refer to File 
No. SR-Phlx-2003-72 and should be submitted by February 11, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-1213 Filed 1-20-04; 8:45 am]
BILLING CODE 8010-01-P