[Federal Register Volume 59, Number 106 (Friday, June 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13472]
[[Page Unknown]]
[Federal Register: June 3, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34129 ; File No. SR-Amex-91-31]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the American Stock Exchange, Inc., Relating to the Addition
of Options Series at 2\1/2\ Point Strike Price Intervals for Major
Market Index Options
May 27, 1994.
On November 27, 1991, the American Stock Exchange, Inc. (``Amex''
or ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to alter its strike price policy
in order to introduce near-the-money\3\ options series on the XMI at
2\1/2\-point strike (exercise) price intervals.\4\
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\The Amex amended its proposal to define ``near-the-money'' as
a strike price within 10 points above or below the current value of
the Major Market Index (``XMI'' or ``Index''). Thus, if the XMI is
at 310, the proposal would allow the Exchange to list 2\1/2\ point
strikes between the range of 290 to 310. See Letter from Ellen T.
Kander, Special Counsel, Derivative Securities, Amex, to Yvonne
Fraticelli, Staff Attorney, Options Branch, Division of Market
Regulation (``Division''), Commission, dated March 4, 1993 (``March
4, 1993 Letter'').
\4\On December 8, 1992, the Amex amended its filing to include a
memorandum from Charles H. Faurot, Amex, to Howard Baker, Amex,
dated December 2, 1992, which discusses the ability of the Options
Price Reporting Authority (``OPRA'') and market information vendors
to accommodate the additional strike prices provided for under the
proposal (``OPRA Capacity Statement''). See Letter from Ellen
Kander, Special Counsel, Derivative Securities, Amex, to Thomas
Gira, Branch Chief, Options Regulation, Division, Commission, dated
December 8, 1992.
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Notice of the proposal was published for comment and appeared in
the Federal Register on January 15, 1993.\5\ No Comments were received
on the proposed rule change.
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\5\See Securities Exchange Act Release No. 31710 (January 8,
1993), 58 FR 4720.
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In 1983, when the Exchange began trading index options, options
series were introduced in 5-point strike price intervals for index
values up to 200 and 10-point increments for index values above 200.
Subsequently, the Exchange obtained Commission approval to list index
options with 5-point strike price intervals when the value of the
relevant index is above 200.\6\ The Amex continues to follow this
policy for all of the Exchange's index options with expirations up to
one year; for longer-term index options, the Exchange may have strike
price intervals as wide as 25 or 50 points.
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\6\See Securities Exchange Act Release No. 21644 (January 9,
1985), 50 FR 2360 (order approving File No. SR-Amex-84-31).
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The Amex proposes to amend its strike price policy to allow the
Exchange to list near-the-money options on the XMI at 2\1/2\-point
strike price intervals. The Amex has found that the current policy of
5-point strike intervals frequently results in in-the-money options
that are often ``too costly'' and out-of-the money options that yield
too little premium to attract uncovered or covered writers. The Amex
believes that the proposal to narrow strike price intervals by
increasing the number of available near-the-money strike prices will
enable customers to more finely tailor their options positions to
achieve their intended investment objectives. In addition, the Amex
believes that providing customers with greater opportunities and
flexibility will further enhance the depth and liquidity of the Amex's
index options markets.
The Amex also believes, in connection with the reduction of the XMI
to one-half its previous value,\7\ that the addition of 2\1/2\-point
strike intervals for near-the-money options will satisfy requests by
investors to maintain the pre-split ``Index-to-strike price ratio''
(e.g., from a 640 Index value with 5-point strike price intervals to a
320 Index value with 2\1/2\-point strike price intervals).
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\7\See Securities Exchange Act Release No. 29798 (October 8,
1991), 56 FR 51976 (order approving File No. SR-Amex-91-18).
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The Amex believes that the proposal will not result in a
proliferation of strike prices since the 2\1/2\-point intervals will
only be added to surround the XMI's current Index value. For this
purpose, 2\1/2\ point strikes would only be added 10 points above or
below the current Index value.\8\ In addition, the Amex represents that
listing near-the-money XMI options series at 2\1/2\ point price
intervals will not adversely impact the capacity of OPRA or market
information vendors. In this regard, the Amex notes that the OPRA
system was upgraded in early November 1992 to accommodate up to 300
messages per second (``MPS''). The Exchange believes that this capacity
is more than sufficient to accommodate the requirements of all OPRA
participants, including the proposed 2\1/2\ point strike prices for the
XMI, since the recent peaks in message traffic for all OPRA
participants combined have been in the range of 100-125 MPS. In
addition, the Amex believes that the additional options series
necessitated by the proposed 2\1/2\ point strike prices for the XMI
will have no impact on the ability of vendors to receive and process
data.\9\
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\8\See March 4, 1993 Letter, supra note 3.
\9\See OPRA Capacity Statement, supra note 4.
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The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of section 6(b)(5).\10\ Specifically, the
Commission believes that the proposed listing of 2\1/2\ point strike
price intervals for near-the-money XMI options will provide investors
with more flexibility in the trading of XMI options, thereby protecting
investors and furthering the public interest by allowing investors to
establish XMI options positions that are better tailored to meet their
investment objectives.
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\10\15 U.S.C. 78f(6)(5) (1982).
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The Commission also believes that the Amex's proposal strikes a
reasonable balance between the Exchange's need to accommodate the needs
of investors and the need to avoid the excessive proliferation of
options series. Specifically, the Commission believes that by limiting
the number of additional strikes to within 10 points above or below the
current Index value, the Amex's proposal permits a fairly small
absolute increase in the number of XMI strikes that may be outstanding
at any one time. Further, the Commission notes that the proposal sets
the maximum permissible number of additional 2\1/2\ point strikes; the
Amex retains discretion to list fewer strike prices than allowed.
In addition, the Commission notes that the Amex has represented
that there is customer interest in 2\1/2\ strikes for near-the-money
XMI options. Specifically, the Exchange has stated that the existing 5-
point strike intervals frequently result in in-the-money options that
are ``too costly'' and out-of-the money options that yield too little
premium to attract uncovered or covered writers. Moreover, the Amex
believes that the proposed 2\1/2\ point strike intervals will satisfy
requests by investors to maintain the pre-split ``Index-to-strike price
ratio'' of the XMI. In light of the investor interest in the 2\1/2\
price strikes, and the proposal's limit on the number of strikes the
Amex may list, the Commission believes that the proposal should provide
the Amex with the flexibility to list additional strike prices in near-
the-money XMI options in response to genuine customer interest and, at
the same time, appropriately limit the number of XMI options series
that may be outstanding at any one time. Finally, based on
representations from OPRA,\11\ the Commission is satisfied that the
Amex and OPRA will have adequate computer processing capacity to
accommodate the trading and quote dissemination demands of the
additional strike prices that may be listed under the proposal.
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\11\See OPRA Capacity Statement, supra note 4.
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In summary, the Commission believes that the benefits to be derived
from the proposal in accommodating the needs and objectives of
investors outweigh the possible adverse effects on market liquidity due
to the dispersion of trading interest in more XMI options series. In
making this determination, the Commission notes that the change is
limited to near-the-money series in XMI options only. Nevertheless, the
Commission expects the Amex to monitor additional strikes added under
this proposal to ensure that there are no detrimental effects on the
market for XMI options.
It is therefore ordered, pursuant to section 19 (b) (2) of the Act,
\12\ that the proposed rule change (File No. SR-Amex-91-31) is
approved.
\12\15 U.S.C. 78s(b) (2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\17 CFR 200.30-3 (a) (12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-13472 Filed 6-2-94; 8:45 am]
BILLING CODE 8010-01-M