[Federal Register Volume 59, Number 195 (Tuesday, October 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25003]
[[Page Unknown]]
[Federal Register: October 11, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34781; File No. SR-PHLX-94-28]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to the Quote
Spread Parameters for National Over-the-Counter Index (``XOC'') Options
October 3, 1994.
On June 13, 1994, the Philadelphia Stock Exchange, Inc. (``PHLX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``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 amend PHLX Rule 1014,
``Obligations and Restrictions Applicable to Specialists and Registered
Options Traders,'' and PHLX Floor Procedure Advice (``Advice'') F-6,
``Option Quote Spread Parameters,'' to establish the following maximum
quote spreads for National Over-the-Counter Index (``XOC'') options:
$2.00 for XOC options with bids of $20.00 to less than $40.00; and
$3.00 for XOC options with bids of $40.00 or more.
---------------------------------------------------------------------------
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
---------------------------------------------------------------------------
Notice of the proposed appeared in the Federal Register on July 25,
1994.\3\ Prior to the filing of the proposal with the Commission, the
PHLX received one comment letter.\4\
---------------------------------------------------------------------------
\3\See Securities Exchange Act Release No. 34401 (July 19,
1994), 59 FR 37801.
\4\See Letter from Barry J. Weisberg, Certified Financial
Planner, Vice President, Financial Consultant, Smith Barney
Shearson, to Gerald O'Connell, Vice President, Market Surveillance,
PHLX, dated March 24, 1994 (``March 24 Letter''). The commenter
argues that the PHLX's widening of the quote spread parameters for
XOC options will disadvantage public customers and may discourage
public customer interest in trading index options on the PHLX. In
response to the March 24 Letter, the PHLX indicated that the
Exchange's Committee on Options considered the quote spread
parameters established by the Chicago Board Options Exchange, Inc.
(``CBOE'') for its Nasdaq 100 Index (``NDX''). In addition, the PHLX
noted that the XOC trading crowd has increased its minimum volume
guarantee to 20 contracts for public customer orders in series with
previous-close bid values of $10.00 or less. See Letter from Gerald
O'Connell, Vice President, Market Surveillance, PHLX, to Barry J.
Weisberg, Certified Financial Consultant, Smith Barney Shearson,
dated April 29, 1994 (``April 29 Letter''). On September 22, 1994,
the PHLX submitted a letter providing additional information about
the proposal. Specifically, the PHLX states that the proposed quote
spread parameters reflect the greater uncertainty of pricing higher-
priced options, which are generally deep in-the-money and may be
far-term or long-term options. In addition, the PHLX states that the
combination of high volatility and high index price produces many
XOC series which trade on a delta basis of at or near 100, so that
an index change of one point results in an option price change of
one point. The PHLX believes that the wider quote spread parameters
will help XOC specialists maintain their affirmative market making
obligations for high-delta XOC options. See Letter from Gerald
O'Connell, First Vice President, Regulation and Trading Operations,
PHLX, to Michael Walinskas, Branch Chief, Options Branch, Division
of Market Regulation, Commission, dated September 22, 1994
(``September 22 Letter'').
---------------------------------------------------------------------------
Currently, PHLX Rule 1014 and Advice F-6 establish a maximum quote
spread of $1.00 for index options with bids of $20.00 or more. The PHLX
proposes to amend the quote spread parameters for XOC options to
establish the following parameters for XOC options with bids of $20.00
or more: $2.00 for XOC options with bids of $20.00 to less than $40.00;
and $3.00 for XOC options with bids of $40.00 or more.
According to the PHLX, recent volatility in the XOC caused floor
officials to temporarily widen the quote spreads for XOC options
pursuant to Advice F-6.\5\ The Exchange proposes to codify these wider
quote spread parameters for higher-priced XOC series.
---------------------------------------------------------------------------
\5\Advice F-6 states that relief from the established bid/ask
differentials may be granted upon the receipt of approval of two
floor officials. The Commission notes that Advice F-6 permits an
exception from the quote spread parameters only on a case-by-case
basis.
---------------------------------------------------------------------------
The PHLX states that the purpose of the wider quotations is to
reflect the wider bid/ask differential in the over-the-counter
(``OTC'') securities underlying the XOC, which market participants
purchase in order to hedge XOC exposure. According to the Exchange, the
aggregate bid/ask differential for the XOC's component securities is
often greater than $5.00.\6\
---------------------------------------------------------------------------
\6\The bid/ask differential in the underlying securities is
determined by adding the bids for such securities and dividing by
100 (the number of securities comprising the XOC) to arrive at the
composite bid; to arrive at a composite, or average, offer, the
offers for the underlying securities are similarly added together
and divided by 100.
---------------------------------------------------------------------------
The PHLX states that the bid/ask differential in XOC options is
particularly problematic with respect to higher-priced option series
because the higher bids represent a greater premium dollar value and
thus more risk. Thus, the Exchange notes that a $40.00 bid represents a
$4,000 premium. Accordingly, the Exchange proposes to widen the XOC
quote spread parameter only for higher-priced series. Moreover, the
PHLX notes that the XOC series priced at $20.00 or less are most often
chosen for investment by public customers (i.e., ``customers'' who are
not associated with broker-dealer organizations or subject to
discretionary authorization by associated persons of broker-
dealers).\7\
---------------------------------------------------------------------------
\7\See also September 22 Letter, supra note 4.
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is consistent
with section 6 of the Act, in general, and, in particular with section
6(b)(5), 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,
because widening higher-priced XOC quote spread parameters should
facilitate hedging, and, in turn, liquidity.
The Commission has considered carefully the opinions of the
commenter and the PHLX and finds, for the following reasons, 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) in that the proposal is designed to promote just and equitable
principles of trade.\8\ Specifically, the Commission believes that the
proposal to establish wider quote spread parameters for XOC options
priced at over $20 is designed to facilitate hedging in higher-priced
XOC options, thereby helping XOC specialists to meet their affirmative
market making obligations and providing for increased liquidity in
higher-priced XOC series. According to the PHLX, the aggregate bid/ask
differential for the securities underlying the XOC is $5-6, while the
current bid/ask differential for XOC options priced at over $20 is $1.
The PHLX states that the proposed quotations for XOC options priced at
over $20 are designed to reflect the wider bid/ask differential of the
securities underlying the XOC, which market participants purchase to
hedge XOC exposure. Thus, the PHLX believes that the wider quote spread
parameters will facilitate hedging of high-priced XOC options.\9\
---------------------------------------------------------------------------
\8\15 U.S.C. 78f(b)(5) (1988).
\9\See September 22 Letter, supra note 4.
---------------------------------------------------------------------------
In addition, the PHLX states that volatility in the XOC has caused
floor officials to grant temporary relief pursuant to Advice F-6 to
allow wider quote spreads in the XOC. In light of the volatility of the
XOC, the bid/ask differential of the underlying securities, and the
high value of the XOC,\10\ the Commission believes that its is
reasonable, under these limited circumstances, for the PHLX to widen
the quote spread parameters for XOC series priced at $20 or more. The
Commission notes, however, that the proposal established maximum
allowable quote spreads and that it applies solely to XOC options
priced at $20 or more; the Commission expects the PHL to allow the use
of the maximum quote spreads only where market conditions justify their
application.
---------------------------------------------------------------------------
\10\As of September 22, 1994, the level of the XOC was 581.
---------------------------------------------------------------------------
In addition, the Commission notes that under PHLX Rule 1014,
``Obligations and Restrictions Applicable to Specialists and Registered
Options Traders,'' XOC 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 XOC options affected by the
proposal to ensure that there is adequate market market activity in
those series and to ensure that market are meeting their obligations to
maintain fair and orderly markets. Accordingly, the commission expects
the PHLX to monitor trading in XOC options affected by the proposal to
ensure that there is adequate market make activity in those series and
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,\11\ that the proposed rule changed is approved.
---------------------------------------------------------------------------
\11\15 U.S.C. 78s(b)(2) (1984).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
---------------------------------------------------------------------------
\12\17 CFR 200.30-3(a)(12) (1983).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25003 Filed 10-7-94; 8:45 am]
BILLING CODE 8010-01-M