[Federal Register Volume 60, Number 92 (Friday, May 12, 1995)]
[Notices]
[Pages 25752-25754]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X95-50512]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35680; File Nos. SR-Phlx-95-08, SR-Amex-95-12, SR-PSE-
95-07, SR-CBOE-95-19, SR-NYSE-95-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Changes by the Philadelphia Stock Exchange, Inc., the American Stock 
Exchange, the Pacific Stock Exchange, Incorporated, the Chicago Board 
Options Exchange, Incorporated, and the New York Stock Exchange, to 
Adopt a 2\1/2\ Point Strike Price Pilot Program

May 5, 1995.
    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 February 6, March 8, March 15, and March 22, 1995, respectively, the 
Philadelphia Stock Exchange, Inc. (``Phlx''), the American Stock 
Exchange (``Amex''), the Pacific Stock Exchange, Incorporated 
(``PSE''), the Chicago Board Options Exchange, Incorporated (``CBOE''), 
and the New York Stock Exchange (``NYSE'') (collectively the 
``Exchanges'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule changes as described in Items I, II, 
and III below, which Items have been prepared by the Exchanges. 
Additionally, the Committee on Options Proposals (``COOP'') filed a 
letter with the Commission endorsing the Exchanges' proposed rule 
changes.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule changes from interested persons.

    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
    \3\See Letter from Michael Schwartz, Chairman, COOP, to Jonathan 
G. Katz, Secretary, Commission, dated April 5, 1995.
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I. Self-Regulatory Organizations' Statement of the Terms of Substance 
of the Proposed Rule Changes

    The Exchanges propose to establish a pilot program, whereby the 
Exchanges may select a certain number of their listed options for 
inclusion in a twelve month pilot program for the listing of strike 
prices at 2\1/2\ point intervals.\4\ [[Page 25753]] Specifically, the 
CBOE proposes to adopt new Interpretation and Policy .07 to CBOE Rule 
5.5, ``Option Contracts Open for Trading.'' Similarly, the Phlx 
proposes to amend Phlx Rule 1012, ``Series of Options Open for 
Trading,'' by adopting a new Commentary .05.\5\ The PSE proposes to 
amend PSE Rule 6.4, ``Series of Options Open for Trading,'' by adopting 
a new Commentary .03. The NYSE proposes to amend NYSE Rule 703, 
``Series of Options for Trading,'' by amending Supplementary Material 
.30(d)(ii) and adopting a new Supplementary Material 0.30(f).\6\ The 
Amex proposes to list 2\1/2\ point strike prices pursuant to the pilot 
program in accordance with Amex Rule 903(a)(ii), ``Series of Options 
Open for Trading.'' Equity options with strike prices between $25 and 
$50 would be eligible for the pilot program. The text of the proposed 
rule changes for each exchange is available at the Office of the 
Secretary, the Exchanges, and at the Commission.

    \4\The Exchanges amended the original proposals to extend the 
pilot program, from six to twelve months. See Letters from Michael 
Pierson, Senior Attorney, PSE, dated March 24, 1995 (``PSE Amendment 
No. 1''), and Timothy Thompson, Attorney, CBOE, dated March 27, 1995 
(``CBOE Amendment No. 1''), to John Ayanian, Attorney, Office of 
Market Supervision (``OMS''), Division of Market Regulation 
(``Market Regulations''), Commission, and Letters from Gerald 
O'Connell, First Vice President, Phlx, dated March 29, 1995 (``Phlx 
Amendment No. 2''), Clarie McGrath, Special Counsel, Amex, dated 
April 3, 1995 (``Amex Amendment No. 1''), and Daniel Parker Odell, 
Assistant Secretary, NYSE, dated March 29, 1995 (``NYSE Amendment 
No. 1''), to Michael Welinskas, Branch Chief, OMS, Market 
Regulation, Commission.
    \5\The Phlx also proposes to codify the existing procedure for 
determining strike price intervals by stating that such intervals 
generally shall be $2.50 or greater where the strike price is $25 or 
less, $5.00 or greater where the strike price is greater than $25 
but less than $200, and $10 or greater where the strike price is 
$200 or more. See File No. SR-Phlx-95-08.
    The Phlx submitted Amendment No. 1 on March 10, 1995 to add the 
phrase ``or greater'' to the last clause of the text of the above 
rule change to be consistent with CBOE Rule 5.5, Interpretation .01, 
in that strike price intervals may be $10 ``or greater'' where the 
strike price is $200 or more. See Letter from Gerald O'Connell, 
First Vice President, Phlx, to Michael Walinskas, Branch Chief, OMS, 
Market Regulation, Commission, dated March 10, 1995. (``Phlx 
Amendment No. 1'').
    \6\The NYSE submitted Amendment No. 1 on April 3, 1995 to amend, 
among other things, the text of proposed Supplementary Material 
.30(f) and .30(f)(i) to NYSE Rule 703 to list 2\1/2\ strike prices 
for 14 options, instead of 11 options as originally stated. See NYSE 
Amendment No. 1, supra note 3.
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II. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, the Exchanges included 
statements concerning the purpose of and basis for the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item IV below. The Exchanges have prepared summaries, set 
forth in Sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

(A) Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    The Exchanges have, as a result of a cooperative effort, submitted 
a joint proposal regarding the listing of 2\1/2\ point strike prices 
for selected equity options on a pilot basis. The pilot program would 
operate for a twelve-month period following implementation by the 
Exchanges. Currently, the Exchanges list strike prices for equity 
options at 5 point intervals, where the underlying stock is trading 
between $25 and $200.\7\

    \7\See Securities Exchange Act Release No. 21985 (April 25, 
1985), 50 FR 18595 (Approving File Nos. SR-Phlx-85-9 and SR-PSE-85-
9, amending both exchanges' policies regarding strike price 
intervals to conform to those of the other options exchanges); see 
also Securities Exchange Act Release No. 21929 (April 10, 1985), 50 
FR 15258 (April 17, 1985) (File Nos. SR-CBOE-85-1 and SR-Amex-85-6).
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    The Exchanges propose to list select options trading at a strike 
price greater than $25 but less than $50\8\ (i.e., 27\1/2\, 32\1/2\, 
37\1/2\, 42\1/2\ and 47\1/2\\9\ at 2\1/2\ point intervals. Pursuant to 
the pilot program, the Exchanges would be permitted to use such 2\1/2\ 
point strike price intervals for a joint total of up to 100 option 
issues. Each of the exchanges may select 10 options plus a percentage 
of the remaining 50 options equal to that exchange's pro rata share of 
the total number of equity options listed by the Exchanges.\10\

    \8\Proposed NYSE Rule 703, Supplementary Material .30(f) states 
that select options may be listed at 2\1/2\ point strike price 
intervals ``if the strike price for that series is greater than 
$25.00, but is less than or equal to $50.00.'' While the NYSE has 
proposed slightly different language to make the proposed rule 
consistent with other NYSE rules, the proposal allows for the 
listing of 2\1/2\ point strike prices at 27\1/2\, 32\1/2\, 37\1/2\, 
42\1/2\ and 47\1/2\ in accordance with the terms of the pilot 
program. Telephone conversation between Gary Katz, Managing 
Director, Options and Index Products, NYSE, and John Ayanian, 
Attorney, OMS, Market Regulation, Commission, on May 2, 1995.
    \9\The applicable strike price codes will be Y 27\1/2\; Z 32\1/
2\; U 37\1/2\; V 42\1/2\; and W 47\1/2\.
    \10\The actual allotment of option issues for each exchange is 
as follows: CBOE (28), Amex (22), Phlx (18), PSE (18), and NYSE 
(14).
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    In addition, certain other conditions would apply to the pilot 
program. Listing 2\1/2\ point strike prices in selected options 
generally would be required for all expiration months on all 
participating exchanges, but not for long-term options (LEAPS).\11\ If 
an exchange chooses a multiply-traded option for its allotment, any 
other exchange trading that option would also be allowed to list 2\1/2\ 
point strike prices without having such listing count toward the other 
exchange's allotted amount. The Exchanges have agreed that in the event 
more than one exchange simultaneously selects the same multiply-traded 
option, the Options Clearing Corporation (``OCC'') would determine 
which exchange would be deemed to have selected the option. Such option 
would not count toward the other exchange's allotment.

    \11\The NYSE states that it does not propose to require the 
listing of 2\1/2\ point strikes for all expiration months in 
selected option classes. Telephone conversation between Gary Katz, 
Managing Director, Options and Index Products, NYSE, and John 
Ayanian, Attorney, OMS, Market Regulation, Commission, on May 4, 
1995.
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    In implementing the proposal, the Exchanges note that the pilot 
program effectively adds five additional strike prices to each of the 
applicable clauses of equity options, thereby creating a significant 
number of new strikes, including both puts and calls for all four 
listed expiration months.\12\ The Exchanges believe that limiting the 
pilot program to 100 selected equity options is a reasonable 
alternative to adding 2\1/2\ point strike price intervals for all 
equity options trading at a strike price greater than $25 but less than 
$50. Further, the Exchanges believe that the allocated number of 
options limits the number of new strike prices while providing 
important investment opportunities for selected options.\13\

    \12\The maximum number of allotted new strikes created as a 
result of this pilot program for each exchange is as follows: CBOE 
(1,120); Amex (880); Phlx (720); PSE (720); and NYSE (560). These 
figures do not include the new strikes created from multiply-traded 
options simultaneously selected by more than one exchange in 
accordance with the terms of the pilot program.
    \13\The Amex notes in its proposal that certain low volatility 
stocks of highly capitalized companies usually trade in fairly 
narrow price ranges. Amex further notes that options on such stocks 
generally have limited trading activity since in-the-money options 
sell for little more than intrinsic value and out-of-the-money 
options yield little premium income to attract uncovered or covered 
writers. (See File No. SR-Amex-95-12).
    The NYSE notes in its proposal that it anticipates selecting its 
allotment from among those options that overlie less volatile 
stocks. The NYSE believes that the market for options that overlie 
low volatility stocks will benefit from the pilot program because 
options series with strike prices that are closer to the price of 
the underlying stock will be available. Consequently, expanded 
options strategies will be available to investors. (See File No. SR-
NYSE-95-12).
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    Further, the Exchanges believe that the addition of 2\1/2\ point 
strike price intervals will stimulate customer interest by creating 
greater trading opportunity and flexibility. The Exchanges believe that 
2\1/2\ point strikes will provide customers the ability to more closely 
tailor investment strategies to the precise movement of the underlying 
security. The Exchanges also [[Page 25754]] believe that an increase in 
customer interest will, in turn, enhance the depth and liquidity of the 
markets in the affected equity options.
    The Exchanges believe that the proposed rule changes are consistent 
with Section 6 of the Act, in general, and further the objectives of 
Section 6(b)(5), in particular, in that they are designed to promote 
just and equitable principles of trade as well as to protect investors 
and the public interest.

(B) Self-Regulatory Organizations' Statement on Burden on Competition

    The Exchanges do not believe that the proposed rule changes will 
impose any burden on competition.

(C) Self-Regulatory Organizations' Statement on Comments on the 
Proposed Rule Changes Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Changes 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 the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule changes, or
    (B) Institute proceedings to determine whether the proposed rule 
changes should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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 at the Commission's Public Reference Section, 450 Fifth Street, 
NW., Washington, D.C. 20549. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchanges. All submissions should refer to File Nos. SR-Phlx-95-08, SR-
Amex-95-12, SR-PSE-95-07, SR-CBOE-95-19, and SR-NYSE-95-12 and should 
be submitted by June 2, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.