[Federal Register: June 17, 2003 (Volume 68, Number 116)]
[Notices]
[Page 35933-35937]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jn03-104]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48013; File No. SR-PHLX-2002-55]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change and Amendments
No. 1, 2, and 3 by the Philadelphia Stock Exchange, Inc. to Initiate a
Pilot Program that Allows the Listing of Strike Prices at One-Point
Intervals for Certain Stocks Trading under $20
June 11, 2003.
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 October 2, 2002, the Philadelphia Stock Exchange, Inc. (``PHLX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The PHLX filed Amendments No. 1, 2, and 3 to the proposal on March 17,
2003,\3\ June 6, 2003,\4\ and June 10, 2003,\5\ respectively. The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons and to grant
accelerated approval to the proposed rule change, as amended, through
June 5, 2004.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaces the original filing in its
entirety.
\4\ Amendment No. 2 replaces Amendment No. 1 in its entirety.
\5\ See letter from Jurij Trypupenko, PHLX, to Nancy Sanow,
Senior Special Counsel, Office of Market Supervision, Commission,
dated June 9, 2003 (``Amendment No. 3''). Amendment No. 3 indicates
that the proposal expires on June 5, 2004.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to initiate a pilot program (``Pilot
Program'') that will allow the Exchange to list options on selected
stocks trading below $20 at one-point intervals. The text of the
proposed rule change appears below. Additions are in italics; deletions
are in brackets.
Series of Options Open for Trading
Rule 1012. (a)--(d) No change.
Commentary:
.01 to .04 No change.
.05 (a) The interval of strike prices of series of options on
individual stocks [will] may be:
(i) $1 or greater (``$1 strike prices'') provided the strike price
is $20 or less,
[[Page 35934]]
but not less than $3. The listing of $1 strike prices shall be limited
to options classes overlying no more than 5 individual stocks (the ``$1
Pilot'') as specifically designated by the Exchange. The Exchange may
list $1 strike prices on any other option classes if those classes are
specifically designated by other securities exchanges that employ a
similar $1 Pilot under their respective rules.
To be eligible for inclusion into the $1 Pilot, an underlying stock
must close below $20 in its primary market on the previous trading day.
After a stock is added to the $1 Pilot, the Exchange may list $1
strike prices from $3 to $20 that are no more than $5 from the closing
price of the underlying on the preceding day. For example, if the
underlying stock closes at $13, the Exchange may list strike prices
from $8 to $18.
The Exchange may not list series with $1 intervals within $0.50 of
an existing $2.50 strike price (e.g., $12.50, $17.50) in the same
series. Additionally, the Exchange may not list long-term option series
(``LEAPS[reg]'') at $1 strike price intervals for any option class
selected for the $1 Pilot.
A stock shall remain in the $1 Pilot until otherwise designated by
the Exchange. The $1 Pilot shall expire on June 5, 2004;
(ii) $2.50 or greater where the strike price is $25 or less[,];
provided, however, that the Exchange may not list $2.50 intervals below
$20 (e.g., $12.50, $17.50) for any class included within the $1 Pilot
if the addition of $2.50 intervals would cause the class to have strike
price intervals that are $0.50 apart;
(iii) $5[.00] or greater where the strike price is greater than $25
but less than $200[,]; and
(iv) $10 or greater where the strike price is $200 or more, except
as provided in paragraph (b) below.
The interval of strike prices of series of options on Exchange-
Traded Fund Shares will be $1 or greater where the strike price is
[less than ]$200 or less.
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 Exchange 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 III below. The Exchange 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 amend PHLX Rule 1012, ``Series of Options Open
for Trading,'' to implement the Pilot Program, which will operate for a
pilot period ending on June 5, 2004. The Pilot Program will allow the
PHLX to list a finite number of options at $1.00 strike price intervals
pursuant to the Pilot Program. Specifically, the proposal will allow
the PHLX to originally list as many as five options at $1.00 strike
price intervals within certain parameters specified in the proposed
rule, and to multiply list options classes at $1.00 strike price
intervals where those classes were specifically designated by other
securities exchanges that employ a similar $1.00 strikes pilot program
under their rules.
PHLX Rule 1012 establishes guidelines regarding the addition of
strike prices for series of options. Currently, the PHLX may list
options at $2.50 intervals where the strike price is $25.00 or less, at
$5.00 intervals where the strike price is greater than $25.00 but less
than $200.00, and at $10.00 intervals when the strike price is $200.00
or more.\6\ The PHLX notes that over the past two years, prices of
stocks in general have dropped, with many listings suffering
precipitous declines. As a result, there has been a proliferation of
stocks trading below $20.00, and the PHLX lists options on more than
390 such stocks, including Ford Motor Company, Cisco Systems, Inc., Sun
Microsystems, Inc., Corning, Inc., Motorola, Inc., Nextel
Communications, Inc., AOL Time Warner, Inc., and Walt Disney Company.
According to the PHLX, these stocks trading below $20.00 are among the
most widely held and actively traded equities listed on the New York
Stock Exchange, Inc., the American Stock Exchange LLC, and Nasdaq, and
the options overlying these stocks also trade actively.
---------------------------------------------------------------------------
\6\ See PHLX Rule 1012, Commentary .05. See also PHLX Rule 1012,
Commentary .05(b), which establishes guidelines for listing $2.50
strikes for a set number of classes trading between $25.00 and
$50.00.
---------------------------------------------------------------------------
The PHLX notes that when a stock underlying an option trades at
lower prices, it requires a larger percentage gain in the price of the
stock for the option to become in-the-money. For example, when a stock
trades at $6.00 and a potential investor wants to buy out-of-the-money
call options, he or she will have to buy the calls at a $7.50 strike
price. At these pricing levels, the stock would need to achieve a 25%
price gain before reaching at-the-money status. Such a 25% or higher
gain in the underlying stock is particularly significant in light of
the substantially lessened degree of volatility in many stocks and
options in the past several months. As a result, the PHLX believes that
there is a disincentive for investors to use options on these lowest-
tier stocks to manage risk. Additionally, with the recent increase in
the number of stocks trading below $20.00, PHLX member firms have
expressed a strong desire to list additional strike prices on these
stocks in order to provide their customers with greater flexibility in
achieving their investment strategies. The PHLX believes that the
proposed Pilot Program would give investors an opportunity to more
closely and effectively tailor their options investments to the price
of the underlying stock and at the same time would allow the PHLX to
take advantage of competitive opportunities to list options at $1.00
strike prices pursuant to the terms of the Pilot Program.
Moreover, the PHLX believes that implementing the Pilot Program is
decidedly pro-competitive. The PHLX believes, and has consistently
maintained, that its ability to list options is a significant, and
indispensable, component of competition that should not be
circumscribed. The PHLX believes that it, like the other options
exchanges, should be able to list $1.00 strike price intervals
(pursuant to the terms of the Pilot Program) for the issues that it
believes are commercially feasible or desirable. The PHLX maintains
that, as history has frequently borne out, yesterday's lowest-
performing options, particularly those in the lowest priced trading
bracket (i.e., the lowest priced stocks), could well become tomorrow's
most desirable options.
For these reasons, the PHLX proposes to implement the Pilot
Program, as described below.
Options Eligible for the Pilot Program
The Pilot Program would allow the Exchange to list $1.00 strike
prices on equity options overlying up to five individual stocks
provided that the strike prices are $20.00 or less, but not less than
$3.00. The appropriate Exchange committee will determine which
underlying stocks will be included in the Pilot Program. A class
becomes eligible for inclusion in the
[[Page 35935]]
Pilot Program when the underlying stock price closes below $20.00 in
the primary market on the previous trading day. Underlying stocks
trading under $20.00 that are not a part of the Pilot Program will
continue to be eligible for trading at $2.50 and $5.00 intervals.
Although the PHLX may select up to five securities to be included
in the Pilot Program, the Exchange would not be precluded from also
listing options on other stocks at $1.00 strike price intervals if
other options exchanges list those series pursuant to their respective
$1.00 strike price pilot programs.
The Exchange will not list $1.00 strike price intervals on LEAPS
pursuant to the Pilot Program.
Adding $1.00 Strike Price Intervals
The procedures for adding $2.50 or $5.00 strikes are contained in
Exchange Rule 1012, Commentary .05, which will be amended to allow the
addition of $1.00 strike price intervals.\7\ Under the proposed Pilot
Program, the closing price of the underlying stock will serve as the
reference point for determining which $1.00 strike prices the Exchange
may open for trading.
---------------------------------------------------------------------------
\7\ PHLX Rule 1012(a)(iii) permits the Exchange to add a new
option series ``as the market price of the underlying stock or
Exchange-Traded Fund Share or the underlying foreign currency, as
the case may be, moves substantially from the initial exercise price
or prices.'' Moreover, PHLX Rule 1010 provides that where
exceptional circumstances have caused an underlying security not to
comply with the Exchange's maintenance requirements, ``the Exchange
may, in the interest of maintaining a fair and orderly market for
the protection of investors, determine to open additional series of
option contracts on the class covering that underlying security.''
---------------------------------------------------------------------------
To minimize unnecessary proliferation of series, the PHLX will only
list $1.00 strike prices within a range of $5.00 greater or $5.00 less
than the closing price of the underlying stock on the primary market on
the day before selection by the Exchange. No strike prices will be
added outside the $5.00 range. For example, if the underlying trades at
$6.00, the PHLX could list $1.00 strikes from $3.00 to $11.00. The
Exchange believes that this proposed range-format will significantly
restrict the number of series that may be added at any one time.
As noted above, PHLX Rule 1012, Commentary .05, currently allows
the PHLX to list strike prices with $2.50 intervals when an underlying
stock trades below $25.00. For this reason, several options have $7.50,
$12.50, and $17.50 strike price intervals. To further avoid the
proliferation of series, the PHLX does not intend to list $1.00 strike
prices at levels that ``bracket,'' that is, are on either side of,
existing $2.50 intervals (e.g., $7.00 and $8.00 strikes around a $7.50
strike). Accordingly, in this situation, there must be more than $0.50
between any two strike prices. Thus, if the underlying stock closed at
$5.00, the Pilot Program would permit the Exchange to list options with
$1.00 strike price intervals from $3.00 to $10.00, if nothing was
trading already at $5.00 and $7.50 strike prices, or $1.00 strike price
intervals at $3.00, $4.00, $6.00, $9.00 and $10.00, if options were
already trading at $5.00 and $7.50 strike prices. When the $2.50
intervals are ``phased-out,'' as described below, the PHLX will
introduce $1.00 intervals that ``bracket'' the phased-out price. For
example, when the $7.50 series expires, the PHLX will replace it by
issuing a new month with $7.00 and $8.00 intervals.
Phasing-Out $2.50 Strike Price Intervals
Once an option becomes part of the Pilot Program, the Exchange will
begin the process of phasing-out existing $2.50 intervals overlying the
same stock in favor of $1.00 intervals. To phase out the $2.50
intervals, the Exchange initially will delist those $2.50 series for
which there is no open interest. Subsequently, the Exchange will no
longer add new expiration months at $2.50 intervals below $20.00 when
the existing months expire. This process will effectively phase-out the
remaining $2.50 intervals as the farthest-out months expire.
Adding Expiration Months
PHLX Rule 1012 generally allows the Exchange to make available for
trading four expiration months for each initial listing of an option.
Upon expiration of the near-term month, the Exchange may list an
additional expiration month. Under the Pilot Program, if the underlying
closed at or above $20.00 on Expiration Friday, the PHLX would not list
an additional month for a $1.00 strike series until the stock again
closed below $20.00 in the primary market on the day before selection
for listing.
Deleting $1.00 Strike Price Intervals
At any time, the Exchange may cease listing $1.00 strike prices on
existing series by submitting a Cessation Notice to the Options
Clearing Corporation (``OCC'').\8\ As discussed above, if the
underlying closed at or above $20.00 on Expiration Friday, the Exchange
would not list any additional months with $1.00 strike prices until the
stock subsequently closed below $20.00 on the primary market on the day
prior to the Exchange listing the option. If the underlying stock does
not subsequently close below $20.00, thereby precluding the listing of
additional $1.00 strike prices and months, the existing $1.00 series
would eventually expire. When the near-term month is the only series
available for trading in the Pilot Program, the Exchange may submit a
Cessation Notice to OCC. Upon submission of that notice, the listing
would no longer count towards the five listings that are allowed the
Exchange pursuant to the Pilot Program, thereby allowing the PHLX to
list classes on an additional stock. Once the Exchange submits the
Cessation Notice, it would not list any additional months for trading
with strikes below $20.00 within the Pilot Program unless the
underlying once closed below $20.00, as required by the Pilot
Program.\9\
---------------------------------------------------------------------------
\8\ The reasons for submitting a Cessation Notice include:
expiration of available $1.00 strikes (i.e., the underlying stock
price on the primary market remains above $20.00); series
proliferation concerns; and delisting because of, among other
things, low price, merger, or takeover. In any event, the PHLX would
continue to have the ability to cease trading series that become
inactive and have no open interest, with prior notice to its
members).
\9\ If the underlying stock trades below $20.00 after submission
of the Cessation Notice by the PHLX, the Exchange could list $1.00
strike prices again provided it included the class as one of the
five classes permitted under the Pilot Program.
---------------------------------------------------------------------------
Options Price Reporting Authority (``OPRA'') Capacity
The Exchange believes that, according to OPRA figures, there is
sufficient capacity to accommodate the Exchange's proposed Pilot
Program. The PHLX believes that there is significant excess system
capacity at this time: on a daily basis, the options exchanges are
using an average of less than 7,000 messages per second (``mps'')
during peak periods, which is less than 25% of the total system
capacity of 32,000 mps.\10\ To date, the exchanges have yet to exceed
11,000 mps for any extended period of time.\11\ Thus, the PHLX believes
that implementing the Pilot Program should not have any significant
negative impact on OPRA system capacity.
---------------------------------------------------------------------------
\10\ Securities Industry Automation Corporation (``SIAC''),
which administers and services the network for OPRA, estimates that
as much as 6,000 mps of the total system capacity will be used to
send best bid and offer (``BBO'') messages when the BBO feed becomes
operational. See Securities Exchange Act Release No. 47231 (January
22, 2003), 68 FR 4258 (January 28, 2003) (publication of notice of
File No. SR-OPRA-2002-01). See also Securities Exchange Act Release
No. 47231 (January 22, 2003), 68 FR 4258 (January 28, 2003) (order
approving File No. SR-OPRA-2002-01).
\11\ On November 6, 2002, the OPRA five-minute message peak was
8,203 mps. On November 13, 2002, the one-minute peak was 10,091 mps.
---------------------------------------------------------------------------
[[Page 35936]]
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
section 6(b)\12\ of the Act in general and furthers the objectives of
section 6(b)(5),\13\ in particular, in that it is designed to perfect
the mechanism of a free and open market and a national market system,
protect investors and the public interest and promote just and
equitable principles of trade. According to the PHLX, the proposal
would achieve this by allowing the listing of $1 strike price
intervals, thereby stimulating customer interest in options overlying
the lowest tier of stocks and creating greater trading opportunities
and flexibility and providing customers with the ability to more
closely tailor investment strategies to the precise movement of the
underlying stocks.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The PHLX 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 solicited or received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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. 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
filings will also be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-PHLX-2002-55 and should be submitted by July 8, 2003.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, 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.\14\ In particular, the Commission believes that the proposed
rule change is consistent with section 6(b)(5) of the Act,\15\ which
requires, among other things, that the rules of a national securities
exchange be designed to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest. Specifically,
the Commission believes that the proposed listing of one point strike
price intervals in selected equity options on a pilot basis should
provide investors with more flexibility in the trading of equity
options overlying stocks trading at more than $3 but less than $20,
thereby furthering the public interest by allowing investors to
establish equity options positions that are better tailored to meet
their investment objectives. The Commission also believes that the
Exchange's limited Pilot Program strikes a reasonable balance between
the Exchange's desire to accommodate market participants by offering a
wide array of investment opportunities and the need to avoid
unnecessary proliferation of options series. The Commission expects the
Exchange to monitor the applicable equity options activity closely to
detect any proliferation of illiquid options series resulting from the
narrower strike price intervals and to act promptly to remedy this
situation should it occur. In addition, the Commission requests that
the PHLX monitor the trading volume associated with the additional
options series listed as a result of the Pilot Program and the effect
of these additional series on market fragmentation and on the capacity
of the Exchange's, OPRA's, and vendors' automated systems.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
As noted above, the Commission is approving the PHLX's proposal on
a pilot basis. In the event that PHLX proposes to extend the Pilot
Program beyond June 5, 2004, expand the number of options eligible for
inclusion in the Pilot Program, or seek permanent approval of the Pilot
Program, it should submit a Pilot Program report to the Commission
along with the filing of such proposal.\16\ The report must cover the
entire time the Pilot Program was in effect, and must include: (1) Data
and written analysis on the open interest and trading volume for
options (at all strike price intervals) selected for the Pilot Program;
(2) delisted options series (for all strike price intervals) for all
options selected for the Pilot Program; (3) an assessment of the
appropriateness of $1 strike price intervals for the options the PHLX
selected for the Pilot Program; (4) an assessment of the impact of the
Pilot Program on the capacity of the PHLX's, OPRA's, and vendors'
automated systems; (5) any capacity problems or other problems that
arose during the operation of the Pilot Program and how the PHLX
addressed them; (6) any complaints that the PHLX received during the
operation of the Pilot Program and how the PHLX addressed them; and (7)
any additional information that would help to assess the operation of
the Pilot Program.
---------------------------------------------------------------------------
\16\ The Commission expects the PHLX to submit a proposed rule
change at least 60 days before the expiration of the Pilot Program
in the event the PHLX wishes to extend, expand, or seek permanent
approval of the Pilot Program.
---------------------------------------------------------------------------
The Commission finds good cause for approving the proposal prior to
the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. The PHLX's Pilot Program is identical
to a CBOE pilot program (``CBOE Pilot'') that the Commission
approved.\17\ Notice of the CBOE Pilot was published for comment \18\
and the Commission received one comment letter, which supported the
CBOE's proposal. Accordingly, the Commission believes that the proposal
raises no issues of regulatory concern and that there is good cause,
consistent with sections 6(b)(5) and 19(b) of the Act,\19\ to approve
the PHLX's proposal on an accelerated basis.
---------------------------------------------------------------------------
\17\ See Securities Exchange Act Release No. 47991 (June 5,
2003) (order approving File No. SR-CBOE-2001-60).
\18\ See Securities Exchange Act Release No. 47753 (April 29,
2003), 68 FR 23784 (May 5, 2003).
\19\ 15 U.S.C. 78f(b)(5) and 78s(b).
---------------------------------------------------------------------------
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-PHLX-2002-55) and Amendment
Nos. 1, 2, and 3 thereto are hereby approved, on an accelerated basis
and as a pilot program, through June 5, 2004.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78s(b)(2).
[[Page 35937]]
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
---------------------------------------------------------------------------
\21\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-15263 Filed 6-16-03; 8:45 am]
BILLING CODE 8010-01-P