Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, 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.
17 CFR 240.19b-4.
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 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.
Index options traded on the Exchange are also known as sector index options.
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 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, 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.
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.
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) 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. To date, the OPRA participants have yet to exceed 16,000 mps for any extended period of time. 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.
The OPRA participants are: American Stock Exchange LLC; Chicago Board Options Exchange, Inc.; International Securities Exchange, Inc.; and Pacific Exchange, Inc.
The OPRA participants have recently voted to expand OPRA system capacity to 40,000 mps.
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.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act in general, and furthers the objectives of Section 6(b)(5) of the Act 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.
15 U.S.C. 78f(b)(5).
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: rule-comments@sec.gov. 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 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.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-1213 Filed 1-20-04; 8:45 am]
BILLING CODE 8010-01-P