regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.,

[Federal Register: April 20, 1999 (Volume 64, Number 75)]

[Notices]

[Page 19396-19397]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr20ap99-115]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41277; File No. SR-Phlx-99-02]

Self-Regulatory Organizations; Order Approving Proposed Rule Change by the Philadelphia Stock Exchange, Inc. to Change the Required Minimum Value Size for an Opening Transaction in FLEX Equity Options

April 13, 1999.

1. Introduction

   On January 19, 1999, the Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') submitted to the Securities and Exchange Commission (``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 reduce the required minimum value size for an opening transaction in FLEX Equity Options. The Federal Register published the proposed rule change for comment on March 11, 1999.\3\ The Commission received no comments on the proposal. This order approves the proposal.

   \1\ 15 U.S.C. 78s(b)(1).

   \2\ 17 CFR 240.19b-4.

   \3\ Exchange Act Release No. 41136 (March 3, 1999), 64 FR 12203 (March 11, 1999).

2. Description of Proposal

   The Exchange is proposing to change the minimum value size for opening transactions, other than FLEX Quotes responsive to a FLEX Request for Quotes, in any FLEX equity option series in which there is no open interest at the time the Request for Quotes is submitted. Currently, under Exchange Rule 1079 the minimum value size for these opening transactions is 250 contracts. The Exchange is proposing to change the minimum value size for these transactions to the lesser of 250 contracts or the number of contracts overlying $1 million of the underlying securities.

   The Exchange is proposing this change because it believes the current rule is unduly restrictive. The rule was originally put in place to limit participation in FLEX equity options to sophisticated, high net worth individuals.\4\ The Exchange believes, however, that limiting participation in FLEX equity options based solely on the number of contracts purchased may diminish liquidity and trading interest in FLEX equity options on higher priced equities. The Exchange believes the value of the securities underlying the FLEX equity options is an equally valid restraint as the number of contracts and, if set at the appropriate limit, can also prevent the participation of investors who do not have adequate resources. In fact, the limitation on the minimum value size for opening transactions in FLEX market index options and FLEX industry index options is tied to the same type of standard--the underlying equivalent value.\5\ The Exchange believes the number of contracts overlying $1 million in underlying securities is adequate to provide the requisite amount of investor protection. An opening transaction in a FLEX equity option series on a stock priced at $40.01 or more would reach this $1 million limit before it would reach the contract size limit, i.e., 250 contracts times the multiplier (100) times the stock price ($40.01) totals $1,000,250 in underlying value.

   \4\ Exchange Act Release No. 37691 (September 17, 1996), 61 FR 50060 (September, 24, 1996) (adopting SR-Phlx-96-38).

   \5\ See Exchange Rule 1079(a)(8)(A)(i).

   Currently, an investor can purchase 250 contracts in a FLEX equity series on lower priced stocks, meeting the minimum requirement without reaching an underlying equivalent value of $1 million. For example, a purchase of FLEX equity options overlying a $10 stock is permitted although the underlying value for the options would be $250,000, i.e., 250 contracts times the multiplier (100) times the stock price ($10). Conversely, under the proposed amendment, a participant could open a new FLEX equity option series overlying a $110 stock with a trade of

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   91 contracts or more since the underlying equivalent value would be $1,001,000.

3. Discussion

   The Commission finds that the proposed rule change is consistent with the objectives of section 6(b) of the Act.\6\ In particular, the Commission finds that the proposed rule change furthers the objectives of section 6(b)(5) \7\ which requires an exchange's rules to be designed to promote just and equitable principles of trade, prevent fraudulent and manipulative acts and practices, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and to protect investors and the public interest.\8\ Specifically, the Commission believes that the proposed rule change will increase liquidity and trading interest in FLEX equity options on higher priced securities. The Commission also believes that limiting the minimum value size for opening transactions in FLEX equity options to the lesser of 250 contracts or $1 million of underlying equivalent value is an appropriate level to prevent investors who do not have adequate resources from trading such options.

   \6\ 15 U.S.C. 78f(b).

   \7\ 15 U.S.C. 78f(b)(5).

   \8\ In approving this rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

4. Conclusion

   It is therefore ordered, pursuant to section 19(b)(2) of the Act,\9\ that the proposed rule change (SR-PHLX-99-02) is approved.

   \9\ 15 U.S.C. 78s(b)(2).

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\10\

   \10\17 CFR 200.30-3(a)(12).

   Jonathan G. Katz, Secretary.

   [FR Doc. 99-9815Filed4-19-99; 8:45 am]

   BILLING CODE 8010-01-M