Self-Regulatory Organizations; Order Partially Approving and Granting Accelerated Approval of Amendment No. 2 to a Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Establishing a 4:02 p.m. Closing Time for Equity and Narrow-Based Index Options Trading, and Modifying Option Trading Rotation Procedures

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38671; File No. SR-PHLX-97-04]

Self-Regulatory Organizations; Order Partially Approving and

Granting Accelerated Approval of Amendment No. 2 to a Proposed Rule

Change by the Philadelphia Stock Exchange, Inc. Establishing a 4:02

p.m. Closing Time for Equity and Narrow-Based Index Options Trading,

and Modifying Option Trading Rotation Procedures

May 23, 1997.

I. Introduction

On January 8, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx''

or ``Exchange'') filed with the Securities and Exchange Commission

(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of

the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4

thereunder.\2\ On January 29, 1997, the Exchange filed Amendment No. 1

to the rule proposal.\3\ On April 4, 1997, the Exchange filed Amendment

No. 2 to the proposed rule change.\4\ On April 23, the Exchange filed

Amendment No. 3 to the proposed rule change.\5\

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

\2\ 17 CFR 240.19b-4.

\3\ Letter from Theresa McCloskey, Exchange, to Janice Mitnick,

Commission, dated January 29, 1997. Amendment No. 1 is a technical

amendment, correcting rule language in Rule 1047, Commentary .03(c),

which was submitted as Exhibit B with the rule filing.

\4\ Letter from Philip H. Becker, Exchange, to Michael A.

Walinskas, Commission, dated April 4, 1997. Amendment No. 2 proposes

a 4:02 p.m. close of trading for narrow-based index options and

modifies option trading rotation procedures. Amendment No. 2

originally contained a proposal modifying Exchange index option

exercise cut-off procedures. However, this proposal was resubmitted

in Amendment No. 3, constituting a withdrawal of such proposal from

Amendment No. 2.

\5\ File No. SR-PHLX-97-04, Amendment No. 3, dated April 22,

1997. Amendment No. 3 proposes to amend Rule 1042A and Floor

Procedure Advice G-1 to change the index option exercise cut-off

time from 4:30 p.m. (or 15 minutes after the close of trading if

trading is closed at a time other than the regular close of trading)

to five minutes after the close of trading. The proposal also

deletes the current requirement that member organizations must

accept exercise instructions until 4:15 p.m. each business day.

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[[Page 29757]]

Notice of the substance of the proposed rule change and Amendment

No. 1 was provided by issuance of a release \6\ and by publication in

the Federal Register.\7\ Notice of the substance of Amendment Nos. 2

and 3 was provided by issuance of a release \8\ and by publication in

the Federal Register.\9\ One comment letter was received.\10\ This

order partially approves the proposed rule change. Specifically, this

order approves the originally filed proposal that establishes a 4:02

p.m. close of trading for equity options, Amendment No. 1, a technical

amendment to the originally filed proposal, and Amendment No. 2, which

proposes a 4:02 close of trading for narrow-based index options and

modifies option trading rotation procedures.\11\

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\6\ Securities Exchange Act Release No. 38218 (January 30,

1997).

\7\ 62 FR 5662 (February 6, 1997).

\8\ Securities Exchange Act Release No. 38554 (April 29, 1997).

\9\ 62 FR 24529 (May 5, 1997).

\10\ Letter from Michael Schwartz, Committee On Options

Proposals, dated January 10, 1997.

\11\ In partially approving the Exchange proposal, the

Commission is not approving at this time Amendment No. 3 to the

proposal. The comment period for Amendment No. 3 expires on May 26,

1997. See supra n. 9.

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II. Description of the Proposal

The Exchange proposes to amend Rule 101 to close equity and narrow-

based index options trading at 4:02 p.m. Currently, both equity and

narrow-based index options trade until 4:10 p.m.

The Exchange also proposes to amend Rule 1047 to permit two floor

officials to approve a trading rotation after the normal close of

trading. Currently, authority to determine that a final trading

rotation is needed to assure a fair and orderly market rests with the

Options Committee.

The Exchange also proposes to amend Rules 1047 and 1047A to amend

the notification requirement that applies to trading rotations

conducted after the close of trading. Currently, notice of a trading

rotation held as a result of unusual market conditions must be

disseminated to the floor by the close of trading. This effectively

requires the Exchange to decide whether it is going to conduct a

trading rotation before the close of trading. The proposal eases this

strict provision by only requiring that advance notice of a rotation be

disseminated and that the rotation not commence until five minutes

after dissemination of the notice.

The Exchange also proposes to amend, pursuant to Amendment No. 3 to

the proposal, Rule 1042A and Floor Procedure Advice G-1 to change the

index option exercise cut-off time from 4:30 p.m. (or 15 minutes after

the close of trading if trading is closed at a time other than the

regular close of trading) to five minutes after the close of trading.

Thus, the exercise cut-off time applicable to narrow-based index

options (proposed to close at 4:02 p.m.) would be 4:07 p.m., and the

cut-off time applicable to broad-based index options (which close at

4:15 p.m.) would be 4:20 p.m. The proposal, pursuant to Amendment No.

3, also deletes the current requirement that member organizations must

accept exercise instructions until 4:15 p.m. each business day.

The Commission received one comment letter regarding this

proposal.\12\ The commenter generally supports a 4:02 p.m. close of

trading for equity and narrow-based index options.\13\ The commenter

also supports the Exchange's proposed Amendment No. 3, which would

amend the Exchange's narrow-based index exercise cut-off time to expire

five minutes after the close of trading.

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\12\ See supra n. 10.

\13\ The American Stock Exchange, Inc. (``Amex''); Chicago Board

Options Exchange, Inc. (``CBOE''); Pacific Exchange, Inc. (``PCX'');

and New York Stock Exchange, Inc. (``NYSE'') have all amended their

rules to implement a 4:02 p.m. close for equity and narrow-based

index options. See Release No. 34-38640 (May 14, 1997) (order

approving Amex rule change), Release No. 34-38643 (May 14, 1997)

(order approving CBOE rule change), Release No. 34-38641 (May 14,

1994) (order approving NYSE rule change), and Release No. 34-38642

(May 14, 1997) (order approving PCX rule change).

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III. Discussion

The Commission finds that those portions of the proposed rule

change that establish a 4:02 p.m. close of trading for equity and

narrow-based index options and modify option trading rotation practices

are consistent with the requirements of the Act, and the rules and

regulations thereunder applicable to a national securities exchange,

and, in particular, Section 6(b)(5).\14\ Section 6(b)(5) requires,

among other things, that the rules of an exchange be designed to

promote just and equitable principles of trade, perfect the mechanism

of a free and open national market, and, in general, to further

investor protection and the public interest.

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\14\ 15 U.S.C. Sec. 78f(b)(5). The Commission is not, at this

time, approving or making any findings with regard to Amendment No.

3 to the proposal.

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The Commission believes that it is reasonable for the Exchange to

amend its rules to close trading in equity and narrow-based index

options at 4:02 p.m., versus the existing 4:10 p.m. close. Changing the

closing time for these options to 4:02 p.m. preserves the Exchange's

stated need to continue trading options for some period of time after

the close of trading in the underlying securities. The Exchange has

stated that this two minute extension from the close of the stock

markets will allow options traders to respond to late reports of

closing prices over the consolidated tape, thereby bringing options

quotes into line with the closing price of the underlying security. Due

to technological advances, these delays have now been reduced, but have

not been completely eliminated. The Exchange believes that two minutes

of options trading after the underlying equities close is sufficient to

bring options quotes into line with the closing price of the underlying

security.

In determining an appropriate closing time, the Exchange has also

considered the problems that might result when the Exchange remains

open after the close of the primary exchange for the underlying stocks.

The Exchange states that the existing 4:10 options trading close,

providing ten minutes of options trading after the underlying equities

have closed, often results in automatic executions of options at

outdated prices. The Exchange also states that, like equity options,

narrow-based index options are sensitive to changes in the underlying

equities prices. Further, the Exchange states that not all market

participants are able to respond quickly to changes in equity options

prices between 4:00 and 4:10 p.m.

Therefore, the Commission finds that a closing time of 4:02 p.m.

for equity and narrow-based index options is a reasonable means to

address the Exchange's desire to balance the need for some extended

trading period after the underlying markets have closed with the need

to prevent negative impact from equity and narrow-based index options

trading without the pricing benefit of continuing stock trading.

The Commission also believes that it is reasonable for two Exchange

floor officials to determine to commence a trading rotation due to

unusual market conditions, rather than the Options Committee. The

Exchange states such ``unusual market conditions'' include a situation

where an underlying stock has not stopped printing transaction prices

by the time of the options trading close. This change provides the

Exchange a more flexible decision making

[[Page 29758]]

mechanism for determining whether to conduct a trading rotation. A full

Options Committee determination may not be possible or practical under

many market circumstances. The Commission notes that the CBOE and the

Amex do not require full committee approval for conducting a trading

rotation.\15\

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\15\ See CBOE Rule 6.2, Interpretations and Policies .02; and

Amex Rule 1, Commentary .02.

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The Commission also believes that it is reasonable to amend the

rules of the Exchange to alter the notification procedure for trading

rotations to permit notice of such rotations to be disseminated after

the close of trading. Currently, notice of a trading rotation must be

disseminated to the floor by the close of trading. The Exchange's

proposal would require that a trading rotation not commence until five

minutes after dissemination of the notice of the rotation. The

Commission notes that the CBOE and the PCX require a five minute notice

period prior to a trading rotation and permit trading rotation notice

to be given after the close of trading.\16\

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\16\See CBOE Rule 6.2, Interpretations and Policies .02; and PCX

Rule 6.64, Commentary .01.

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It is contemplated that the Exchange will implement this rule

change on or about June 23, 1997.\17\

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\17\ Phone conversation between Edith Hallahan, Exchange and

Janice Mitnick, Commission, on May 23, 1997.

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The Exchange has requested that the portion of the proposed rule

change that establishes a 4:02 p.m. close of trading for narrow-based

index options and modifies option trading rotation practices be given

accelerated effectiveness pursuant to Section 19(b)(2) of the Act.\18\

The Commission finds good cause for approving this portion of the

proposed rule change prior to the thirtieth day after the date of

publication of notice thereof in the Federal Register. The Commission

notes that it has approved a 4:02 p.m. close for equity and narrow-

based index options for the Amex, CBOE, NYSE, and PCX.\19\ The Amex,

CBOE and PCX rule filings were published in the Federal Register \20\

and were subject to a full notice and comment period. One comment

letter supporting the proposals was received.\21\ Further, as stated

above, the Commission notes that the proposal regarding option trading

rotation practices are similar to the current practices of the Amex and

PCX.\22\ Accordingly, the Commission believes, consistent with Section

6(b)(5) of the Act, that good cause exists to approve this portion of

the proposed rule change on an accelerated basis.

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\18\ Letter from Philip H. Becker, Exchange, to Michael

Walinskas, Commission, dated May 22, 1997 (requesting acceleration

of narrow-based index options 4:02 p.m. close); phone conversation

between Edith Hallahan, Exchange and Janice Mitnick, Commission, on

May 23, 1997 (requesting acceleration of option trading rotation

practices provision).

\19\ See supra n.13.

\20\ See SR-AMEX-96-45, Release No. 34-38123 (January 6, 1997),

62 FR 1786 (January 13, 1997); SR-CBOE-96-71, Release No. 34-37988

(November 26, 1996), 61 FR 64405 (December 4, 1996); and SR-PSE-96-

41, Release No. 34-37920 (November 4, 1996), 61 FR 58434 (November

14, 1996).

\21\ See supra n.10.

\22\ See supra n.16.

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IV. Conclusion

For the reasons discussed above, the Commission finds that the

proposal is consistent with the Act, and, in particular, Section 6 of

the Act.

It is therefore Ordered, pursuant to Section 19(b)(2) of the

Act,\23\ that those portions of the proposed rule change that establish

a 4:02 p.m. close of trading for equity and narrow-based index options

and modify option trading rotation practices (SR-PHLX-97-04) are hereby

approved.

\23\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\24\

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\24\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-14283 Filed 5-30-97; 8:45 am]

BILLING CODE 8010-01-M