New York Stock Exchange directors endorsed the Big Board's entry into organized options trading "in principle" today.
The NYSE directors, at their regular monthly meeting, also gave final approval to a requirement that all NYSE-listed companies have audit committees as part of their corporate boards, and that the committees be composed of noncompany "outside" directors.
Options have been the hottest investment vehicle developed in recent years, and the possibility that the Big Board will begin to trade them drew an immediate blast from the American Stock Exchange, which has been trading them for more than a year and found them to be very profitable for its membership.
AMEX Chairman Paul Kolton said the NYSE directors' decision "should be a matter of concern to the investing public, the securities industry and the regulatory authorities."
Kolton said he was worried if "the nation's largest exchange channels its resources into the development of another options facility at the possible expense of the premiere equities market - and at a time when major efforts are under way to eliminate duplication, consolidate facilities, provide for effective competition, and cut costs and fees for the industry and the public."
The NYSE and the AMEX are currently involved in merger discussions, and the directors endorsement today was partly seen as a way to strengthen the Big Board's hand in the negotiations because one appeal of a merger for NYSE members has been the chance to get into options trading.
The AMEX, however, was not alone in criticizing today's tentative decision.
A spokesman for the country's biggest brokerage firm, Merrill Lynch, Pierce, Fenner & Smith, said it believes "the exchanges should concentrate on formation of a central market with full protection of customer orders and competition between markets within that system. A movement towards more dual listings of options before a central market system is in place puts the burden on the brokers to seek the best markets for their customers without giving them the mechanism for providing full-price protection."
Besides the AMEX, the Chicago Board Options Exchange, the Pacific, the PBW and the Midwest Exchanges currently trade options, but they are all on NYSE-listed stocks.
Since the NYSE would in all likelihood dually trade some of the options already traded on other exchanges, and since it is the primary market for the underlying shares, the NYSE might have difficulty in getting approval from the Securities and Exchange Commission to go ahead unless it guarantees full separation of its stock and option trading or introduces competition into its specialist system of market-making.
Martin Moskowitz, assistant director of the SEC's division of market regulation, said that some people have interpreted recent commission decisions on options "as saying the NYSE would have to provide soem form of competitive market-making before their specialists should be able to freely trade in options, whether on the New York Stock Exchange or elsewhere."
The NYSE staff embarked on a study six months ago on whether the exchange should get into options trading, and the affirmative report was submitted today for the boards approval. If the NYSE does go into options trading, it might have to expand by building a new floor over its present trading area, or it could expand laterally, the study also suggested.
The audit committee requirement must still be approved by the SEC before it goes into effect June 30, 1978, but that should be no problem. SEC Chairman Roderick Hills was the one who initially recommended that the NYSE make this a requirment for its listed companies.
Audit committees of outside directors have been responsible for uncovering many of the corporate payoffs and illegal behavior by company officers in recent years.
In a separate matter. Irwin Guttag, senior managing partner in the firm of Kaufman, Alsber & Co. was named to the NYSE 20-member board to fill the seat left vacant by the death of Goldman, Sachs & Co. Chairman Gustave Levy in November.