The New York Stock Exchange won conditional approval yesterday from the Securities and Exchange Commission to trade options on individual listed stocks.
Despite objections from the four other exchanges now trading options, the commissioners agreed unanimously that the NYSE met SEC requirements for consumer protection and safeguards against market manipulation and did not present direct or unfair competition. It is not known how soon trading will begin.
An option is a contract affording an investor the right to buy or sell a certain quantity of stock at a fixed price within a given period of time. The holder pays a premium for the privilege.
The Big Board has been trying for about seven years to trade individual options. (It began trading options on its composite index in late 1983 and last year added several other options on indexes.) Currently, options on individual stocks are traded on the American, Pacific and Philadelphia stock exchanges as well as the Chicago Board Options Exchange, the first and largest of the options traders.
To overcome their objections, the NYSE agreed to handle options and stocks on different trading floors and to prohibit electronic communications between the floors so as not to give Big Board traders an advantage over their competitors. A specialist -- a broker-dealer on the floor who makes an orderly market in a stock -- will not be a specialist as well in the option on that stock. The NYSE also agreed that a dealer trading for his own account cannot trade in a given option for one hour after leaving the stock floor. These provisions are designed to prevent price manipulation.
With a very few exceptions, options on each stock are traded on only one exchange. The NYSE can expect to join the lottery system run by the other four exchanges that decides where each option will be traded. Because 391 options on the top stocks already have been assigned to the four exchanges, the 150 to 300 additional stocks eligible for options trading may not appear too attractive to the NYSE.
The Big Board is looking to the day when options can be traded on multiple exchanges, a development that would put it in direct competition with the smaller exchanges. But the SEC is not considering that issue for the time being.
In other action, the SEC voted with great reservations to deny TransCanada Pipelines Ltd. an exemption from the rules covering stock registration and reporting. The case presages the problems the commission will face as the globalization of markets increases.
The Canadian corporation claimed that compliance with U.S. regulations would cost $1,700 per share for the 1,800 shareholders in America. While sensitive to the economic burden on TransCanada, the commissioners felt an exemption would set the wrong precedent for other foreign companies selling stock to U.S. investors.