The Securities and Exchange Commission yesterday approved trading of over-the-counter options by stock exchanges and over-the-counter markets, a move that brings the country a step closer to integrated markets.
The SEC broke precedent by conditionally approving a one-year pilot program that would allow both markets to simultaneously trade options on six of the most active OTC stocks. Until now, the SEC has prohibited the same firm from making a market in both a common stock and the option to purchase that stock, out of fear of market manipulation.
The stocks included in the pilot program are the most actively traded in dollar volume on Nasdaq (National Association of Securities Dealers Automated Quotations). They are Apple Computer, Intel, Tandem Computer and Digital Switch. Two others, MCI and Convergent Technologies, will be eligible if the price of the shares rises to the $10 minimum set by the SEC for participation in the program. The SEC is prepared to change that restriction.
A staff aide said the pilot would put on the market "the best new option stocks in a long time."
A stock option gives the buyer the right, but not the obligation, to purchase shares at a given time in the future at a determined price. The buyer pays a premium for the right to buy the stock. If the price of the shares rises above the specified "strike price" of the option, the investor can make money. If the stock price does not rise, the option expires worthless and the investor loses the premium.
Trading in OTC options could begin by Oct. 1 as the result of yesterday's decision. In May or June the commission is scheduled to decide whether the stock exchanges also can trade the underlying stocks, which are now handled only in the over-the-counter market.
In a separate vote, the SEC agreed to allow immediate trading of options on up to 100 top Nasdaq stocks by both the exchanges and over-the-counter markets. The same option could be traded in many markets -- unlike current practice, which permits only one market to handle each option -- but no side-by-side trading of options and underlying stocks by the same firms would be allowed.
The SEC also voted to allow options trading based on the movements of an index of the top 100 Nasdaq stocks and a similar option index for the Philadelphia Stock Exchange. Trading can start as soon as the markets are ready.
Gordon S. Macklin, president of the National Association of Security Dealers, said he would have preferred a pilot option program of two or three dozen stocks. The fact that the exchanges are likely to slip in ahead of Nasdaq does not worry him in the long run, Macklin said.
The association did not ask the SEC to give it reciprocity in the form of trading options on stocks listed on the various exchanges, but Macklin said it was "not impossible" that the organization would change its mind.
In other action, the SEC voted to ask for comments on what, if anything, should be done about the government securities market. Ordered by Congress in the wake of recent scandals to come up with recommendations by June 21, the SEC wants to know whether voluntary capital guidelines, registration and examination are appropriate, the pros and cons of collateralized repurchase agreements, whether to extend the SEC's jurisdiction to bar people from the markets because of of fraud.
It inquires further whether a self-regulatory organization is sufficient, or whether to extend regulation of municipal bond dealers to government securities dealers as well, as some congressmen have proposed, or whether there should be formal regulation by the SEC, the Treasury or the Federal Reserve.