[Federal Register Volume 63, Number 203 (Wednesday, October 21, 1998)]
[Notices]
[Pages 56284-56286]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28193]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40557; File No. SR-Phlx-97-55]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval of Amendment Nos. 1 and 2 to Proposed
Rule Change by the Philadelphia Stock Exchange, Inc. Establishing an
Enhanced Parity Split Pilot Program for Specialists in Foreign Currency
Options Effective Until October 1, 1999
October 15, 1998.
I. Introduction
On December 1, 1997, the Philadelphia Stock Exchange, Inc.
(``Exchange'' or ``Phlx'') 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 establish an enhanced parity
split pilot program for Exchange specialists trading foreign currently
options. The proposed rule change was published for comment in the
Federal Register on January 23, 1998.\3\ The Commission did not receive
any comment letters with respect to the proposal. The Exchange
submitted Amendment No. 1 to the proposal on June 17, 1998,\4\ and
Amendment No. 2 on October 2, 1998.\5\ This order
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approves the Exchange's proposed rule change and accelerates approval
of Amendment Nos. 1 and 2.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 39552 (Jan. 15, 1998),
63 FR 3611 (Jan. 23, 1998).
\4\ Amendment No. 1 modifies the application of the enhanced
parity split in situations where a customer order for 100 or more
FCO contracts is on parity. The revision requires that for customer
bids/offers of 100 FCO contracts or more, no such customer order on
parity shall receive a smaller participation than any other crowd
participant, including the specialist. Amendment No. 1 also revises
the text of the proposed rule to clarify that customer orders for
less than 100 FCO contracts have time priority. See Letter to
Michael Loftus, Attorney, Division of Market Regulation, Commission,
from Nandita Yagnik, Counsel, Exchange, dated June 16, 1998.
\5\ Amendment No. 2 extends the expiration date of the pilot
program to October 1, 1999. See Letter to Michael Loftus, Attorney,
Division of Market Regulation, Commission, from Nandita Yagnik,
Counsel, Exchange, dated September 30, 1998.
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II. Description of the Proposal
The proposed rule change would revise Exchange Rule 1014(h) to
establish an enhanced parity split pilot program (``Pilot Program'')
for the Exchange's foreign currency option (``FCO'') specialists. The
Exchange seeks to implement an enhanced parity split procedure similar
to the one currently applied to transactions in equity and index
options at the Exchange.\6\ Under the Pilot Program, however, the
application of the proposed FCO enhanced parity split would be more
widespread, and the enhanced parity split would be available to all FCO
specialists assigned to FCO products.\7\ The Pilot Program would remain
in effect until October 1, 1999.
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\6\ The enhanced parity split for equity and index option
specialists works as follows: when an equity or index option
specialist is on parity with one controlled account (any account
controlled by or under common control with a member broker-dealer)
and the order is for more than 5 contracts, the specialist will
receive 60% of the contracts and the controlled account will receive
40%. When the specialist is on parity with two controlled accounts
and the order is for more than 5 contracts, the specialist will
receive 40% of the contracts and each controlled account will
receive 30%. When the specialist is on parity with three or more
controlled accounts and the order is for more than 5 contracts, the
specialist will be counted as 2 crowd participants when allocating
the contracts. In any of these situations, if a customer is on
parity, he will not be disadvantaged by receiving a lesser allotment
than any other crowd participant, including the specialist.
In December, 1997, the Exchange amended its enhanced parity
split pilot program for equity and index option specialists to
expand its application. As a result of the revisions, all index
options and all newly listed equity options receive the enhanced
parity split. However, only 50% of those equity options not
considered ``newly listed'' are eligible to receive the enhanced
parity split. In addition, specialists are now permitted to revise
the list of eligible equity options on a quarterly basis, rather
than an annual basis. See Securities Exchange Act Release No. 39401
(Dec. 4, 1997), 62 FR 65300 (Dec. 11, 1997).
\7\ It should be noted that because FCOs on the Italian Lira and
the Spanish Peseta are traded as customized options, there are not
specialists assigned to those products. For simplicity and clarity,
all further references to FCOs shall not include these two products.
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The proposed enhanced parity split would apply to the first 500
contracts in a FCO transaction when the specialist is on parity with
one or more trading crowd participants. When the enhanced parity split
is applied, the FCO specialist will be counted as two crowd
participants when determining the allocation of the FCO contracts among
the trading crowd participants on parity, except in the following
circumstances: (i) When there is one other trading crowd participant on
parity, the FCO specialist will receive 60% of the FCO contracts making
up the order; or (ii) when there are two other trading crowd
participants on parity, the FCO specialist will receive 40% of the FCO
contracts making up the order.
Because a customer bid/offer for less than 100 FCO contracts
currently is deemed to have time priority over all other bids/offers,
such a customer order will not be subject to the enhanced parity
split.\8\ This provision will help ensure that small customer orders
are not disadvantaged by the application of the enhanced parity split.
In addition, any customer order that is on parity, and is for 100 or
more FCO contracts, will not receive a smaller participation than any
other crowd participant, including the specialist. This measure ensures
that larger customer orders (i.e., 100 or more FCO contracts) will not
be negatively impacted by the proposed enhanced parity split. Finally,
if a FCO transaction involves more than 500 contracts, these contracts
exceeding the 500 contract threshold will be allocated on a pro rata
basis among the crowd participants on parity.
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\8\ Exchange Rule 1014(h), ``Options on Foreign Currencies,''
Subsection (i), states that ``all bids/offers of customer accounts
for under 100 contracts have time priority over all other bids/
offers'' on the FCO floor. In that instance, the FCO specialist
cannot be on parity with such customer so the enhanced parity split
will not apply.
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The Commission notes that the application of the enhanced parity
split for FCO specialists will be mandatory. Therefore, with respect to
any FCO transaction that implicates the enhanced parity split, the FCO
specialist will be required to accept the preferential allocation and
may not decline the enhancement.\9\
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\9\ Telephone conversation between Michele R. Weisbaum, Vice
President and Associate General Counsel, Exchange, and Michael L.
Loftus, Attorney, Division of Market Regulation, Commission
(December 15, 1997).
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III. Discussion
For the reasons discussed below, the Commission finds that the
proposed rule change is consistent with the Act and the rules and
regulations under the Act applicable to a national securities exchange.
In particular, the Commission believes the proposed rule change is
consistent with the Section 6(b)(5) \10\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, prevent fraudulent and manipulative acts and practices, and
protect investors and the public interest.\11\ The Commission also
finds that the proposal may serve to remove impediments to and perfect
the mechanism of a free and open market by encouraging the Exchange's
FCO specialists to maintain tight markets in order to attract order
flow to the Exchange.
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\10\ 15 U.S.C. 78f(b)(5).
\11\ In approving this proposed rule change, the Commission has
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
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The Exchange previously provided an enhanced parity split to the
specialist dealing in dollar denominated delivery German Mark (``3D
German Mark'') options.\12\ The enhanced parity split gave the
specialist 50% of the first 500 contracts of any parity trade in 3D
German Mark options, except for customer orders involving less than 100
contracts. The Exchange eliminated the enhanced parity split in
September, 1997, because the specialist in 3D German Mark options found
the enhancement to be of little benefit.\13\ At the time the enhanced
parity split was eliminated, the Exchange informed the Commission that
ti would continue to study the potential use of an enhanced parity
split for all FCO specialists on a broader basis. This proposed rule
change represents the Exchange's plan for the expanded use of the
enhanced parity split in FCOs.
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\12\ The enhanced parity split for the specialist in 3D German
Mark options was first approved on December 29, 1994. See Securities
Exchange Act Release No. 35177 (Dec. 29, 1994), 60 FR 2419 (Jan. 9,
1995). 3D German Mark options are cash-settled, European-style,
cash/spot foreign currency option contracts on the German mark.
\13\ The enhanced parity split was eliminated as of September 8,
1997. See Securities Exchange Act Release No. 39030 (Sept. 8,
1997), 62 FR 48332 (Sept. 15, 1997). The sole specialist firm
trading 3D German Mark options indicated that the enhanced parity
split was not particularly useful. Furthermore, the Exchange
represented that the 3D German Mark enhanced parity split did not
serve as an effective means of attracting order flow to the
Exchange.
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The purpose of the enhanced parity split is to encourage FCO
specialist to make deep and liquid markets in order to attract order
flow to the Exchange. The Commission has previously noted that
specialists have responsibilities that other crowd participants do not
share, such as the staff costs associated with continually updating and
disseminating quotes.\14\ As a result, the Commission believes it is
reasonable for the Exchange to grant certain advantages to specialists,
such as the enhanced parity split, to attract and retain well
capitalized specialists at the Exchange. As long as these advantages do
not unreasonably restrain competition and do not harm investors, the
Commission believes that the granting of such benefits to specialists,
in general, is within the business judgment of the Exchange. Therefore,
even though the
[[Page 56286]]
proposed rule change could arguably have some negative impact on crown
participants, other than customers, the Commission believes the
proposal is consistent with the Act.
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\14\ See e.g., Securities Exchange Act Release No. 35177 (Dec.
29, 1994), 60 FR 2419 (Jan. 9, 1995).
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The Commission believes that customers, as they are defined in
Exchange Rule 1014(h),\15\ will not be disadvantaged by the proposal
and that current benefits available to customers will not be affected.
Specifically, customer bids/offers for less than 100 FCO contracts will
continue to have time priority over all other bids/offers. In that
instance, an FCO specialist cannot be on parity with such customer, and
as a result the enhanced parity split will not apply. The time priority
ensures that customers' smaller FCO orders will be filled first and
that FCO specialists will not benefit to the detriment of FCO
customers.
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\15\ Exchange Rule 1014(h) defines customer accounts as ``all
accounts other than ROT [Registered Options Trader], member or
specialist accounts.''
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The Commission notes that Exchange Rule 1014(h) does not confer
time priority on customer order for 100 or more FCO contracts. Under
the proposal, therefore, an FCO specialist on parity with a customer
orders for 100 or more FCO contracts will receive the enhanced parity
split. However, the proposal specifies that the application of the
enhanced parity split cannot cause the customer to receive a smaller
participation than any other crowd participant, including the
specialist. The Commission believes this provision adequately protects
customer orders for 100 or more FCO contracts from any negative impact
that might flow from application of the enhanced parity split. As a
result, the customer is ensured a participation that, at a minimum, is
equal to that given any other crowd participant on parity. Finally, the
Commission notes that this provision is consistent with the enhanced
parity split that applies to specialists trading equity and index
options.\16\
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\16\ See Description of the enhanced parity split available to
Exchange specialists trading equity and index options supra note 6.
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The Commission finds good cause for approving Amendment Nos. 1 and
2 to the proposed rule change prior to the thirtieth day after the date
of publication of notice of filing thereof in the Federal Register. The
Commission believes the Exchange's FCO specialists should begin
receiving the benefits of the enhanced parity without delay. The
Commission notes that Amendment No. 1 provides protection to customer
orders for 100 or more FCO contracts by requiring that any such
customer order on parity may not receive a smaller participation than
any other crowd participant, including the specialist. The Commission
believes this change strengthens the proposal by providing protection
to customer order for 100 or more FCO contracts that might otherwise be
impacted negatively by full application of the enhanced parity split.
Finally, Amendment No. 2 extends the expiration date of the Pilot
Program to October 1, 1999, to allow the Exchange to implement the
Pilot Program for one full year. The Commission believes, the Exchange
will benefit by operating the Pilot Program for one year rather than a
shorter period of time. A one year Pilot Program should provide the
Exchange with sufficient experience to determine in what form the Pilot
Program should be extended or made permanent, or whether the Pilot
Program should be discontinued. Accordingly, the Commission believes it
is consistent with Section 6(b)(5) of the Act \17\ to approve Amendment
Nos. 1 and 2 to the Exchange's proposed rule change on an accelerated
basis.
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\17\ 15 U.S.C. 78f(b)(5).
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Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 1 and 2 to the proposal, including
whether the proposed rule change as modified by Amendment Nos. 1 and 2
is consistent with the Act. Persons making written submissions should
file six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies of the
submissions, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any persons, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for inspection and copying in the Commission's
Public Reference Section, 450 Fifth Street, NW, Washington, DC 20549.
Copies of such filing will be available for inspection and copying at
the principal office of the Exchange. All submissions should refer to
File No. SR-Phlx-97-55 and should be submitted by November 12, 1998.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-Phlx-97-55), as amended, is
approved.
\18\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 98-28193 Filed 10-20-98; 8:45 am]
BILLING CODE 8010-01-M
