[Federal Register Volume 59, Number 190 (Monday, October 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24305]
[[Page Unknown]]
[Federal Register: October 3, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34721; File No. SR-Phlx-92-03]
Self Regulatory Organizations; Order Approving Proposed Rule
Change and Amendment Nos. 1, 2, and 3 to the Proposed Rule Change, and
Notice of Filing and Order Granting Accelerated Approval of Amendment
No. 4 to the Proposed Rule Change, by the Philadelphia Stock Exchange,
Inc., Amending Options Floor Procedure Advice A-2 and Rule 1066
September 26, 1994.
On February 26, 1992, the Philadelphia Stock Exchange, Inc.
(``Phlx'' or ``Exchange'') 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 amend Phlx Options Floor
Procedure Advice (``OFPA'') A-2 and Phlx Rule 1066. The Exchange filed
Amendment No. 1 to the proposed rule change on January 6, 1993,\3\
Amendment No. 2 on June 19, 1993,\4\ Amendment No. 3 on June 23,
1994,\5\ Amendment No. 4 on September 21, 1994.\6\
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\1\15 U.S.C. Sec. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\Amendment No. 1 clarifies that an Exchange specialist may
accept or refuse contingency orders for placement on the Exchange
order book, except that Exchange floor official approval is required
to refuse to accept a customer contingency order. See Letter from
Gerald D. O'Connell, Vice President, Market Surveillance, Phlx, to
Sharon Lawson, Assistant Director, Division of Market Regulation,
Commission, dated January 5, 1995.
\4\In Amendment No. 2, the Exchange notified the Commission of
its intention to withdraw File No. SR-Phlx-92-37, because proposed
changes to Phlx Rule 1066(c) contained therein, which would clarify
the definitions of stop-limit and stop (stop-loss) orders and add
definitions of all-or-none, opening-only-market, market-on-close,
and cancel-replacement orders, would have duplicated the changes
proposed by the Exchange in this File No. SR-Phlx-92-03. See
Securities Exchange Act Release No. 32380 (May 28, 1993), 58 FR
31765 (June 4, 1993) (``Release No. 32380''). Also in Amendment No.
2, the Exchange proposed that Exchange specialists be permitted to
accept spread, straddle, and combination orders, in addition to
contingency orders, without the prior approval of an Exchange floor
official. Amendment No. 2 added that Exchange specialists would not
be permitted to refuse to accept customer contingency, spread,
straddle, or combination orders without the prior approval of two
Exchange floor officials. See Letter from Gerald D. O'Connell, Vice
President, Market Surveillance, Phlx, to Michael Walinskas, Staff
Attorney, Division of Market Regulation, Commission, dated June 17,
1993.
\5\In Amendment No. 3, the Exchange deleted from its proposal
its request that Exchange specialists be permitted to accept spread,
straddle, and/or combination orders without the prior approval of an
Exchange floor official. See Letter from Gerald D. O'Connell, First
Vice President, Phlx, to Michael Walinskas, Branch Chief, Options
Regulation, Division of Market Regulation, Commission, dated June
23, 1994.
\6\In Amendment No. 4, the Phlx revised the text of Option Floor
Procedure Advice A-2 to reflect the requirement that Exchange
specialists are not permitted to accept discretionary orders,
including spread, straddle, and combination orders, regardless of
whether they receive the approval of a floor official. See Letter
from Gerald D. O'Connell, First Vice President, Phlx, to Michael
Walinskas, Branch Chief, Options Regulation, Division of Market
Regulation, Commission, dated September 21, 1994.
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The proposed rule change and Amendment Nos. 1, 2, and 3 thereto
were published for comment in the Federal Register on July 1, 1994.\7\
No comments were received on the proposed rule changes, nor the
amendments. This order approves the proposal and the floor amendments.
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\7\See Securities Exchange Act Release No. 32455 (June 24,
1994), 59 FR 33998 (July 1, 1994).
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The proposed rule change to existing OFPA A-2 relates to the
acceptance of contingency orders by Exchange specialists
(``Specialists''). The changes to part (ii), and the addition of part
(iii), of OFPA A-2 would permit Specialists to accept contingency
orders currently forwarded through the Automated Options Market System
(also known as ``AUTOM'') without the requirement of approval by an
Exchange floor official (``Floor Official''). Such contingency orders
would include those currently listed and defined in paragraph (c) of
Phlx Rule 1066,\8\ as well as additional types of contingency orders
that the Exchange is proposing to add to Rule 1066(c). In addition, the
Exchange is proposing to make changes to the fine schedule of OFPA A-2.
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\8\Phlx Rule 1066 generally sets forth certain types of orders,
including contingency orders, market orders, and limit orders.
Paragraph (c) of Rule 1066 lists certain types of contingency
orders, and specifically defines such orders. Currently, the
contingency orders currently listed and defined under paragraph (c)
are stop (stop-loss) orders, stop-limit orders, delta orders, and
multi-part orders.
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Curently, a Specialist is prohibited under OFPA A-2 from accepting
contingency orders, other than stop (stop-loss) and stop-limit orders,
without the express approval of a Floor Official.\9\ The proposed
changes would make permissible the acceptance of contingency orders by
Specialists without the approval of a Floor Official. The change would
extend the acceptance of certain contingency orders without floor
official approval beyond the currently permitted acceptance of stop
(stop-loss) and stop-limit orders to include contingency orders as
defined as such in Rule 1066(c), and will apply to both customer and
broker-dealer accounts. Furthermore, a Specialist would be able to
refuse to accept contingency orders, but may only refuse to accept
contingency orders from customer accounts upon the prior approval of
two Floor Officials.
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\9\In addition, a Specialist is prohibited from accepting option
orders consisting of two or more option series (i.e., spread,
straddle, and/or combination orders). See Phlx OFPA A-2. The
Exchange's proposed rule change does not affect this prohibition,
which continues to apply to Specialists. See Amendment No. 3, supra
note 5.
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The Exchange is proposing to clarify the existing definitions of
stop (stop-loss) and stop-limit orders in Phlx Rule 1066, and to add
new subparagraphs (c)(4)-(7) to Rule 1066. This new text would expand
the existing list of the types of contingency orders and define each
contingency order permitted. Specifically, the Exchange proposes to add
all-or-none,\10\ opening-only-market,\11\ market-on-close,\12\ and
cancel-replacement orders.\13\
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\10\The Exchange defines an all-or-none order as a market order
or limit order which is to be executed in its entirety, or not at
all.
\11\The Exchange defines an opening-only-market order as a
market order which is to be executed in whole or in part during the
opening rotation of an options series, or not at all.
\12\The Exchange defines a market-on-close order as a market or
limit order to be executed as close as possible to the closing bell,
or during the closing rotation, and should be near to or at the
closing price for the particular series.
\13\The Exchange defines a cancel-replacement order as a
contingency order consisting of two or more parts which require the
immediate cancellation of a previously received order prior to the
replacement of a new order with new terms and conditions. If the
previously placed order is already filled partially or in its
entirety, the replacement order is automatically cancelled or
reduced by such number.
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Finally, the Exchange is proposing to amend the fine schedule to
OFPA A-2 to increase the penalties for infractions of those guidelines
by Specialists.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5) of the Act.\14\
Specifically, the Commission finds the amendment to OFPA A-2 permitting
Specialists to accept contingency orders, as defined in Phlx Rule 1066,
without prior Floor Official approval, will remove impediments to and
perfect the mechanism of a free and open market and a national market
system by facilitating quicker and more efficient executions of such
contingency orders. While the Commission believes that it is
permissible for Specialists to retain the ability to refuse to accept
contingency orders as market conditions necessitate, the Commission
also believes that the proposed amendment to OFPA A-2 requiring the
express approval of two Floor Officials in order for a Specialist to
refuse to accept a contingency order from a customer account will serve
to prevent Specialists from arbitrarily rejecting such customer orders,
and will thereby help to protect investors and the public interest. In
this regard, the Commission would expect the Phlx to monitor this area
to assure that orders are not arbitrarily or unfairly being refused.
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\14\15 U.S.C. Sec. 78f(b)(5) (1988).
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The Commission finds that the expansion of Phlx Rule 1066(c) to
include four additional types of contingency orders is consistent with
the Act and the rules thereunder, as well as the rules of other self-
regulatory organizations which trade option products. Specifically, the
definitions of all-or-none,\15\ opening-only-market,\16\ and market-on-
close\17\ orders are consistent with the definitions contained in the
rules of other options self-regulatory organizations, all of which
rules have been previously approved by the Commission. In addition,
although not contained in the rules of other self-regulatory
organizations, the ability, or in some cases the responsibility, of
Exchange members to submit cancel-replacement orders in appropriate
circumstances is set forth in Phlx OFPA A-7(b), which was previously
approved by the Commission.\18\
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\15\See American Stock Exchange, Inc. (``Amex'') Rule 131(c);
Chicago Board Options Exchange, Inc. (``CBOE'') Rule 6.53(i); and
New York Stock Exchange, Inc. (``NYSE'') Rule 13. See also Phlx OFPA
A-7.
\16\See Amex Rule 131(e); CBOE Rule 6.53(l); and NYSE Rule 13.
\17\See Amex Rule 131(f) and NYSE Rule 13.
\18\See Securities Exchange Act Release No. 30670 (May 6, 1992),
57 FR 20312 (May 12, 1992) (``Release No. 30670''). OFPA A-7(b)
states that in order to effect a change in the option series of an
order placed on the Specialist book, a member shall submit separate
cancel and replacement orders to the Specialists. In order to effect
a change in the price or volume of an order placed on the Specialist
book, a member may submit the appropriate cancel and replacement
ticket or tickets to the Specialist. In Release No. 30670, the
Commission found that this provision ``served the needs of investors
and promotes investor confidence in the quality and integrity of the
Phlx's options market by requiring specialists to respond promptly
to cancellation instructions and to indicate immediately that the
cancellation was accepted or that the cancellation was too late, and
therefore, that the order was executed.'' In addition, the
Commission found that the provision ``will improve the execution of
customer orders by providing an efficient procedure for submitting
changes in the terms of an order on the specialist's book.'' Id.
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The Commission also finds that the proposed amendments to the
definitions of stop (stop-loss) and stop-limit orders in Rule 1066(c)
merely clarify the current definitions of those terms, and therefore
present no new regulatory issues.
The Commission also finds that the amendment to OFPA A-2's fine
schedule to increase the penalties for infractions thereof will
continue to provide a fair and effective means to enforce compliance
with the provisions and thereby promote just and equitable principles
of trade and the protection of investors and the public interest.
Finally, the Commission finds good cause for approving Amendment
No. 4 to the proposed rule change prior to the thirtieth day after the
date of publication of notice of filing thereof in the Federal
Register. Currently, OFPA A-2(ii) permits specialists to accept spread,
straddle, or combination orders, as those terms are defined in Phlx
Rule 1066(d), (g) and (h), respectively with the express approval of
one Floor Official. However, because such orders are discretionary in
nature, and Section 11(a) of the Act\19\ prohibits specialists from
accepting discretionary orders, the Phlx has amended OFPA A-2 to
prohibit specialists from accepting such orders, regardless of Floor
Official approval. Thus, the purpose of Amendment No. 4 is merely to
conform OFPA A-2 with the requirements and prohibitions of the Act, and
necessarily serves to promote just and equitable principles of trade
and protect investors and the public interest. Therefore, the
Commission finds that no new regulatory issues are raised by Amendment
No. 4. Accordingly, the Commission believes it is consistent with
Sections 19(b)(2) and 6(b)(5) of the Act to approve Amendment No. 4 on
an accelerated basis.
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\19\15 U.S.C. 78k(a).
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Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 4 to the proposed rule change.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the submission, all subsequent
amendments, all written statements with respect to the foregoing that
are filed with the Commission, and all written communications relating
to the foregoing between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. Sec. 552, will be available for inspection and
copying in the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. Copies of such filing also will be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory orgainzation. All submissions should refer to File No.
SR-Phlx-92-03, and should be submitted by October 24, 1994.
It is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\20\ that the proposed rule change (File No. SR-Phlx-92-03), as
amended, is approved.
\20\15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24305 Filed 9-30-94; 8:45 am]
BILLING CODE 8010-01-M
