[Federal Register Volume 60, Number 218 (Monday, November 13, 1995)]
[Notices]
[Pages 57028-57031]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27879]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36457; File No. SR-Phlx-95-60]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Regarding Alternate
Specialists
November 3, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on
September 15, 1995, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange
[[Page 57029]]
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. On November 1, 1995, the Exchange submitted to
the Commission Amendment No. 1 to the proposed rule change.\1\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
\1\ See letter from Gerald D. O'Connell, First Vice President,
Phlx, to Glen Barrentine, Team Leader, Division of Market
Regulation, SEC, dated October 30, 1995. In Amendment No. 1, the
Exchange clarifies that the ``50% of quarterly opening share
volume'' requirement has been replaced with ``50% of quarterly trade
volume.''
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend Phlx
Rule 202A, Responsibilities of Alternate Specialists, to reduce the
number of equity issues in which an individual can serve as Alternate
Specialist from the current maximum, which is all of the Exchange's
approximately 2,300 securities, to a new level of 60 securities.
Moreover, under the proposed rule change, the Exchange would permit
the ``50% on-floor requirement'' to be met by trade volume, rather than
share volume. The proposed rule change would also allow Alternate
Specialists to count trades effected on another national securities
exchange through the Intermarket Trading System (``ITS'') towards their
50% on-floor requirement provided that the Alternate Specialist's on-
floor trades outnumber his/her ITS trades by a minimum ratio of three-
to-one. An Alternate Specialist's ITS trades in excess of that ratio
could not be used to satisfy the 50% requirement. Moreover, unexecuted
orders of 500 shares or more placed with the Specialist on the Exchange
at a price on or in-between the consolidated market and maintained on
the book for an extended period of time would be eligible for the 50%
on-floor requirement.\2\
\2\ According to the Exchange, an ``extended period of time''
will be determined by the Exchange on a case by case basis.
Telephone conversation between Edith Hallahan, Special Counsel,
Regulatory Services, Phlx, and Jennifer S. Choi, SEC, on October 11,
1995.
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The Exchange also proposes that, once a member has been assigned as
an Alternate Specialist, the member must maintain such assignment for
at least 30 business days, after which the member may terminate the
assignment by providing written notification to the Exchange on a form
prescribed by the Exchange.\3\ Terminations will become effective as of
the opening of trading on the equity floor on the business day
following the submission.
\3\ The Exchange notes that the general provision pertaining to
assignment of Alternate Specialists is Phlx Rule 201A.
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Moreover, to avoid repetition and improve the clarity of Rule 202A,
the Phlx proposes to amend several provisions that focus on the
coordination of Alternate Specialist activities with the respective
Specialist, the Alternative Specialist's participation on openings, and
the handling of orders. Specifically, the Exchange proposes to
consolidate into Rule 202A(a) the provisions relating to an Alternate
Specialist's affirmative and negative market making obligations, which
were previously covered by paragraphs (b)-(e) of Rule 202A. Under the
proposed rule change, Rule 202A(a) defines an Alternate Specialist as
an individual member of the Exchange registered as an equity Specialist
on the floor who, in addition to those securities for which he serves
as Specialist, has agreed to provide liquidity on demand as an
Alternate Specialist in the execution of customer orders in certain
other securities on the Exchange. The responsibilities of the Alternate
Specialist are defined as follows: to provide a bid and/or offer in the
security upon the request of a Floor Broker or Specialist holding a
customer order and to only participate in the execution of such orders
in a manner reasonably calculated to contribute to the maintenance of a
fair and orderly market.
Finally, the Exchange proposes to incorporate certain requirements
previously contained in the Supplementary Materials into new Rule
202A(c), which will list the criteria for qualifying and maintaining
the status of an Alternate Specialist. The Exchange also proposes to
delete the remaining requirements in the Supplementary Materials
because the Exchange finds them unnecessary in light of other existing
Exchange rules.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Currently, Rule 202A, which was adopted in 1987, outlines the
responsibilities of Alternate Specialists on the Exchange. The Rule
presently permits equity Specialists to trade in an Alternate
Specialist capacity in all securities traded on the equity floor. As a
result, the current rule does not encourage Alternate Specialists to
focus liquidity in small groups of stocks where more concentration of
activity could result in a higher degree of liquidity. Therefore, the
proposal limits the maximum number of Alternate Specialist issues to 60
per member. The primary purpose of the propose rule change is to
bolster liquidity provided by the Phlx's Alternate Specialist program
by concentrating Alternate Specialist activities in a more focused
manner.
The current rule also provides that Alternate Specialists must
comply with two quarterly trading requirements. First, 50% of an
Alternate Specialist's quarterly share volume (excluding share volume
in securities in which he is registered as Specialist) must be in
issues to which he is assigned. In situations where a Floor Official
requests an Alternate Specialist to participate in trading an issue in
which he is not assigned, to share volume so accumulated will be
included as part of the volume required to satisfy the 50% requirement.
Second, 50% of the quarterly share volume that creates or increases a
position (``opening'') in an alternative specialist account must result
from transactions consummated on the Exchange.
This proposal deletes the first requirement that 50% of the
Alternate Specialist's share volume must be in assigned issues because
the Exchange has limited the maximum number of Alternate Specialist
securities to 60. The other 50% requirement (i.e., that 50% of the
Alternate Specialist's ``opening'' volume must be effected on the Phlx)
is retained.\4\ The Exchange, however, proposes to replace the ``50% of
quarterly opening share volume'' requirement with ``50% of quarterly
trade volume.'' The Exchange states that it has determined that the
requirement should no longer be limited to
[[Page 57030]]
``opening'' positions because measuring all trade volume each quarter
to ensure that 50% is executed on the Exchange should fulfill the
Phlx's intent to monitor for true alternate specialist activity and
obligations. The Exchange also notes that opening transactions are
difficult to monitor because floor tickets are not marked with an
opening or closing distinction on the equity floor.
\4\ See Phlx Rule 202A(c)(iv).
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Moreover, the 50% on-floor requirement is proposed to be amended
both to employ trade volume rather than share volume in the calculation
as well as to include: (1) ITS trades and (2) unexecuted orders placed
on the Phlx at prices on or between the consolidated market. In this
regard, the Phlx notes that, consistent with their regulatory
responsibility to provide fair and orderly markets, Alternate
Specialists must provide liquidity on the Exchange in assigned
alternate issues. The ability to inventory or offset securities
positions is a critical aspect of the National Market System, which
links equity markets, including the Phlx and seven other equity
markets, with the goal of best-execution pricing. Thus the Exchange
believes that it is appropriate to allow one-quarter of the 50% on-
floor requirement to be met by ITS trades effected away from the
Exchange, because ITS enhances liquidity and provides the linkage vital
to a true National Market System. Only those ITS trades that do not
exceed a ratio of three Phlx trades to one ITS trade may be counted.
For example, if an Alternate Specialist needs to employ ITS trades to
meet his on-floor requirement, and has executed a total of 2,000 trades
in that quarter, the requirement could be met by effecting 250 off-
floor ITS trades and 750 on-floor trades.
Second, the Exchange notes that Alternate Specialists serve an
important role in providing liquidity and stabilizing the marketplace
in their Alternate Specialist securities. In offsetting positions or
responding to market needs, Alternate Specialists routinely place
orders on the Exchange that add liquidity to the Exchange's market,
regardless of whether the orders are subsequently availed upon by a
customer's agent, to facilitate customer interest. In order to give
proper credit to such stabilizing and liquidity-providing orders placed
on the Exchange floor by Alternate Specialists that are not executed,
the Exchange also proposes to count toward the 50% requirement orders
placed on the Exchange on or in-between the consolidated market,
notwithstanding that the orders are not executed. The Alternate
Specialist must evidence for any such claim that the respective bid or
offer was maintained for an extended period of time.
As part of the proposed simplification of the Rule, the Phlx
proposes to delete certain existing provisions, namely former
Supplementary Material .06, .07 and .09. First, the Exchange proposes
to delete Commentary .06, which states that Alternate Specialists as a
group are entitled to participate in opening a security on the Exchange
with equal standing with respect to any net imbalance (after Specialist
participation) of purchase and sale orders on the Exchange. This
provision is being deleted because the Exchange believes that the
priority of orders is already adequately addressed in Rules 119 and
120,\5\ which fairly allot participation levels to all members,
including Alternate Specialists.\6\
\5\ See Phlx Rule 119 (Precedence of Highest Bid) and Phlx Rule
120 (Precedence of Offers at Same Price).
\6\ Therefore, in accordance with Phlx's rules of priority and
precedence, the level of Alternate Specialists participation would
depend on price and size. Telephone conversation between Gerald
O'Connell, Vice President, Phlx, and Jennifer S. Choi, SEC, on
October 25, 1995.
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Second, the Phlx also proposes to delete Commentary .07, which
provides that following the opening, when the bids or offers of one or
more Alternate Specialists are equal in price to those of the
Specialist, the Alternate Specialist as a group are entitled to
participate in the transactions effected thereon to the extent of one-
third of the total shares involved (excluding those needed to satisfy
public orders). This provision also is being deleted because existing
parity and priority provisions of Rules 119 and 120 satisfactorily
allocate shares in today's market environment.\7\
\7\ Under the Phlx's rules of priority and precedence, the
number of shares that an Alternate Specialist and a regular
specialist would be entitled to would depend on price, time, and
size. Telephone conversation between Gerald O'Connell Vice
President, Phlx, and Jennifer S. Choi, SEC, on October 25, 1995.
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Third, the Exchange also proposes to delete Commentary .09, which
states that, when requested by a Floor Broker, an Alternate Specialist
must accept and guarantee execution of all 100 share agency orders to
which his assignment extends that are not accepted by the Specialist.
This provision is being deleted because the affirmative obligation of
this provision only pertains to 100 share orders and will be largely
superseded by new Rule 202A(c)(iv), where the Alternate Specialist's
affirmative obligation to maintain an adequate presence in his assigned
issues is more pronounced.\8\
\8\ The Commission notes that new provision 202A(c)(iv) requires
that the Alternate Specialist ``maintain an adequate presence in the
Exchange's market with respect to assigned alternate issues and
related trade activities for the alternate account,'' and sets forth
the 50% on floor requirement. This provision, however, does not
require the alternate specialist to guarantee execution of any
specific number of shares.
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2. Statutory Basis
The proposed rule change is consistent with Section 6 of the Act in
general, and in particular, with Section 6(b)(5), in that it is
designed to promote just and equitable principles of trade, prevent
fraudulent and manipulative acts and practices, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, as
well as to protect investors and the public interest. The Exchange
believes that the proposed changes to Rule 202A strengthen its
requirements by limiting the number of Alternate Specialist issues,
which, in turn, should prevent fraudulent and manipulative acts and
practices, and foster consistency with the principles underlying the
National Market System and Section 11A, as well as favorable specialist
margin treatment.\9\ Nevertheless, the Exchange also believes that the
proposed changes with respect to the 50% requirements should protect
investors and the public interest as well as promote just and equitable
principles of trade by facilitating the inventory needs of Alternate
Specialists.
\9\ Phlx specialists and alternate specialist qualify for
favorable margin treatment under Rule 12 of Regulation T.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such other period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
[[Page 57031]]
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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 submission, 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 person, 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 at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-Phlx-95-60 and should be
submitted by December 4, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
FR Doc. 95-27879 Filed 11-9-95; 8:45 am]
BILLING CODE 8010-01-M
