[Federal Register Volume 62, Number 32 (Tuesday, February 18, 1997)]
[Notices]
[Pages 7289-7291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3919]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38265; File No. SR-Phlx-96-23]
Self-Regulatory Organizations; Order Approving and Notice of
Filing and Order Granting Accelerated Approval of Amendment No. 1 to
Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating
to Options Specialist Evaluations.
February 11, 1997.
On July 1, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``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 modify its procedures for
evaluating options specialists units. Notice of the proposal was
published for comment and appeared in the Federal Register on September
12, 1996. The exchange subsequently filed Amendment No. 1 to the
proposed rule change on December 2, 1996.\3\ No comment letters were
[[Page 7290]]
received on the proposal. This order approves the Phlx proposal as
amended.
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\1\ U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Michele R. Weisbaum, Vice President and
Associate General Counsel, Phlx, to Jon Kroeper, Esquire, Office of
Market Supervision, Division of Market Regulation, SEC, dated
November 27, 1996. Amendment No. 1 amends Rule 511 to clarify that
the Allocation, Evaluation, and Securities Committee (``Committee'')
has the authority to hold a hearing in the event that a registrant
has failed to fulfill minimum performance standards, and to allow
the Committee to take action against a registrant who does not
attend a scheduled informal meeting or hearing.
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I. Description of the Proposal
Since at least 1978, the Exchange has been evaluating its options
specialists based on the same questionnaire in use today. Subjective
series of questions answered by the floor brokers that have traded with
the particular specialists over the last quarter. The results of the
questionnaire are used by the Committee when making allocation and
reallocation decisions regarding option specialist privileges. The
Exchange has represented that the Committee's current review system is
very complicated and needs to be simplified in order to be more
effective. The evaluations are now scored on a scale of 1 through 10,
and any unit with an overall score below 5 on the questionnaire in one
quarter, a score of below 5 for three or more questions in one quarter,
or a score below 5 on the same question for three consecutive quarters
is deemed to have performed below minimum standards and is subject to
review by the Committee.
The Phlx proposal, as amended, modifies the survey and revises the
process by which the Committee uses the questionnaires to evaluate the
specialists' performance.
1. Survey Modification
The survey is revised such as to request information that the
Exchange believes would be more directly indicative of a specialist's
performance. The new survey has 15 all-new questions. It would be
answered every six months by floor brokers who would have traded at
least a minimum number of times in the specialist's issues over the
past six months.\4\ Only specialist units (not individual specialists)
would now be graded as allocations are made to units, not individual
specialists; however, separate evaluations will be conducted for each
quarter or half turret post at which a unit has a specialist operation.
Thus, a large specialist unit which is spread out over the floor may
receive two or three separate evaluation scores so that the Committee
could focus on exactly where a problem may be occurring. The same
questionnaire will be used for equity option specialists, index option
specialists \5\ and foreign currency option specialists.
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\4\ Floor brokers surveyed will be chosen according to Exchange
records. The number of trades may vary but will be predetermined by
the Committee.
\5\ Currently, all of the specialist units that have been
allocated index options are also equity option specialists; however,
if a unit only traded index options, the survey would be equally
applicable.
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Each question must be answered by giving the unit a score of 1
through 9 (very poor to excellent). Any question that is answered with
a score of 4 or less must be accompanied by a written explanation.
Floor brokers who submit negative comments about a particular
specialist unit may, but are not required to, speak directly with a
representative of the specialist unit in order to try to resolve any
problems that may exist; Exchange staff may attend such a meeting.
Floor brokers who do not complete and return the surveys will continue
to be subject to fines pursuant to Options Floor Procedure Advice C-8.
The questions asked will cover a wide range of specialist
responsibilities such as the degree of liquidity provided, the
tightness of quotes, timeliness of quote updates, ability to fill small
lot orders, timeliness of reports, ability to conduct opening
rotations, maintenance of crowd control, and clerical staffing.
2. Evaluation Procedure
Under the proposed new language in Supplementary Material .02 to
Rule 515, the Committee \6\ would review the survey as well as
regulatory history, written complaints, timeliness of openings, trading
data, and any other relevant information in order to determine if
minimum performance standards have been met in areas such as quality of
markets, observance of ethical standards, and administrative
responsibilities. If a specialist unit is ranked by score in the bottom
10% of all units as a result of a semi-annual review, it will be
presumed to have failed to meet the minimum performance standards.\7\
The Committee may also make such a presumption if the information on
the survey or the other information reviewed by the Committee supports
such a finding.
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\6\ The Committee may conduct such reviews or it may delegate
that responsibility to the Quality of Markets Subcommittee. Exchange
Rule 509 is being amended to note this function as a specific
responsibility of this subcommittee.
\7\ Under the current procedure, a specialist unit that receives
an average score under 5.00 in any one quarter would be deemed to
have performed below minimum standards.
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If the Committee makes such a presumption of failure to meet
minimum performance standards, it may elect to hold an informal meeting
with the specialist unit. If the unit refuses to meet without
reasonable justification, or if the evaluation scores are not improved,
the Committee may proceed with a formal hearing in accordance with Rule
511(e). The Committee may only impose sanctions such as removal of
specialist privileges in one or more options classes or a prohibition
from new allocations as the result of a formal hearing. The hearing
procedures set forth in Rule 511(e) will not change as a result of this
rule proposal and decisions will still be subject to appeal to the
Board of Governors as provided for under By-Law Article XI, Section 11-
1.
II. Discussion
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 Sections 6(b)(5) in that it is designed
to prevent fraudulent, manipulative acts and practices and to promote
just and equitable principles of trade, and to remove impediments to
and protect the mechanism of a free and open market and to protect
investors and the public interest.
The Commission believes that the adoption of a new, expanded survey
is a more precise measurement of specialist units' performance and will
serve to enhance the options specialists evaluation procedures; these
evaluation procedures are designed to help the Exchange maintain the
quality and integrity of its markets by setting minimum standards of
specialist performance and providing a means to identify specialist
units which fail to meet minimum performance standards. Specifically,
the evaluation procedures should further the Phlx's ability to ensure
liquid and continuous markets for options by permitting the Exchange to
enforce more effectively the affirmative and negative obligations
imposed on specialist units.
The Commission also believes that the Committee's consideration of
the floor broker survey results in allocating options to specialist
units should provide an incentive for improved specialist performance.
Moreover, the Commission finds the Phlx's program is substantially
similar to those of the Chicago Board Options Exchange (``CBOE'') \8\
and Pacific Stock Exchange (``PSE'') \9\ which have been in operation
for several years. In particular, the Commission believes that the
purposes for conducting the questionnaires will not be compromised
[[Page 7291]]
by distributing the questionnaires semi-annually instead of quarterly.
The Commission notes that the CBOE and PSE also evaluate their trading
crowds and market makers on a semi-annual basis.
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\8\ CBOE Rule 8.60.
\9\ PSE Option Floor Procedure Advice B-13.
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Finally, the Commission believes that more stringent formalized
specialist standards will further enhance the integrity of the options
markets and contribute to investor confidence and protection.
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. Amendment No. 1
made clarifying technical changes to the text of the rule, and did not
propose new substantive provisions to the submitted rule change.
Accordingly, the Commission believes that consistent with Sections
6(b)(5) and 19(b)(2) of the Act, good cause exists to accelerate
approval of Amendment No. 1.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. 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 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,
N.W., Washington, D.C. 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-96-23 and
should be submitted by March 11, 1997.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\10\ that the proposed rule change (SR-Phlx-96-23), as amended, is
approved.
\10\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3919 Filed 2-14-97; 8:45 am]
BILLING CODE 8010-01-M
