[Federal Register Volume 63, Number 55 (Monday, March 23, 1998)]
[Notices]
[Pages 13901-13902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7370]
[[Page 13901]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39754; File No. SR-Phlx-97-53]
Self-Regulatory Organizations; Philadelphia Stock Exchange,
Inc.; Order Granting Approval to Proposed Rule Change Relating to
Amending Its Floor Procedure Advice A-1 Regarding Displaying Best Bids
and Offers
March 13, 1998.
I. Introduction
On November 3, 1997, 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 amend its floor procedure
Advice A-1 regarding displaying best bids and offers. On December 23,
1997, and January 20, 1998, respectively, the Exchange filed Amendments
1 and 2 to the proposal with the Commission.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Michele R. Weisbaum, Vice President and
Associate General Counsel, Phlx, to David Sieradzki, Attorney,
Division of Market Regulation (``Division''), Commission dated
December 18, 1997 and letter from J. Keith Kessel, Phlx, to David
Sieradzki, Attorney, Division, Commission dated January 16, 1998.
Amendments 1 and 2 made several changes to clarify the purpose
section of the filing.
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The proposed rule change and Amendments 1 and 2 thereto were
published for comment in the Federal Register on January 29, 1998.\4\
No comments were received on the proposal. This order approves the
proposal as amended.
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\4\ Securities Exchange Act Release No. 39571 (January 22,
1998), 63 FR 4515 (January 29, 1998).
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II. Description of the Proposal
The Phlx is proposing to amend its Advice A-1, regarding
Displaying Best Bids and Offers to require Floor Brokers and Registered
Options Traders (``ROTs'') to immediately remove stale bids/offers.
Currently, Advice A-1 requires that Specialists use due diligence to
ensure that the best available bid and offer is displayed for those
option series in which s/he is assigned. Under Advice A-1, bids and
offers for the Specialist's own account, bids and offers on the book,
and bids and offers established in the crowd are deemed to be available
for display purposes. The Phlx proposes: (1) To designate the foregoing
provisions from the current advice as a paragraph (a) of Advice A-1 and
(2) to create new paragraph (b), to govern situations where a member of
the trading crowd is no longer bidding and offering. In the latter
situations, under the proposal, the Floor Broker or ROT would be
required to use due diligence to inform the Specialist when s/he is no
longer bidding/offering at that price. Under the proposal, the Floor
Broker or ROT must immediately inform the Specialist when s/he is
``out'' of that bid/offer, including due to an execution or departure
from the crowd.
New paragraph (b) is being proposed to address situations where
members have been ``out'' of a bid/offer, yet failed to inform the
Specialist. Often, that member is no longer present in the trading
crowd. In that instance, if a trade occurs because someone accepted the
stale bid/offer, either the member who initiated the bid/offer, the
Specialist or the other members of the trading crowd will be required
to honor the trade. Regardless of who honors the trade, the intent of
this proposal is to deter these occurrences by imposing fines for such
conduct. The proposed language refers to being ``out'' of a market for
reasons including (but not limited to) an execution or a departure from
the crowd. Other reasons may also apply, but the Exchange determined
that an exhaustive list is neither possible, nor necessary, and,
therefore, the violation involves the general failure to inform the
Specialist, regardless of the particular reason for being ``out.''
A member that fails to meet the obligations imposed upon it by new
paragraph (b) will be subject to a fine.\5\ Under the proposal, fines
would be imposed by Option Floor Officials who would determine whether
a member should be fined based upon whether a stale quote was caused by
a Specialist not using due diligence to ensure that the best available
bid and offer is displayed pursuant to paragraph (a) or whether it was
caused by a Floor Broker or ROT not using due diligence to inform the
Specialist that it was no longer bidding/offering at that price,
pursuant to paragraph (b) of the Advice. The Exchange believes that
violations of proposed new paragraph (b) of the Advice involving a
failure to notify the Specialist when a Floor Broker or ROT is ``out''
of a market are within the purview of Phlx Rule 970, concerning minor
rule violations, and are otherwise designed to be easily verifiable and
objective. The Exchange notes that the proposed fines are comparable to
those in other advices, such as Advices A-2 (Types of Orders to be
Accepted onto the Specialist's Book), B-4 (PHLX ROTs Entering Orders
from On-Floor and Off-Floor for Execution on the Exchange) and B-5
(Agency-Principal Restrictions).
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\5\ The fine schedule applicable to proposed new paragraph (b)
of the Advice will be as follows:
1st Occurrence: $250.00.
2nd Occurrence: $500.00
3rd and Thereafter: Sanction is discretionary with Business
Conduct Committee.
The fine schedule applicable to specialists, which will remain
unchanged, is as follows:
1st Occurrence: $50.00.
2nd Occurrence: $100.00.
3rd Occurrence: $250.00.
4th and Thereafter: Sanction is discretionary with Business
Conduct Committee.
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III. 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, with the requirements of Section 6(b).\6\ Specifically, the
Commission believes that the proposal is consistent with the Section
6(b)(5) \7\ requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, and, in general, to protect investors and the
public interest. The proposal is also consistent with the Section
6(b)(6) \8\ requirement that the rules of an exchange provide that its
members and persons associated with those members be appropriately
disciplined for violations of an exchange's rules and the Act.\9\
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
\8\ 15 U.S.C. 78f(b)(6).
\9\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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The proposal is consistent with Exchange Act Section 6(b)(5)
because it should help to discourage Floor Brokers and ROTs from
walking away from quotes that they have posted. The proposal also is
consistent with Exchange Act Section 6(b)(6) in that it provides for an
appropriate penalty to be assessed against those who violate the
advice.
Maintaining accurate option quotes is integral to the Specialist's
role in the marketplace. Although a member posting a bid/offer is
generally not held to that market after leaving the trading crowd, the
purpose of the proposed rule change is to discourage stale markets by
giving the Exchange the ability to impose fines for failure to remove
such a bid/offer. Failure to remove a bid/offer may cause the member
making the bid/offer or other crowd participants to have to honor an
incorrectly disseminated
[[Page 13902]]
quote that may have attracted order flow, including Phlx Automatic
Execution System orders. To avoid this result, the Commission believes
that it is appropriate for the Phlx to require Floor Brokers and ROTs
to use due diligence to inform the Specialist when they are ``out'' of
a bid/offer.
The Commission notes that the proposed rule is similar to a Chicago
Board Options Exchange rule, requiring Floor Brokers, Designated
Primary Market-Makers and Order Book Officials causing a bid/offer to
be disseminated to be responsible for having the bid/offer removed once
the order is filled or canceled.\10\
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\10\ See CBOE Rule 8.51, Commentary .02
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The Exchange has represented that this rule will be enforced under
Exchange Rule 970, which is the Exchange's minor rule violation
enforcement and reporting plan (``MRP'').\11\ The Commission believes
that enforcing Floor Procedure Advice A-1, paragraph (b) under the
Exchange's MRP is consistent with Section 6(b)(6) of the Act. The
purpose of the Exchange's MRP is to provide a response to a violation
of the Exchange's rules when a meaningful sanction is needed but when
initiation of a disciplinary proceeding pursuant to Exchange Rule 960.2
\12\ is not suitable because such a proceeding would be more costly and
time-consuming than would be warranted given the nature of the
violation. Violations of Floor Procedure Advice A-1, paragraph (b) can
be appropriately handled through expedited proceedings because they are
objective in nature and easily verifiable. Noncompliance with the
provisions may be determined objectively and adjudicated quickly
without the complicated factual and interpretive inquiries associated
with more sophisticated Exchange disciplinary proceedings.
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\11\ The Phlx's minor rule plan, codified in Phlx Rule 970,
contains floor procedure advices, such as Advice A-1, along with the
accompanying fine schedules. Rule 19d-1(c)(2) under the Act
authorizes national securities exchanges and other self-regulatory
organizations (``SRO''s) to adopt minor rule violation plans for
summary discipline and abbreviated reporting. Rule 19d-1(c)(1) under
the Act requires that SROs promptly file notice with the Commission
of any final disciplinary actions. However, minor rule violations
not exceeding $2,500 where the sanctioned person has not sought an
adjudication, including a hearing, or otherwise exhausted his
administrative remedies at the SRO with respect to the matter are
deemed not final for purposes of Rule 19d-1(c)(1), thereby
permitting periodic, as opposed to immediate, reporting. See Phlx
Rule 970 and 17 CFR 240.19d-1(c).
\12\ Phlx Rule 960.2 governs the initiation of disciplinary
proceedings by the Exchange for violations within the disciplinary
jurisdiction of the Exchange.
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Finally, the Commission finds that the imposition of the
recommended fines for violations of Floor Procedure Advice A-1,
paragraph (b) should result in appropriate discipline of members in a
manner that is proportionate to the nature of such violations.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-Phlx-97-53) is approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-7370 Filed 3-20-98; 8:45 am]
BILLING CODE 8010-01-M
