[Federal Register Volume 59, Number 60 (Tuesday, March 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7278]
[[Page Unknown]]
[Federal Register: March 29, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33796; File No. SR-Phlx-93-15]
Self-Regulatory Organizations; Order Approving and Notice of
Filing and Order Granting Accelerated Approval to Amendment No. 1 to a
Proposed Rule Change by the Philadelphia Stock Exchange Relating to the
Handling of Registered Options Traders' Orders
March 22, 1994.
On April 5, 1993, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with 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 make certain amendments to Exchange Rule 1065
and Exchange Floor Procedure Advice C-3 (``Advice C-3'').\3\ Notice of
the proposal (not including Amendment No. 1) appeared in the Federal
Register on October 13, 1993.\4\ No comment letters were received on
the proposed rule change. This order approves the Exchange's proposal,
as amended.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
\3\On January 13, 1994, the Phlx proposed amending Phlx rule
1065 in order to state that a Phlx floor broker may not exercise any
discretion with respect to the order of an options market maker
registered on another exchange. This change was necessary in order
to make Phlx rule 1065 consistent with the Phlx proposed changes to
Advice C-3. See letter from Gerald D. O'Connell, Vice President,
Market Surveillance, Philadelphia Stock Exchange to Richard Zack,
Branch Chief, Options Branch, Division of Market Regulation, SEC,
dated January 13, 1994.
\4\See Securities Exchange Act Release No. 33012 (October 4,
1993), 58 FR 53010.
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The Phlx has proposed amending Advice C-3 to extend its
restrictions to non-Phlx options market makers. Accordingly, the Phlx
proposes to retitle Advice C-3 as follows: Handling Orders of Phlx ROTs
and Other Registered Options Market Makers. In addition, the
restrictions contained in paragraph (d) (formerly paragraph (c)) would
now apply to options market makers from other exchanges so that the use
of floor broker discretion\5\ with respect to the orders of such market
makers would be prohibited. The Phlx has similarly proposed amending
Rule 1065 to reflect this prohibition.\6\
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\5\A Phlx floor broker may not execute or cause to be executed
any order(s) on the Phlx with respect to which such floor broker is
vested with discretion as to: (i) The choice of class of options to
be bought or sold, (ii) the number of contracts to be bought or
sold, or (iii) whether any such transaction shall be one of purchase
or sale. See Phlx Rule 1065.
\6\See note 3, supra.
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In addition, paragraph (b) would be added to Advice C-3 to require
floor brokers to ascertain which orders are for the accounts of non-
Phlx market makers. The Phlx has stated that the purpose of this new
provision is to establish an accurate audit trail of such orders by
requiring that order tickets be marked with an ``N.'' The Phlx has also
stated that new paragraph (b) would reinforce the requirement that a
Phlx floor broker, when in possession of an ``N'' order, must represent
to the trading crowd that the order is a ``BD'' order, as orders of
market makers qualify by definition as ``BD'' orders.
In order to fulfill this obligation, the floor broker or the floor
unit of the member firm with which the floor broker is associated would
be required to make reasonable inquiry of the account status of orders
for market makers to identify orders for the accounts of non-Phlx
market makers. Currently, paragraph (a) requires floor brokers to
announce to the trading crowd whether an order is for a Phlx market
maker and whether such order would establish or close out an option
position (opening or closing).
The Commission believes 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 the proposal
is designed to promote just and equitable principles of trade as well
as to protect investors and the public interest.
Specifically, the proposed amendments requiring Phlx floor brokers
to: (1) Take reasonable steps to inquire which orders placed with him
or her for execution are orders for non-Phlx market makers; (2)
represent such orders as ``BD'' orders in the trading crowd, and (3)
mark such orders ``N'' for purposes of identification will, in
combination, help strengthen the Phlx's ability to generate greater
detailed audit trail information for non-Phlx market makers. The Phlx
currently possesses the capability to generate similarly detailed audit
trail information for Phlx market makers. The above amendments will
extend such capabilities to non-Phlx market makers as well, thereby
ensuring that the Exchange has detailed audit trail capability for all
market maker transactions. Additionally, these proposed amendments will
help protect investors and the public interest by helping the Phlx to
assure compliance with certain important Exchange trading rules,
including rule 1033(a) (``Ten-Up Rule'') and Rule 1014(g) (``Priority
Rule'').
The Commission is also satisfied that the proposed amendments (Phlx
rule 1065, commentary .02 and Phlx Advice C-3(d)) that will extend the
floor broker prohibition against exercising ``discretionary orders'' to
orders for the accounts of non-Phlx market makers serves legitimate
regulatory concerns that are consistent with the Act. The Commission
believes that market maker use of ``not held'' discretionary orders
that are placed with floor brokers can, under certain circumstances, be
deemed inconsistent with appropriate market maker functions and section
11(a) of the Act, which states it is unalwful for a member to effect a
transaction for its account or an account of an associated person where
it exercises investment discretion. Although section 11(a) excludes
from this prohibition any transaction by a dealer acting in the
capacity of a market maker, without the proposed prohibition, non-Phlx
market makers, through the use of ``not held'' discretionary orders
placed with Phlx floor brokers, could effectively obtain the benefits
of market maker status in Phlx-listed options (i.e., margin treatment)
without being subject to the corresponding burdens of such status, such
as providing market liquidity. Market makers could circumvent
prohibitions against using ``not held'' orders by submitting them to a
broker on another exchange (in this case, the Phlx).
Accordingly, the Commission believes that it is appropriate for the
Exchange to proscribe such activity.\7\
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\7\The Commission notes that the proposed amendments do not
present substantial competitive issues because they do not restrict
access by non-Phlx market makers to the Phlx options trading market
nor do they affect the existing priority or parity standards
applying to the others on non-Phlx market makers.
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The Commission finds good cause for approving Amendment No. 1 prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. Accelerating approval will allow the
Exchange to implement the complete rule change proposal without delay.
Further, the purpose of the amendment is non-substantive, limited to
amending rule 1065 so that it will be consistent with the proposed
amendment to Advice C-3, the substance of which was fully described in
the original filing. The Commission further notes that the proposal
(excluding Amendment No. 1) was published for the full 21 day comment
period and no comments were received.
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, 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 in the Commission's Public
Reference Section, 450 Fifth Street, NW., Washington, DC. Copies of
such filing will also be available for inspection and copying at the
principal office of the Phlx. All submissions should refer to File No.
SR-Phlx-93-15 and should be submitted by April 19, 1994
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\8\ that the proposed rule change (SR-Phlx-93-15), as amended, is
hereby approved.
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\8\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-7278 Filed 3-28-94; 8:45 am]
BILLING CODE 8010-01-M
