[Federal Register Volume 63, Number 93 (Thursday, May 14, 1998)]
[Notices]
[Pages 26836-26838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12809]
[[Page 26836]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39975; File No. SR-PHLX-98-03]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to Trading
Disputes and Floor Official Rulings
May 7, 1998.
I. Introduction
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ the Philadelphia Stock
Exchange, Inc. (``PHLX'' or ``Exchange'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') a proposal to replace
the current text of PHLX Rule 124, ``Disputes,'' with new text. In the
filing, the PHLX also proposed to adopt Floor Procedure Advice
(``Advice'') F-27, ``Floor Official Rulings--Options'' and F-27,
``Floor Official Rulings--Equity'' (together, the ``Advices''), which
incorporate and expand upon the provisions of PHLX Rule 124. On March
3, 1998, the PHLX amended its proposal.\3\ Notice of the proposed rule
change and Amendment No. 1 to the proposed rule change were published
for comment in the Federal Register on March 17, 1998.\4\ No comments
were received regarding the proposal. This order approves the proposed
rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Linda S. Christie, Counsel, PHLX, to Yvonne
Fraticelli, Attorney, Division of Market Regulation (``Division''),
Commission, dated March 3, 1998 (``Amendment No. 1''). Amendment No.
1 revises the text of PHLX Rule 124 to make the rule consistent with
the Advices. Specifically, Amendment No. 1 modifies the text of PHLX
Rule 124 to indicate that two options floor officials (rather than
one floor official) may nullify a transaction if they determine that
the transaction violated any of the following PHLX Rules: 1014,
``Obligations and Restrictions Applicable to Specialists and ROTs;''
1015, ``Quotation Guarantees;'' 1017, ``Priority and Parity at
Openings in Options;'' 1033, ``Bids and Offers--Premium;'' or 1080,
``PHLX Automated Options Market (AUTOM) and Automatic Execution
System (AUTO-X).'' In addition, Amendment No. 1 indicates that two
equity floor officials (rather than one floor official) may nullify
a transaction if they determine that the transaction violated any of
the following PHLX Rules: 110, ``Bids and Offers--Precedence;'' 111.
``Bids and Offers Binding;'' 118. ``Bids and Offers Outside Best Bid
and Offer;'' 119. ``Precedence of Highest Bid;'' 120, ``Precedence
of Offers at Same Price;'' 126, `` `Crossing' Orders;'' 203,
``Agreement of Specialist;'' 218, ``Customer's Order Receives
Priority;'' 229, ``Philadelphia Stock Exchange Automated
Communication and Execution System (PACE);'' 232, ``Handling Orders
When the Primary Market is Not Open for Free Trading (EXP, PPS, GTX
Orders);'' or 455, ``Short Sales.''
\4\ See Securities Exchange Act Release No. 39741 (March 11,
1998), 63 FR 13087.
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II. Description of the Proposal
The PHLX proposes to codify its current procedures regarding floor
officials' rulings by replacing the text of PHLX Rule 124 \5\ with new
text and adopting two Advices. The Advices will be published in the
PHLX's Floor Procedure Advice handbook. According to the PHLX, the
proposal will incorporate expressly into the PHLX's rules the
Exchange's current procedures for resolving trading disputes and the
role of floor officials in resolving trading disputes.
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\5\ Currently, PHLX Rule 124 states that ``[d]isputes arising on
bids or offers, if not settled by agreement between the members
interested, shall be settled, if practicable, by vote of the members
knowing of the transaction in question; if not so settled, they
shall be settled by the Committee.'' The ``Committee'' is the
applicable floor standing committee. The applicable standing
committees are the Floor Procedure Committee for the equity floor;
the Options Committee for the equity option floor and the index
option floor; and the Foreign Currency Options (``FCO'') Committee
for the FCO floor.
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New PHLX Rule 124 also acknowledges that, in addition to resolving
trading disputes, floor officials may issue citations for violations of
Floor Procedure Advices pursuant to PHLX Rule 970, ``Floor Procedure
Advices: Violations, Penalties, and Procedures,'' and for violations of
the PHLX's order and decorum regulations, pursuant to PHLX Rule 60,
``Assessments for Breach of Regulations.'' The PHLX's proposal contains
two provisions applicable to all rulings by floor officials. First, the
Advices set forth a conflict of interest provision which states that a
floor official should not render a decision or authorize a citation
where the floor official was involved in or affected by the dispute, or
in any situation where the floor official is not able to objectively
and fairly render a decision. Second, PHLX Rule 124(b) states that all
rulings by floor officials are effective immediately and must be
complied with promptly. Failure to comply promptly with a ruling
concerning a trading dispute may result in a referral to the PHLX's
Business Conduct Committee (``BCC''). Failure to comply with a floor
official's ruling issued pursuant to PHLX Rule 60 or PHLX Rule 970 may
result in an additional violation of those rules. For example, a first
violation for disorderly conduct that does not cease promptly after the
floor official issues the violation will result in a second violation,
also for disorderly conduct.
The remaining provisions of new PHLX Rule 124 concern trading
disputes. Specifically, new PHLX Rule 124(a) states that disputes
occurring on and relating to the trading floor, if not settled by
agreement between the interested members, shall be settled, if
practicable, by vote of the members knowing of the transaction; if not
so settled, the disputes shall be settled by a floor official summoned
to the trading crowd. In resolving trading disputes, floor officials
may institute the course of action deemed to be most fair to all
parties under the circumstances at the time. A floor official may
direct the execution of an order on the floor or adjust the transaction
terms or participants to an executed order. In addition, two floor
officials may nullify a transaction if they determine that the
transaction violated certain enumerated PHLX rules.\6\ The Advices
state that floor officials need not render decisions unless the request
for a ruling is made within a reasonable period of time.
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\6\ See Amendment No. 1, supra note 3.
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PHLX Rule 124(c) identifies the procedures for review of floor
officials' rulings. Specifically, PHLX Rule 124(c) states that floor
officials' rulings issued under the PHLX's order and decorum
regulations are reviewable pursuant to PHLX Rule 60, and that floor
officials' rulings issued under Floor Procedure Advices are reviewable
pursuant to PHLX Rule 970. Floor officials' rulings in connection with
trading disputes are reviewable pursuant to the procedures established
in new PHLX Rule 124(d).
Under PHLX Rule 124(d), floor officials' rulings for options and
FCO trading are reviewable by a minimum of three members of the
applicable Subcommittee on Rules and Rulings or by the Chairperson of
the applicable standing committee \7\ (or his or her designee) if three
Subcommittee members cannot be convened promptly. With respect to
equity trading, floor officials' rulings are reviewable by a minimum of
three members of the Floor Procedure Committee, or the Chairperson of
the Floor Procedure Committee (or his or her designee) if three members
cannot be convened promptly. This will be the designated review panel
for floor officials' rulings.
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\7\ See note 5, supra, for a description of the jurisdiction of
the standing committee.
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The Advices state that a member must submit a request for review of
a floor official's ruling to the Director of the PHLX's Market
Surveillance Department (or his or her designee) within 15 minutes from
the time the contested ruling was rendered.\8\ Floor officials'
[[Page 26837]]
rulings may be sustained, overturned, or modified by a majority vote of
the review panel members present.\9\ In making the determination, the
review panel may consider facts and circumstances not available to the
ruling floor official as well as actions taken by the parties in
reliance on the floor official's ruling (e.g., cover, hedge, and
related trading activity). Decisions of the review panel are final and
may be appealed to the PHLX's Board of Governors as a final decision of
the standing floor committee pursuant to PHLX By-Law Article XI,
``Appeals.'' The PHLX notes that neither floor officials' rulings or
reviews of floor officials' rulings preclude a person from seeking
redress through the PHLX's arbitration facilities.\10\
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\8\ The review panel will try to meet as soon as practicable
after notice of a request for a review of a floor official's
rulings. The PHLX notes, however, that this time frame will apply to
the extent practicable under the circumstances, particularly if
convening a review panel proves to be difficult due to the time of
day, heavy trading volume, or scheduling conflicts. In addition, the
PHLX notes that, in connection with options trading, the obligations
to maintain a fair and orderly market or the due diligence
requirements of PHLX Rule 1063 may prevail over the obligation of a
floor official to provide a ruling or attend a review.
\9\ See PHLX rule 124(d).
\10\ See PHLX Rule 950, ``Arbitration.''
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The Advices reiterate the provisions in PHLX Rule 124 and provide
additional details regarding the operation of PHLX Rule 124. Among
other things, the Advices state that floor officials shall try to be
prompt in rendering decisions. However, a floor official may delay
rendering a ruling until discovery is completed if the floor official
determines that the benefits of further discovery as to the facts and
circumstances of the matter under review outweigh the monetary risks of
a delayed ruling.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the Act and, in particular, with Section 6(b)(5) of the Act, in
that the proposed rule change is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.\11\ According to the PHLX, the proposal codifies the
Exchange's existing procedures for resolving trading disputes,
including the role and authority of floor officials in resolving
trading disputes and the means for appealing floor officials'
decisions. By codifying the Exchange's procedures for resolving trading
disputes, the Commission believes that the proposal will help to ensure
that PHLX members are aware of the PHLX's rules governing the
resolution of trading disputes and will facilitate compliance with
those rules. In addition, the Commission believes that the trading
dispute resolution procedures in PHLX Rule 124 and the Advices will
help to ensure that the PHLX's markets function in a fair, orderly, and
efficient manner.
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\11\ See 15 U.S.C. 78f(b)(5). In approving this rule change, the
Commission has considered the proposal's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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PHLX Rule 124(a) allows a member to summon a floor official to
settle a dispute on the trading floor if neither the interested members
or members with knowledge of the transaction are able to resolve the
dispute. The Commission notes that the trading dispute resolution
authority granted to floor officials under PHLX Rule 124 and the
accompanying Advices is similar to the authority granted to floor
officials under the rules of other securities exchanges.\12\
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\12\ See e.g., NYSE Rule 75, ``Disputes as to Bids and Offers''
(allowing a floor official to settle disputes concerning bids or
offers that are not settled by agreement between the interested
members); and Amex Rule 22(c) (allowing a floor official to resolve
market disputes submitted to him by members).
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In addition, the Commission believes that several requirements in
PHLX Rule 124 and the Advices will provide members and floor officials
with guidance concerning the resolution of trading disputes and help to
enhance the fairness, accuracy, and integrity of floor officials'
decisions. In this regard, PHLX Rule 124(a) and the Advices require a
floor official resolving a trading dispute to institute the course of
action he or she deems to be most fair to all parties under the
circumstances at the time. In addition, the Advices allow a floor
official to delay rendering a ruling if the floor official believes
that the benefits of further discovery concerning the facts and
circumstances of a matter outweigh the monetary risks of a delayed
ruling. The Advices also establish a conflict of interest provision
applicable to all ruling by floor officials.\13\ Specifically, the
Advices state that a floor official should not render a decision or
authorize a citation when the floor official was involved in or
affected by dispute, or in any situation where the floor official is
not able to objectively and fairly render a decision.
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\13\ As noted above, the conflict of interest provision applies
to floor officials' actions pursuant to PHLX Rules 60 and 970, as
well as to floor officials' rulings pursuant to PHLX Rule 124.
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The Commission believes that the proposal will provide additional
clarity to the process of resolving trading disputes by specifying the
remedies available to floor officials resolving such disputes. In this
regard, PHLX Rule 124(a) and the Advices state that a floor official
resolving a trading dispute may direct the execution of an order on the
floor or adjust the transaction terms or participants to an executed
order. In addition, two floor officials may nullify a transaction if
they conclude that the transaction violated any of the PHLX rules
enumerated in PHLX Rule 124(a) \14\ and in the Advices. The Commission
believes that permitting floor officials to nullify transactions only
for violations of these enumerated rules will provide guidance to floor
officials concerning the circumstances under which it may be
appropriate to nullify a trade. In addition, requiring the approval of
two floor officials to nullify a transaction will help to ensure that
this remedy is used appropriately.\15\
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\14\ See Amendment No. 1, supra note 3.
\15\ The Commission notes that the rules of the Chicago Board
Options Exchange, Inc. (``CBOE'') also permit two floor officials to
nullify a transaction. Specifically, Interpretation and Policy .05
to CBOE Rule 6.20, ``Admission to and Conduct on the Trading
Floor,'' allows two floor officials to nullify a transaction or
adjust its terms if they determine that the transaction violated any
of the following CBOE rules: (1) 6.43 (manner of bidding and
offering); (2) 6.45 (priority of bids and offers); (3) 6.46
(transactions outside the book's last quoted range); (4) 6.47
(priority on split price transactions); or (5) 8.51 (trading crowd
firm disseminated market quotes).
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The Commission believes that several provisions in new PHLX Rule
124(b) and in the Advices will facilitate the enforcement of floor
officials' rulings. In this regard, PHLX Rule 124(b) and the Advices
indicate that all rulings by floor officials are effective immediately
and must be complied with promptly. Moreover, PHLX Rule 124(b) and the
Advices note that failure to comply with a floor official's ruling in a
trading dispute may result in a referral to the PHLX's BCC, and failure
to comply with rulings issued pursuant to PHLX Rule 60 or to Floor
Procedure Advices may result in the finding of an additional violation
of those rules.
PHLX Rule 124 and the Advices also specify the procedures for
requesting a ruling from a floor official and for appealing a floor
official's ruling in connection with a trading dispute.\16\ As noted
above, PHLX Rule 124(a) allows a member to summon a floor official to
resolve a trading dispute. The Advices state that floor officials need
not render a decision unless the request for a ruling was made within a
reasonable period of time. In addition, the Advices indicate that a
member must submit a request for review of a floor official's ruling to
the PHLX's Director of Market Surveillance
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(or his or her designee) within 15 minutes from the time the contested
ruling was rendered.\17\ The Commission believes that these provisions
will facilitate the prompt resolution of trading disputes while
providing members with an adequate opportunity to obtain a ruling from
a floor official or to appeal a floor official's ruling. In addition,
the Commission notes that these procedures are described in the
Advises, which will be readily available to members in the PHLX's Floor
Procedure Handbook. Accordingly, the Commission believes that PHLX
members will have sufficient notice of the Exchange's procedures for
obtaining a ruling from a floor official and appealing a floor
official's decision.
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\16\ Floor officials' rulings issued pursuant to the PHLX's
order and decorum regulations are reviewable pursuant to PHLX Rule
60; floor officials' rulings issued pursuant to Floor Procedure
Advices are reviewable pursuant to PHLX Rule 970. See PHLX Rule
124(c).
\17\ According to the PHLX, a ``reasonable period of time'' will
depend on market and trading floor conditions (e.g., volume, systems
functioning, and quotation updating). Floor officials will determine
what constitutes a reasonable period of time for requesting a
ruling. The PHLX believes that it is necessary to provide floor
officials with flexibility in making this determination. Telephone
conversation between Linda S. Christie, Counsel, PHLX, and Yvonne
Fraticelli, Attorney, Division, Commission, on April 27, 1998.
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Under PHLX Rule 124(d), a review panel, consisting of either three
members of the applicable Subcommittee on Rules and Rulings (in the
case of options trading) or three members of the Floor Procedure
Committee (in the case of equity trading),\18\ may sustain, overturn or
modify a floor official's ruling. In making its decision, the review
panel may consider facts and circumstances not available to the ruling
floor official and action taken by the parties in reliance on the floor
official's ruling (e.g., cover, hedge, and related trading activity). A
member may appeal the review panel's decision to the Exchange's Board
of Governors pursuant to PHLX By-law Article XI. The Commission
believes that these procedures will provide for prompt and effective
review of floor officials' rulings in trading disputes and help to
ensure that trading disputes are resolved fairly.
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\18\ If three committee members cannot be convened promptly, the
Chairperson of the applicable committee, or his or her designee, may
review the ruling. See PHLX Rule 124(d).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-PHLX-98-03) is approved.
\19\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-12809 Filed 5-13-98; 8:45 am]
BILLING CODE 8010-01-M
