[Federal Register Volume 62, Number 160 (Tuesday, August 19, 1997)]
[Notices]
[Pages 44160-44162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21848]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38924; File No. SR-Phlx-97-36]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Philadelphia Stock
Exchange, Inc. Extending the Pilot Program for Equity and Index Option
Specialist Enhanced Parity Split Participants
August 11, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 24, 1997, the
Philadelphia Stock Exchange, Inc. (``PHLX'' or ``Exchange'') filed with
the Securities and Exchange 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. The Commission
is publishing this notice to
[[Page 44161]]
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PHLX proposes to extend until December 31, 1997, the Exchange's
enhanced parity participation (``Enhanced Parity Split'') pilot program
for equity and index option specialists (``Pilot Program''). Revisions
to Exchange Rule 1014(g)(ii) and its corollary Option Floor Procedure
Advice B-6 (``Advice B-6'') are proposed only to change the expiration
date of the Pilot Program. The text of the proposed rule change is
available at the Office of the Secretary, the PHLX, and at the
Commission.
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 test 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
On August 26, 1994, the Commission approved, as a one-year pilot
program, the Exchange's proposal to adopt an enhanced specialist
participation in parity equity option trades.\2\ On November 30, 1994,
the Commission approved the Exchange's request to expand the Enhanced
Parity Split to include index option specialists as well as equity
option specialists.\3\ The Enhanced Parity Split was again amended on
March 1, 1995 to modify the Pilot Program with respect to situations
where less than three controlled accounts \4\ are on parity with the
specialist.\5\ At the termination of the first year of the pilot, the
Exchange determined to renew the pilot for an additional year until
August 26, 1996.\6\ The Exchange again determined to renew the pilot
until August 26, 1997.\7\
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\2\ Securities Exchange Act Release No. 34606 (Aug. 26, 1994),
59 FR 45741 (Sept. 2, 1994) (order approving File No. SR-PHLX-94-
12).
\3\ Securities Exchange Act Release No. 35028 (Nov. 30, 1994),
59 FR 45741 (Dec. 7, 1994) (notice of filing and immediate
effectiveness of File No. SR-PHLX-94-57).
\4\ A controlled account is defined as ``any account controlled
by or under common control with a member broker-dealer.'' Customer
accounts, which include discretionary accounts, are defined as all
accounts other than controlled accounts and specialist accounts. See
Exchange Rule 1014(g).
\5\ Securities Exchange Act Release No. 35429 (Mar. 1, 1995), 60
FR 12802 (Mar. 8, 1995) (order approving File No. SR-PHLX-94-59).
\6\ Securities Exchange Act Release No. 36122 (Aug. 18, 1995),
60 FR 44530 (Aug. 28, 1995) (notice of filing and immediate
effectiveness of File No. SR-PHLX-95-54).
\7\ Securities Exchange Act Release No. 37524 (Aug. 5, 1996), 61
FR 42080 (Aug. 13, 1996) (notice of filing and immediate
effectiveness of File No. SR-PHLX-96-29).
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The program works as follows: When an equity or index option
specialist is on parity with one controlled account and the order is
for more than five contracts, the specialist will receive 60% of the
contracts and the controlled account will receive 40%. When the
specialist is on parity with two controlled accounts and the order is
for more than five contracts, the specialist will receive 40% of the
contracts and each controlled account will receive 30%. When the
specialist is on parity with three or more controlled accounts and the
order is for more than five contracts, the specialist will be counted
as two crowd participants when dividing up the contracts. In any of
these situations, if a customer is on parity, he will not be
disadvantaged by receiving a lesser allotment than any other crowd
participant, including the specialist.
This enhanced split is not applicable to all equity and index
options traded on the Exchange. It is only applicable to 50% of each
specialist unit's issues listed as of the renewal date of the pilot
each year and all option classes listed after that date. The Exchange
also has a different enhanced split program in place for ``new'' option
specialist units trading newly listed options classes where the
specialist is on parity with two or more registered options traders
(``ROTs'').\8\ That program was approved on a permanent basis and,
therefore, is not included in the subject of this filing.
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\8\ Securities Exchange Act Release No. 34109 (May 25, 1994), 59
FR 28570 (June 2, 1994) (order approving File No. SR-PHLX-93-29).
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Accordingly, the PHLX requests that the two-for-one specialist
enhanced parity split pilot be extended until December 31, 1997.
In the Commission's most recent Approval Order,\9\ it was noted
that prior to granting another extension or permanent approval of the
pilot program, the Commission would require the Exchange to submit a
report (``Report'') discussing: (1) Whether the Pilot Program has
generated any evidence of any adverse effect on competition or
investors, in particular, or the market for equity or index options, in
general; (2) whether the Exchange has received any complaints, either
written or otherwise, concerning the operation of the Pilot Program;
and (3) whether the Exchange has taken any disciplinary action against,
or commenced any investigations, examinations, or inquiries concerning
the operation of the Pilot Program, as well as the outcome of any such
matter. On July 31, 1997, the Exchange submitted the report, which is
summarized below.\10\
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\9\ Release No. 34-37524, supra note 7, n.15.
\10\ See letter from Michele R. Weisbaum, Vice President and
Associate General Counsel, PHLX, to George Villasana, Office of
Market Supervision, Division of Market Regulation, Commission, dated
July 31, 1997.
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As to the issue of competition, the Exchange found that the split
as originally proposed was overly burdensome when only one or two
controlled accounts were on parity with the specialist, so the rule was
amended in March of 1995 in order to make the split more equitable in
those situations.\11\ Subsequently, the Exchange established a
subcommittee composed of four specialists, four ROTs, and one floor
broker who represents customers. The subcommittee has met on numerous
occasions since that time to analyze the program and its effect on
competition, investors and the market in general. The members of the
subcommittee which represent all of the different interests on the
trading floor and in the market, discussed the operation of the program
and concluded that there was no evidence of any adverse effects on
competition or investors or the market for equity or index options.
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\11\ Release No. 34-35429, supra note 5.
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As to the second issue, the provision requiring the specialist to
assure that the customer is not disadvantaged has been strictly
enforced without incident and the Exchange has not received any
complaints either orally or in writing from investors regarding
inequitable splits or the program in general.\12\
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\12\ According to the Exchange, its Matched Order Ticket System
requires trade participants to submit matched tickets to the
appropriate person at the specialist post immediately upon effecting
a transaction in order to assure, among other things, that the party
agrees with each contra-party's claim as to his or her level of
participation. See Release No. 37524, supra note 7 (referencing
telephone conversation on August 2, 1996 between Michelle R.
Weisbaum, Vice President and Associate General Counsel, PHLX, and
George A. Villasana, Attorney, Division of Market Regulation, SEC).
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[[Page 44162]]
Finally, as to the third point, the Exchange took one disciplinary
case against an equity option specialist for making an inequitable
split among himself and the ROTs in the crowd in 1996.\13\ In that
instance, the specialist was censured and suspended for one week as
part of a settlement. The specialist has since left the Exchange. Since
January 1, 1997, the Exchange has not commenced any investigations
relating to the operation of the Pilot program.\14\
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\13\ Enforcement No. 95-12, Business Conduct Committee, PHLX.
\14\ The Commission again notes that in connection with any
future request by the Exchange for the Commission to either further
extend or permanently approve the Pilot Program, the Exchange will
be required to submit a report discussing 1) whether the Pilot
Program has generated any evidence of any adverse effect on
competition or investors, in particular, or the market for equity or
index options, in general, 2) whether the Exchange has received any
complaints, either written or otherwise, concerning the operation of
the Pilot Program, and 3) whether the Exchange has taken any
disciplinary action against, or commenced any investigations,
examinations, or inquiries concerning the operation of the Pilot
Program, as well as the outcome of any such matter.
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the Act
\15\ in general and in particular, with Section 6(b)(5),\16\ 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. Specifically, the
proposal balances the competing interests of specialists and market
makers while assisting the specialist in making tight and liquid
markets in its assigned issues and protects the public interest by
requiring quarterly reviews and assuring that the customers'
participation is never disadvantaged by the enhanced split.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change: (1) Does not
significantly affect the protection of investors or the public
interest; (2) does not impose any significant burden on competition;
(3) does not become operative for 30 days from July 24, 1997, the date
on which it was filed, and the Exchange provided the Commission with
written notice of its intent to file the proposed rule change at least
five business days prior to the filing date, it has become effective
pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(e)(6)
thereunder.\17\
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\17\ 17 CFR 240.19b-4(e)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
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 Station, 450 Fifth Street NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of the Philadelphia
Stock Exchange. All submissions should refer to File No. SR-PHLX-97-36
and should be submitted by September 9, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-21848 Filed 8-18-97; 8:45 am]
BILLING CODE 8010-01-M
