[Federal Register Volume 59, Number 81 (Thursday, April 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10089]


[Federal Register: April 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33935; File No. SR-Phlx-94-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to Enhanced 
Parity Split for Specialists.

April 20, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on February 
28, 1994, 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 Phlx. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx, pursuant to Rule 19b-4 of the Act, proposes a one-year 
pilot program to permit Phlx equity option specialists to receive an 
enhanced participation in parity trades based upon certain conditions 
and subject to a review procedure. 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 Exchange 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 
text of these statements may be examined at the places specified in 
Item IV below. The Phlx has prepared summaries, set forth in section 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    Phlx Rules 119 and 120, generally, and Phlx Rule 1014(g), 
specifically, direct members in the establishment of priority and 
parity of orders on the options floor. These rules provide that when 
bids/offers are made simultaneously, or when it is impossible to 
determine clearly the order of time in which they were made, all such 
bids/offers shall be on parity, and as such shall be shared equally. 
This equal sharing of parity trades among a specialist and Registered 
Options Traders (``ROTs'') has served the Exchange well in a market 
structure where certain options classes are listed exclusively on the 
Phlx. Because all newly listed options classes are subject to multiple 
listing and all currently listed ones are or will become so eligible, 
the current parity participation rule has come under review.
    The Exchange represents that while ROTs provide critical liquidity 
to the market making process at the Phlx, under the Phlx's specialist 
system, the role of the specialist is to provide leadership, liquidity, 
and continuity, and satisfy market making obligations in multiply 
listed options classes, particularly at the incipiency of competition 
for a multiply traded issue. For the options classes that will be 
eligible for multiple listing, the Exchange represents that specialists 
have also taken on a larger market making obligation in order to 
accommodate customers in the hope of garnering critical loyalty that 
will lead to sustained order flow whether the class is or is not ever 
actually multiply traded.
    Furthermore, the Exchange has identified the need to attract new 
specialist units and retain and encourage current specialists units to 
vigorously trade existing options classes as well as to aggressively 
seek and apply for newly allocated classes. The Phlx understands that 
many if not most specialist units, are seeking, or at least have the 
capability to seek, specialist privileges or the equivalent lead market 
making status for any particular multiply listed options class on any 
national securities exchange. Therefore, the Phlx is sensitive to the 
need to afford its specialist units parity split treatment at least 
comparable to the programs existing on other national securities 
exchanges which list options and compete for specialist capital and 
market making talent. Specifically, in order to address these factors, 
the Exchange has determined to implement this one-year pilot program to 
increase the specialist's participation in certain trades where the 
specialist is on parity with ROTs.
    As a point of clarification, the Exchange states that this proposed 
rule change will operate in tandem with another proposal submitted by 
the Exchange that is pending Commission approval.\1\ The Exchange 
represents that the proposal contained in File No. SR-Phlx-93-29 would 
provide a different variant of enhanced specialist parity participation 
applicable only to new specialist units in newly allocated equity 
options classes for a six-month period (subject to one six-month 
extension). If File No. SR-Phlx-93-29 is approved (in addition to the 
present filing), new specialists in new issues could opt for the 
enhanced parity split treatment proposed in this filing at the point in 
time that the enhanced treatment granted under File No. SR-Phlx-93-29 
terminates. As long as a specialist is a ``New Unit'' (as defined in 
File No. SR-Phlx-93-29), the specialist is not eligible for the 
enhanced parity split proposed herein for any new issue of options 
traded by that specialist.\2\
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    \1\See Securities Exchange Act Release No. 32891 (September 14, 
1993), 58 FR 48921 (September 20, 1993) (Notice of filing of SR-
Phlx-93-29).
    \2\Telephone conversation between Michele Weisbaum, Associate 
General Counsel, Phlx, and Brad Ritter, Attorney, Office of 
Derivatives and Equity Oversight, Division of Market Regulation, 
Commission, on April 18, 1994.
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    If approved, Rule 1014(g)(i) will entitle the specialist to an 
enhanced participation on parity trades by being counted as two crowd 
participants in certain circumstances (``enhanced parity split 
participation''). First, the contra side order must be for more than 
five contracts. Secondly, the enhanced participation may not 
disadvantage a customer order that is also on parity.
    Third, the enhanced specialist participation will not be applicable 
to all option classes. It will be applicable for all option classes 
that are listed after the rule becomes effective and for 50% of each 
specialist unit's listed issues at the time the rule becomes effective. 
In this regard, each specialist's registered issues will be divided 
into quartiles based on the most recent quarterly customer contract 
volume. The specialist will be able to choose half of his issues in 
each volume quartile rounded so that the aggregate number chosen does 
not exceed 50% of the total number of issues in all four quartiles. The 
specialist will be required to submit this list to the Allocation, 
Evaluation and Securities Committee (``AES Committee'') for its review 
and approval. This list, once submitted and approved by the AES 
Committee, will be in effect for the entire one-year period of the 
pilot program.
    The Phlx also proposes to adopt Phlx Rule 509 to empower the AES 
Committee to oversee each specialist's performance with respect to the 
enhanced participation privilege. A standing subcommittee of the AES 
Committee entitled the ``Quality of Markets Subcommittee'' 
(``Subcommittee'') will be created to review each specialist's 
performance on a quarterly basis to assure that four conditions are 
being satisfied by a specialist who receives the benefit of the 
enhanced parity splits in his trading crowd. First, the specialist must 
demonstrate that he is the lead market maker in the trading crowd 
measured by his transacting more contracts in an option class than any 
ROT in that issue over the review period.
    The second criterion authorizes the Subcommittee to review whether 
the specialist has provided the Phlx with adequate market share in 
options which are multiply traded. In this respect, the Subcommittee 
will determine whether the Phlx has transacted at least 10% of the 
aggregate customer volume in an issue that is traded by all five 
options exchange, at least 15% where four exchanges trade the issue, at 
least 20% where three exchanges trade the issue, and at least 25% where 
only one other exchange trades the issue. Although this is a measure of 
the total customer volume executed on the Exchange rather than solely 
by the specialist, in the competition for multiply traded issues, the 
Exchange believes the specialist is a key party responsible for 
marketing the issue to upstairs firms, updating markets, and 
maintaining the limit order book. A specialist who performs these 
functions will, the Exchange believes, assist the Exchange in 
increasing order flow.
    The third criterion is one that is already in place. Rule 515 
specifies that an option specialist unit must attain at least a score 
of five on its quarterly specialist evaluation. A specialist who does 
not receive a five on his evaluation may be considered to have 
performed adequately enough to maintain his specialist privileges under 
Rule 515, but may lose his enhanced participation privileges under 
proposed Rule 509 until he increases his score.
    The final criterion authorizes the Subcommittee to consider whether 
a pattern of weakness has been demonstrated by such things as frequent 
floor official rulings with respect to any particular options class or 
crowd and/or by written customer complaints being received by the 
Exchange or Subcommittee regarding the specialist in any particular 
options class.
    If the Subcommittee determines that a specialist has failed to 
adhere to one or more of the four standards or any issue receiving 
enhanced parity split participation, the Subcommittee must make a 
preliminary finding that the specialist should lose the enhanced 
participation privilege in that issue. The specialist will be notified 
of this finding and will be required to appear before the Subcommittee 
within five business days. At such meeting, the specialist bears the 
burden of overcoming the presumption of substandard performance. For 
example, a specialist might be able to overcome this presumption in the 
case where he has transacted less contracts than one ROT in his trading 
crowd during the review period. In this case, if the specialist can 
demonstrate that one large block trade occurred during the review 
period but for which that specialist would have been the lead market 
maker, the Subcommittee may determine that the specialist does not 
deserve to lose the enhanced participation privilege.
    Any decision of the Subcommittee must be in writing and must be 
delivered to the specialist on the next business day following the 
Subcommittee meeting at which the decision was made. A decision to 
revoke the privilege will be effective on the next business day after 
receipt of the decision by the specialist. A specialist who has lost 
the privilege may reapply for it at the Subcommittee's next scheduled 
review and the specialist may be granted reinstatement if the 
Subcommittee finds that the condition which initially caused the 
revocation of the enhanced participation privilege has been cured and 
that no other problems exist.
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act in general, and with section 6(b)(5),\3\ in 
particular, in that it is designed to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
promote just and equitable principles of trade, and protect investors 
and the public interest.
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    \3\15 U.S.C. 78f(b)(5) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will impose 
any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    The Exchange represents that two comment letters were received from 
Exchange members\4\ and considered at the September 8, 1993 Exchange 
Board of Governors (``Board'') meeting. Generally, the Phlx states that 
the authors of the comment letters asserted that the proposed rule may 
be a disincentive to market makers to compete and add liquidity to the 
marketplace. According to the Exchange, the letters expressed a concern 
that there was no evidence that this enhanced participation would 
benefit the Exchange and the public. One commenter recommended a yearly 
review procedure and an on-going performance standard (both of which 
have been included in the proposal approved by the Board). Another 
argument raised related to the procedure for choosing which 50% of a 
specialist's options would be eligible for the enhanced participation. 
There was a concern that if the top 50% of the most active issues were 
subject to the rule, over 90% of the total Exchange volume would be 
subject to the enhanced specialist participation. The Exchange believes 
this concern has been addressed by adopting the quartile approach.
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    \4\See Letter from Robert H. Miller, II, M & G Investments, to 
Board of Governors, Phlx, dated September 7, 1993; and Letter from 
Jay Mizrahi, PJ Shoreline Securities, to Board of Governors, Phlx, 
dated September 8, 1993.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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. 522, 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-94-12 and should be 
submitted by May 19, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-10089 Filed 4-26-94; 8:45 am]
BILLING CODE 8016-01-M