[Federal Register Volume 59, Number 142 (Tuesday, July 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18076]


[[Page Unknown]]

[Federal Register: July 26, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34400; File No. SR-Phlx-91-45]

 

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendments No. 1 and 2 to a Proposed 
Rule Change Relating to the Responsibility to Make Ten-Up Markets

July 19, 1994.
    On December 1, 1991, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b) of 
the Securities Exchange Act of 1934 (``Act''),1 and Rule 19b-4 
thereunder,2 a proposed rule change to clarify several aspects and 
provide for more stringent enforcement of its Ten-Up (``ten-up'') rule.
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    \1\15 U.S.C. 78s(b)(1) (1982).
    \2\17 CFR 240.19b-4 (1991).
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    The proposed rule change was published for comment and appeared in 
Securities Exchange Act Release No. 30298 (Jan. 28, 1992), 57 FR 4233. 
No comments were received on the proposal. On July 13, 1994, the Phlx 
filed Amendment No. 1 to the proposal.3
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    \3\See Letter from Gerald D. O'Connell, First Vice President, 
Phlx, to Michael Walinskas, Derivative Products Regulation, SEC, 
dated July 13, 1994. This letter supersedes the previous letter 
dated May 31, 1994.
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    On July 18, 1994, the Phlx filed Amendment No. 2 to the 
proposal.4
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    \4\See Letter from Gerald D. O'Connell, Vice President, Market 
Survelliance, Phlx, to Michael Walinskas, Derivative Products 
Regulation, SEC, dated July 18, 1994. The language submitted 
originally by the Phlx prohibited unbundling ``for the primary 
purpose of availing upon the ten-up market requirement.'' In the 
amendment the Phlx clarified the language of the rule to prohibit 
any such action for the purpose of attaining ten-up guarantees by 
removing the word ``primary'' which originally preceded ``purpose.''
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    This order approves the proposal.

I. Description of the Proposal

    The Phlx's Options Floor Procedure Advice (``OFPA'') A-11, entitled 
``Responsibility to Make Ten-Up Markets,'' requires specialists and 
Registered Options Traders (``ROTs'') to fill certain eligible customer 
orders at the best market to a minimum of ten contracts. The Phlx 
proposal includes several changes to OFPA -11. First, the Phlx's 
proposal redefines ten-up eligible orders as ``Public customer market 
or marketable limit orders * * *,'' rather than ``non-contingent public 
customer market or marketable limit orders.'' Second, the proposal 
provides that a broker seeking to fill a customer order with respect to 
a displayed quotation must avail upon the displayed market immediately 
or it may be revised. Specifically, the amendment states that once the 
crowd market has been sought, the screen market (if superior) is 
available and may be revised if it is not availed upon immediately. 
Third, the proposal prohibits members from unbundling customer orders, 
or soliciting customers to unbundle orders, for the primary purpose of 
availing upon the ten-up market requirement. The Phlx notes that this 
provision underscores the fact that the ten-up guarantee is offered 
only to certain smaller orders.
    The proposal also requires floor brokers to make a reasonable 
effort to determine whether an order is for the account of a customer 
or a broker-dealer. If the order is for the account of a broker-dealer, 
the floor broker must advise the crowd of the fact before bidding/
offering on behalf of the order or executing the order. The Phlx 
explains that this amendment focuses on requiring disclosure of broker-
dealer orders while such orders are in the crowd. Since disclosure need 
not be made prior to the time the broker-dealer requests the market 
from the crowd, it is only necessary that disclosure be made prior to 
working the order (by bidding or offering on behalf of the order) or, 
in the alternative, prior to executing the order. The Phlx believes 
that requiring disclosure at that time will result in a greater 
inclination by specialists to guarantee more than the minimum ten-up 
amount. Since the Phlx's policy on the options floor requires that 
volume guarantees made for automated systems also applies to hand-held 
orders, the Phlx believes that knowing whether a hand-held order is for 
the account of a broker-dealer is a matter directly related to the 
level of volume guarantees through the Phlx's Automated Options Market 
(``AUTOM'') system.

II. 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, the requirements of Section 6(b)(5).\5\ In particular, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
requirement that the rules of an exchange be designated to promote just 
and equitable principles of trade and not to permit unfair 
discrimination between customers, issuers, brokers, and dealers.
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    \5\15 U.S.C. 78f(b)(5) (1982).
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    In approving the Phlx's ten-up rule in June 1987,\6\ the Commission 
found that it was designed to benefit public customers by increasing 
the size of orders for which they can be assured executions to a 
minimum depth of ten contracts at the best bid or offer as quoted by a 
specialist or ROT. The Rule also is intended to encourage options 
specialists and ROTs to become more competitive in making size markets. 
Although the Commission carefully scrutinizes discriminatory order 
execution practices, the Commission believes that limiting the ten-up 
rule for public customers furthers the purposes of the Act. The intent 
of the ten-up rule is to encourage options specialists and ROTs to 
become more competitive in making markets thereby contributing to a 
more free and open market. However, the incentive for market makers and 
ROTs to benefit public customers through the ten-up rule is contingent 
on the assurance that these market makers volume guarantees will not be 
exhausted by competitors to the detriment of public customers, as the 
ten-up rule was designed by the options exchanges for the benefit of 
public customers.
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    \6\See Securities Exchange Act Release No. 24580 (June 11, 
1987), 52 FR 23120 (June 17, 1987).
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    The Commission believes that requiring the identification of 
broker-dealer orders prior to bidding or offering on behalf of the 
order or execution should improve the quality of the Phlx's options 
markets and enhance market depth because trading crowd participants may 
be more inclined to provide greater volume guarantees to public 
customers than the minimum ten-up contract requirement. In this 
context, we note that the Phlx's proposal would not require disclosure 
at the time a floor broker is probing the market. This ensures that 
floor brokers will be able to ascertain the best quote in the crowd 
irrespective of whether the order is for the account of a broker-dealer 
or public customer. Additionally, the Commission believes unnecessary 
delays in trading occasioned by the market maker's need to inquire as 
to the account status of orders represented on the floor will be 
reduced or minimize.
    The proposal also requires a broker attempting to fill a customer 
order entitled to a ten-up guarantee to execute the order upon the 
displayed market immediately after the crowd market has been sought, 
assuming the displayed market is better than the crowd. The Commission 
believes this requirement will encourage brokers to act promptly once 
the crowd market has been sought or risk a revision of the screen-based 
market.
    In addition, the proposal would prohibit members from unbundling 
customer orders for the purpose of availing upon the ten-up market. The 
Commission believes this requirement will help to ensure the integrity 
and fairness of the Phlx's markets in that it prevents abuse of the 
Phlx's execution guarantees. Such abuse can result in increased risk to 
the Phlx specialists who are required to fill these trades and can 
potentially result in misleading market information with respect to 
legitimate trading interest. Moreover, unbundling of orders solely to 
take advantage of the ten-up guarantee is contrary to the intent of the 
rule to facilitate guarantee is contrary to the intent of the rule to 
facilitate guaranteed execution at the best bid or offer for small 
public customer orders.
    The Commission finds good cause for approving Amendments No. 1 and 
2 to the Exchange's proposed rule change prior to the thirtieth day 
after the date of publication of notice of filing thereof in the 
Federal Register. Amendment No. 1 eliminates the term ``for accounts 
other than broker-dealer accounts'' from OFPA A-11, which was proposed 
in the original filing, thereby bringing OFPA-A-11 into conformity with 
existing Phlx Rule 1033(a). Because the amendment simply retains the 
term ``public customer,'' which is currently used in the Rule, the 
Commission does not believe it raises any substantive issue.\7\ 
Moreover, the Commission believes the proposed change will clarify the 
applicability of the Phlx's ten-up rule which will benefit investors 
without impairing specialist's and ROT's ability to provide market 
depth and liquidity. Amendment No. 2 to the proposed rule prohibits 
unbundling of customer orders for the purpose of availing upon the ten-
up guarantee.\8\ Because the original purpose already prohibited 
unbundling, Amendment No. 2 does not raise any substantive issues. 
Therefore, the Commission finds that no new or unique regulatory issues 
are raised by Amendments No. 1 and 2. Accordingly, the Commission 
believes it is consistent with Sections 19(b)(2) and 6(b)(5) of the Act 
to approve Amendments No. 1 and 2 to the Exchange's proposal on an 
accelerated basis.
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    \7\This proposed rule change does not affect the definition of 
``public customer,'' which will be the subject of a separate Phlx 
proposal.
    \8\See supra note 4.
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III. 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, D.C. 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 Section, 450 Fifth Street, NW., 
Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by August 16, 1994.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-Phlx-91-45) is approved, as 
amended.
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    \9\15 U.S.C. Sec. 78s(b)(2) (1982).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\17 CFR Sec. 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18076 Filed 7-25-94; 8:45 am]
BILLING CODE 8010-01-M