[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