[Federal Register Volume 59, Number 190 (Monday, October 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24305]


[[Page Unknown]]

[Federal Register: October 3, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34721; File No. SR-Phlx-92-03]

 

Self Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 to the Proposed Rule Change, and 
Notice of Filing and Order Granting Accelerated Approval of Amendment 
No. 4 to the Proposed Rule Change, by the Philadelphia Stock Exchange, 
Inc., Amending Options Floor Procedure Advice A-2 and Rule 1066

September 26, 1994.
    On February 26, 1992, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Phlx Options Floor 
Procedure Advice (``OFPA'') A-2 and Phlx Rule 1066. The Exchange filed 
Amendment No. 1 to the proposed rule change on January 6, 1993,\3\ 
Amendment No. 2 on June 19, 1993,\4\ Amendment No. 3 on June 23, 
1994,\5\ Amendment No. 4 on September 21, 1994.\6\
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    \1\15 U.S.C. Sec. 78s(b)(1) (1982).
    \2\17 CFR 240.19b-4 (1993).
    \3\Amendment No. 1 clarifies that an Exchange specialist may 
accept or refuse contingency orders for placement on the Exchange 
order book, except that Exchange floor official approval is required 
to refuse to accept a customer contingency order. See Letter from 
Gerald D. O'Connell, Vice President, Market Surveillance, Phlx, to 
Sharon Lawson, Assistant Director, Division of Market Regulation, 
Commission, dated January 5, 1995.
    \4\In Amendment No. 2, the Exchange notified the Commission of 
its intention to withdraw File No. SR-Phlx-92-37, because proposed 
changes to Phlx Rule 1066(c) contained therein, which would clarify 
the definitions of stop-limit and stop (stop-loss) orders and add 
definitions of all-or-none, opening-only-market, market-on-close, 
and cancel-replacement orders, would have duplicated the changes 
proposed by the Exchange in this File No. SR-Phlx-92-03. See 
Securities Exchange Act Release No. 32380 (May 28, 1993), 58 FR 
31765 (June 4, 1993) (``Release No. 32380''). Also in Amendment No. 
2, the Exchange proposed that Exchange specialists be permitted to 
accept spread, straddle, and combination orders, in addition to 
contingency orders, without the prior approval of an Exchange floor 
official. Amendment No. 2 added that Exchange specialists would not 
be permitted to refuse to accept customer contingency, spread, 
straddle, or combination orders without the prior approval of two 
Exchange floor officials. See Letter from Gerald D. O'Connell, Vice 
President, Market Surveillance, Phlx, to Michael Walinskas, Staff 
Attorney, Division of Market Regulation, Commission, dated June 17, 
1993.
    \5\In Amendment No. 3, the Exchange deleted from its proposal 
its request that Exchange specialists be permitted to accept spread, 
straddle, and/or combination orders without the prior approval of an 
Exchange floor official. See Letter from Gerald D. O'Connell, First 
Vice President, Phlx, to Michael Walinskas, Branch Chief, Options 
Regulation, Division of Market Regulation, Commission, dated June 
23, 1994.
    \6\In Amendment No. 4, the Phlx revised the text of Option Floor 
Procedure Advice A-2 to reflect the requirement that Exchange 
specialists are not permitted to accept discretionary orders, 
including spread, straddle, and combination orders, regardless of 
whether they receive the approval of a floor official. See Letter 
from Gerald D. O'Connell, First Vice President, Phlx, to Michael 
Walinskas, Branch Chief, Options Regulation, Division of Market 
Regulation, Commission, dated September 21, 1994.
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    The proposed rule change and Amendment Nos. 1, 2, and 3 thereto 
were published for comment in the Federal Register on July 1, 1994.\7\ 
No comments were received on the proposed rule changes, nor the 
amendments. This order approves the proposal and the floor amendments.
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    \7\See Securities Exchange Act Release No. 32455 (June 24, 
1994), 59 FR 33998 (July 1, 1994).
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    The proposed rule change to existing OFPA A-2 relates to the 
acceptance of contingency orders by Exchange specialists 
(``Specialists''). The changes to part (ii), and the addition of part 
(iii), of OFPA A-2 would permit Specialists to accept contingency 
orders currently forwarded through the Automated Options Market System 
(also known as ``AUTOM'') without the requirement of approval by an 
Exchange floor official (``Floor Official''). Such contingency orders 
would include those currently listed and defined in paragraph (c) of 
Phlx Rule 1066,\8\ as well as additional types of contingency orders 
that the Exchange is proposing to add to Rule 1066(c). In addition, the 
Exchange is proposing to make changes to the fine schedule of OFPA A-2.
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    \8\Phlx Rule 1066 generally sets forth certain types of orders, 
including contingency orders, market orders, and limit orders. 
Paragraph (c) of Rule 1066 lists certain types of contingency 
orders, and specifically defines such orders. Currently, the 
contingency orders currently listed and defined under paragraph (c) 
are stop (stop-loss) orders, stop-limit orders, delta orders, and 
multi-part orders.
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    Curently, a Specialist is prohibited under OFPA A-2 from accepting 
contingency orders, other than stop (stop-loss) and stop-limit orders, 
without the express approval of a Floor Official.\9\ The proposed 
changes would make permissible the acceptance of contingency orders by 
Specialists without the approval of a Floor Official. The change would 
extend the acceptance of certain contingency orders without floor 
official approval beyond the currently permitted acceptance of stop 
(stop-loss) and stop-limit orders to include contingency orders as 
defined as such in Rule 1066(c), and will apply to both customer and 
broker-dealer accounts. Furthermore, a Specialist would be able to 
refuse to accept contingency orders, but may only refuse to accept 
contingency orders from customer accounts upon the prior approval of 
two Floor Officials.
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    \9\In addition, a Specialist is prohibited from accepting option 
orders consisting of two or more option series (i.e., spread, 
straddle, and/or combination orders). See Phlx OFPA A-2. The 
Exchange's proposed rule change does not affect this prohibition, 
which continues to apply to Specialists. See Amendment No. 3, supra 
note 5.
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    The Exchange is proposing to clarify the existing definitions of 
stop (stop-loss) and stop-limit orders in Phlx Rule 1066, and to add 
new subparagraphs (c)(4)-(7) to Rule 1066. This new text would expand 
the existing list of the types of contingency orders and define each 
contingency order permitted. Specifically, the Exchange proposes to add 
all-or-none,\10\ opening-only-market,\11\ market-on-close,\12\ and 
cancel-replacement orders.\13\
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    \10\The Exchange defines an all-or-none order as a market order 
or limit order which is to be executed in its entirety, or not at 
all.
    \11\The Exchange defines an opening-only-market order as a 
market order which is to be executed in whole or in part during the 
opening rotation of an options series, or not at all.
    \12\The Exchange defines a market-on-close order as a market or 
limit order to be executed as close as possible to the closing bell, 
or during the closing rotation, and should be near to or at the 
closing price for the particular series.
    \13\The Exchange defines a cancel-replacement order as a 
contingency order consisting of two or more parts which require the 
immediate cancellation of a previously received order prior to the 
replacement of a new order with new terms and conditions. If the 
previously placed order is already filled partially or in its 
entirety, the replacement order is automatically cancelled or 
reduced by such number.
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    Finally, the Exchange is proposing to amend the fine schedule to 
OFPA A-2 to increase the penalties for infractions of those guidelines 
by Specialists.
    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) of the Act.\14\ 
Specifically, the Commission finds the amendment to OFPA A-2 permitting 
Specialists to accept contingency orders, as defined in Phlx Rule 1066, 
without prior Floor Official approval, will remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system by facilitating quicker and more efficient executions of such 
contingency orders. While the Commission believes that it is 
permissible for Specialists to retain the ability to refuse to accept 
contingency orders as market conditions necessitate, the Commission 
also believes that the proposed amendment to OFPA A-2 requiring the 
express approval of two Floor Officials in order for a Specialist to 
refuse to accept a contingency order from a customer account will serve 
to prevent Specialists from arbitrarily rejecting such customer orders, 
and will thereby help to protect investors and the public interest. In 
this regard, the Commission would expect the Phlx to monitor this area 
to assure that orders are not arbitrarily or unfairly being refused.
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    \14\15 U.S.C. Sec. 78f(b)(5) (1988).
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    The Commission finds that the expansion of Phlx Rule 1066(c) to 
include four additional types of contingency orders is consistent with 
the Act and the rules thereunder, as well as the rules of other self-
regulatory organizations which trade option products. Specifically, the 
definitions of all-or-none,\15\ opening-only-market,\16\ and market-on-
close\17\ orders are consistent with the definitions contained in the 
rules of other options self-regulatory organizations, all of which 
rules have been previously approved by the Commission. In addition, 
although not contained in the rules of other self-regulatory 
organizations, the ability, or in some cases the responsibility, of 
Exchange members to submit cancel-replacement orders in appropriate 
circumstances is set forth in Phlx OFPA A-7(b), which was previously 
approved by the Commission.\18\
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    \15\See American Stock Exchange, Inc. (``Amex'') Rule 131(c); 
Chicago Board Options Exchange, Inc. (``CBOE'') Rule 6.53(i); and 
New York Stock Exchange, Inc. (``NYSE'') Rule 13. See also Phlx OFPA 
A-7.
    \16\See Amex Rule 131(e); CBOE Rule 6.53(l); and NYSE Rule 13.
    \17\See Amex Rule 131(f) and NYSE Rule 13.
    \18\See Securities Exchange Act Release No. 30670 (May 6, 1992), 
57 FR 20312 (May 12, 1992) (``Release No. 30670''). OFPA A-7(b) 
states that in order to effect a change in the option series of an 
order placed on the Specialist book, a member shall submit separate 
cancel and replacement orders to the Specialists. In order to effect 
a change in the price or volume of an order placed on the Specialist 
book, a member may submit the appropriate cancel and replacement 
ticket or tickets to the Specialist. In Release No. 30670, the 
Commission found that this provision ``served the needs of investors 
and promotes investor confidence in the quality and integrity of the 
Phlx's options market by requiring specialists to respond promptly 
to cancellation instructions and to indicate immediately that the 
cancellation was accepted or that the cancellation was too late, and 
therefore, that the order was executed.'' In addition, the 
Commission found that the provision ``will improve the execution of 
customer orders by providing an efficient procedure for submitting 
changes in the terms of an order on the specialist's book.'' Id.
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    The Commission also finds that the proposed amendments to the 
definitions of stop (stop-loss) and stop-limit orders in Rule 1066(c) 
merely clarify the current definitions of those terms, and therefore 
present no new regulatory issues.
    The Commission also finds that the amendment to OFPA A-2's fine 
schedule to increase the penalties for infractions thereof will 
continue to provide a fair and effective means to enforce compliance 
with the provisions and thereby promote just and equitable principles 
of trade and the protection of investors and the public interest.
    Finally, the Commission finds good cause for approving Amendment 
No. 4 to the proposed rule change prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal 
Register. Currently, OFPA A-2(ii) permits specialists to accept spread, 
straddle, or combination orders, as those terms are defined in Phlx 
Rule 1066(d), (g) and (h), respectively with the express approval of 
one Floor Official. However, because such orders are discretionary in 
nature, and Section 11(a) of the Act\19\ prohibits specialists from 
accepting discretionary orders, the Phlx has amended OFPA A-2 to 
prohibit specialists from accepting such orders, regardless of Floor 
Official approval. Thus, the purpose of Amendment No. 4 is merely to 
conform OFPA A-2 with the requirements and prohibitions of the Act, and 
necessarily serves to promote just and equitable principles of trade 
and protect investors and the public interest. Therefore, the 
Commission finds that no new regulatory issues are raised by Amendment 
No. 4. Accordingly, the Commission believes it is consistent with 
Sections 19(b)(2) and 6(b)(5) of the Act to approve Amendment No. 4 on 
an accelerated basis.
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    \19\15 U.S.C. 78k(a).
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    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4 to the proposed rule change. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of the submission, all subsequent 
amendments, all written statements with respect to the foregoing that 
are filed with the Commission, and all written communications relating 
to the foregoing 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. Sec. 552, will be available for inspection and 
copying in the Commission's Public Reference Section, 450 Fifth Street, 
N.W., Washington, D.C. Copies of such filing also will be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory orgainzation. All submissions should refer to File No. 
SR-Phlx-92-03, and should be submitted by October 24, 1994.
    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\20\ that the proposed rule change (File No. SR-Phlx-92-03), as 
amended, is approved.

    \20\15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24305 Filed 9-30-94; 8:45 am]
BILLING CODE 8010-01-M