[Federal Register Volume 59, Number 250 (Friday, December 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32153]


[[Page Unknown]]

[Federal Register: December 30, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35141; File No. SR-Phlx-94-59]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Regarding Enhanced 
Specialist Parity Participations

December 22, 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 November 
18, 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 to amend 
Exchange Rule 1014(g), respecting enhanced specialist participations, 
which entitle equity and index option specialists, when on parity, to 
receive an enhanced parity participation (or split) in select options 
classes.\1\ The present proposal clarifies that the enhanced parity 
split is applicable in situations where orders of any controlled 
account\2\ are on parity with the specialist, and not just orders of 
Registered Options Traders (``ROTS''). The proposal also serves to 
replace the specialist's ``two-for-one'' enhanced parity split in 
situations where there are only one or two controlled accounts on 
parity with the specialist. Pursuant to this proposal, where there is 
only one controlled account on parity with a specialist, the specialist 
would receive a 60% split and the controlled accounts on parity with a 
specialist, the specialist would receive a 40% split, while each 
controlled account would receive 30% of the contracts.
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    \1\The Commission notes that the Exchange also has a proposal 
pending with the Commission that would provide an enhanced parity 
participation for the 3D foreign currency option (``FCO'') 
specialist. See Securities Exchange Act Release No. 34814 (October 
7, 1994), 59 FR 52337 (October 17, 1994) (notice for File No. SR-
Phlx-94-42). The present proposal will not affect the proposal 
regarding the 3D FCO specialist.
    \2\A controlled account is defined as ``any account controlled 
by or under common control with a member broker-dealer.'' See Phlx 
Rule 1014(g). Customer accounts are all accounts other than 
controlled accounts and specialist accounts. The Phlx represents 
that the rule will continue to prohibit the application of any such 
enhancement in instances which would lessen the pro rata 
participation of customer orders on parity.
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    Further, Floor Procedure Advice (``Advice'') B-6 (Priority of 
Options Orders for Equity Options and Index Options by Account 
Type),\3\ is proposed to be amended to add the enhanced participation 
provisions, both existing and proposed, into Section C. Lastly, Rule 
1014(g) is proposed to be renumbered, numbering the first paragraph as 
(g)(1), the general parity/priority provision for equity and index 
options, and the enhanced split provision currently in paragraph (g)(i) 
as (g)(ii); Commentary .17 is proposed to be deleted and renumbered as 
paragraph (g)(iii).\4\ The text of the proposed rule change is 
available at the Office of the Secretary, the Phlx, and at the 
Commission.
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    \3\Advice B-6 is administered pursuant to Phlx Rule 970 and the 
Exchange's minor rule violation enforcement and reporting plan 
(``minor rule plan''); however, proposed Section C does not contain 
a fine schedule and would be included in the Floor Procedure Advice 
Handbook for informational purposes only. Thus, the Exchange 
believes, no amendment to the minor rule plan is required.
    \4\A minor corresponding amendment to Rule 509 (Enhanced 
Specialist Participation Review) is also proposed to change the 
reference from Rule 1014(g)(i) to Rule 1014(g)(ii).
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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 Phlx 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 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 the 
statutory Basis for, the Proposed Rule Change

    By way of background, Phlx Rule 1014(g)(i), in conjunction with 
Rules 119 and 120, governs priority and parity in the execution of 
orders on the Phlx's equity and index options floor. When bids/offers 
are deemed simultaneous, such bid/offers are at ``parity,'' and subject 
to division among eligible participants in accordance with Exchange 
rules and procedures. The Commission recently approved two provisions 
to afford a specialist on parity with an enhanced participation in 
parity trades (``enhanced split'').\5\
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    \5\See Securities Exchange Act Release Nos. 34109 (May 25, 
1994), 59 FR 28570 (June 2, 1994) (providing an enhanced parity 
split for new specialist units trading newly listed equity option 
classes) (``Exchange Act Release No. 34109''), and 34606 (August 26, 
1994), 59 FR 45741 (September 2, 1994) (providing an enhanced parity 
split applying to specialists, other than new specialist units, for 
certain assigned equity option classes) (``Exchange Act Release No. 
34606''). These provision were subsequently expanded to also include 
index option specialists. See Securities Exchange Act Release No. 
35028 (November 30, 1994), 59 FR 63151 (December 7, 1994).
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    One provision applies to ``new'' specialist units trading new 
option classes, and affords the specialist with a 40% split of parity 
trades for up to one year following the listing of each new class; 
except, where there is only one other ROT on parity, in which case, the 
specialist then receives a 50% split (``new unit/new option enhanced 
split'').\6\ The provision ensures, however, that no customer order on 
parity will be restricted to a smaller participation than any other 
crowd participant, including the specialist. The new unit/new option 
enhanced split is reflected in Commentary .17 to Rule 1014.
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    \6\See Exchange Act Release No. 34109, supra note 5.
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    The second provision established an enhanced split for specialists, 
other than new specialists, on a one-year pilot basis, in certain 
option classes, whereby the specialist would be counted as two crowd 
participants in parity situations (``two-for-one enhanced split'').\7\ 
Similar to the new unit/new option split, no customer order on parity 
will be restricted to smaller participation than any other crowd 
participant, including the specialist. The two-for-one enhanced split 
only applies to orders for more than five contracts. Additionally, it 
applies to all option classes listed after adoption of the provision 
and to 50% of each specialist unit's pre-existing listed issues.\8\
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    \7\See Exchange Act Release No. 34606, supra note 5.
    \8\Specifically, each specialist unit's issues are divided into 
quartiles based on the most recent quarterly contract volume; the 
specialist unit may choose one-half of the issues in each quartile, 
as long as the total number of issues does not exceed 50% of the 
unit's issues.
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    At this time, the Exchange proposes to amend the two-for-one split 
in situations where there are, in addition to the specialist, less than 
three controlled accounts on parity with the specialist. The term 
``controlled account'' includes accounts controlled by or under common 
control with a member broker-dealers.\9\ Thus, the proposal clarifies 
that all controlled account orders are subject to the enhanced split, 
not just ROT orders. The proposal retains the requirement that the 
enhanced split only applies to orders for more than five contracts.\10\
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    \9\See supra note 2.
    \10\Telephone conversation between Michele Weisbaum, Associate 
General Counsel, Phlx, and Brad Ritter, Senior Counsel, Office of 
Market Supervision, Division of Market Regulation, Commission, on 
December 12, 1994.
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    The current language of Rule 1014(g)(i) and Commentary .17 thereto 
discuss the treatment of customer, ROT, and specialist orders in 
applying the enhance split. The purpose of this change is to clarify 
that ``firm'' orders are distinguishable from customer orders with 
respect to the enhanced split calculation. The Exchange represents that 
customer orders on parity will continue to be ensured their pro rata 
split in parity situations.
    In addition to defining the circumstances under which a specialist 
enhancement may be applied, the current proposal also serves to 
replace, in certain situations, the two-for-one provision with a 
percentage distribution. Those situations are where there are orders 
for more than five contracts and where only one or two controlled 
accounts are on parity with the specialist, such that: Where there is 
one controlled account on parity with the specialist, the specialist 
would receive 60% and the controlled account would receive 40% of the 
contracts; and where there are two controlled accounts on parity, each 
controlled account would receive 30% and the specialist would receive 
40% of the contracts. In qualified situations where there are three or 
more controlled accounts on parity with the specialist, the existing 
two-for-one split would continue to apply such that the specialist 
would be counted as two crowd participants.
    The Exchange believes that in situations where there are less than 
three controlled accounts on parity with the specialist, the two-for-
one split becomes overly burdensome for those controlled accounts. For 
example, applying a two-for-one split of a 100 lot buy order in a 
trading crowd consisting of one ROT and the specialist, would result in 
the specialist selling 66 contracts and the ROT selling 34 contracts. 
Pursuant to the split proposed herein, the specialist would sell 60 
contracts and the ROT would sell 40 contracts in the above example. 
Where there are two ROTs and the specialist on parity, the current 
split would entitle the specialist to sell 50 contracts and each ROT 
would sell 25 contracts. The proposed split would entitle the 
specialist to sell 40 contracts, while each ROT would sell 30 
contracts. These results demonstrate that while the specialist would 
continue to receive an ``enhanced'' split, such split would be reduced 
in small crowds where the impact on ROTs is more pronounced.
    Third, the existing provisions of the two-for-one split in Rule 
1014(g)(i) and the new unit/new option split currently in Commentary 
.17 are proposed to be codified into Advice B-6; additionally, the 
proposed changes regarding small trading crowds and firm orders are 
also proposed to be codified into Advice B-6. The purpose of adding 
these provisions into Section C of Advice B-6 is to include all 
significant parity/priority provisions in the Exchange's Floor 
Procedure Advice Handbook for ease of reference on the trading floor. 
Similarly, the proposed renumbering of Rule 1014(g), including moving 
Commentary .17 to paragraph (g)(iii) and renumbering paragraphs (i) and 
(ii), is intended to improve the organization of this Rule.
    The Exchange believes that the foregoing rule change proposal is 
consistent with Section 6 of the Act, in general, and with Section 
6(b)(5), in particular, in that it is designed to promote just and 
equitable principles of trade and to protect investors and the public 
interest by reducing the enhanced split where there are less than three 
controlled accounts, in addition to the specialist, on parity, which 
should, in the Exchange's opinion, promote liquidity by encouraging ROT 
participation in small trading crowds where an enhanced split applies. 
In addition, clarifying the role of firm orders in applying the 
enhanced split should also promote just and equitable principles of 
trade by expressly delineating firm participation in such parity 
situations. Lastly, codifying these provisions into Advice B-6 and 
renumbering Rule 1014(g) is intended to simplify the organization of 
the Exchange's parity/priority provisions.

(B) Self-Regulatory Organization's Statement on Burden on Competition

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

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
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-94-59 and should be 
submitted by January 20, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-32153 Filed 12-29-94; 8:45 am]
BILLING CODE 8010-01-M