[Federal Register Volume 60, Number 45 (Wednesday, March 8, 1995)]
[Notices]
[Pages 12802-12803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5580]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35429; File No. SR-Phlx-94-59]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 2 to the Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to Enhanced Specialist Participation in Parity 
Options Trades

March 1, 1995.
    On November 18, 1994, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with 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: (1) clarifying when a specialist 
is entitled to receive an enhanced participation on parity equity and 
index options trades; and (2) altering the size of the enhanced 
specialist participation presently available pursuant to Phlx Rule 
1014(g). Notice of the proposed rule change appeared in the Federal 
Register on December 30, 1994.\3\ No comment letters were received on 
the proposed rule change. The Exchange filed Amendment No. 1 to the 
proposal on December 20, 1994,\4\ and Amendment No. 2 on February 9, 
1995.\5\ This order approves the Exchange's proposal, as amended.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
    \3\See Securities Exchange Act Release No. 35141 (December 22, 
1994), 59 FR 67744 (December 30, 1994).
    \4\See Letter from Gerald O'Connell, First Vice President, 
Market Regulation and Trading Operations, Phlx, to Michael 
Walinskas, Branch Chief, Office of Market Supervision (``OMS''), 
Division of Market Regulation (``Division''), Commission, dated 
December 14, 1994.
    \5\In Amendment No. 2, the Phlx withdrew Amendment No. 1, 
inserted the effective date of the Two-for-One Split (as defined 
herein) into new Rule 1014(g)(ii), corrected an erroneous cross-
reference in new Rule 1014(g)(ii), and clarified that the proposed 
exceptions to the Two-for-One Split are mutually exclusive. See 
Letter from Gerald O'Connell, First Vice President, Market 
Regulation and Trading Operations, Phlx, to Michael Walinskas, 
Branch Chief, OMS, Division, Commission, dated February 9, 1995.
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    On May 25, 1994, the Commission approved an enhanced specialist 
participation for ``new equity option specialist units trading newly 
listed options classes where the specialist is on parity with two or 
more registered options traders (``ROTs'') (``New Unit Split'').\6\ On 
August 26, 1994, the Commission approved, on a one-year pilot basis, an 
enhanced specialist participation whereby an equity option specialist 
on parity with one or more ROTs is counted as two crowd participants 
(``Two-for-One Split'').\7\

    \6\See Securities Exchange Act Release No. 34109 (May 25, 1994), 
59 FR 28570 (June 2, 1994) (``Exchange Act Release No. 34109''). The 
New Unit Split was subsequently expanded to include index option 
specialists. See Securities Exchange Act Release No. 35028 (November 
30, 1994), 59 FR 63151 (December 7, 1994) (``Exchange Act Release 
No. 35028'').
    \7\The Two-for-One Split only applies to orders for more than 
five contracts. Additionally, it applies to all option classes 
listed after August 26, 1994, and to 50% of each specialist unit's 
issues listed prior to that date. 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. See Securities 
Exchange Act Release No. 34606 (August 26, 1994), 59 FR 45741 
(September 2, 1994) (``Exchange Act Release No. 34606'') As with the 
New Unit Split, this provision was subsequently expanded to include 
index option specialists. See Exchange Act Release No. 35028, supra 
note 6.
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    When either the New Unit Split or the Two-for-One Split apply, no 
customer order on parity is restricted to a smaller participation than 
any other crowd participant, including the specialist.\8\

    \8\See Phlx Rule 1014(g) (Two-for-One Split) and Commentary .17 
thereto (New Unit Split).
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    At this time, the Exchange proposes to amend both Rule 1014(g) and 
Commentary .17 thereto to specify that the enhanced splits apply where 
equity and index option specialists are on parity with controlled 
accounts, not just with ROTs. The term ``controlled account'' includes 
accounts controlled by or under common control with a member broker-
dealer.\9\

    \9\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. For purposes of Rule 
1014(g), discretionary accounts are considered customer accounts. 
Telephone conversation between Edith Hallahan, Special Counsel, 
Phlx, and Brad Ritter, Senior Counsel, OMS, Division, Commission, on 
February 28, 1995. The Phlx represents that the rule will continue 
to prohibit the application of any such enhancement in instances 
that would lessen the pro rata participation of customer orders on 
parity.
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    In addition to defining the circumstances under which the Two-for-
One Split and the New Unit Split will be applied, the current proposal 
also serves to replace, in certain situations, the Two-for-One Split 
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 for such orders. 
In those cases: where there is one controlled account on parity with 
[[Page 12803]] the specialist, the specialist will receive 60% of the 
contracts and the controlled account will receive 40% of the contracts; 
and where there are two controlled accounts on parity, the specialist 
will receive 40% of the contracts and each controlled account will 
receive 30% 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 will continue to apply whereby the 
specialist will be counted as two crowd participants.
    The Exchange believes that in transactions where there are less 
than three controlled accounts on parity with the specialist, the 
current Two-for-One split becomes overly burdensome on those controlled 
accounts. For example, applying the Two-for-One Split to a 100 contract 
buy order in a trading crowd consisting of one ROT and the specialist, 
will result in the specialist selling 66 contracts and the ROT selling 
34 contracts. Pursuant to the proposed amendment, in the above example 
the specialist's share will be reduced to 60 contracts and the ROT's 
share will increase to 40 contracts. As another example, where there 
are two ROTs on parity with a specialist, the present Two-for-One Split 
will entitle the specialist to sell 50 contracts and each ROT to sell 
25 contracts. The proposal will reduce the specialist's share to 40 
contracts and increase each ROT's share to 30 contracts. These results, 
the Exchange believes, demonstrate that while the specialist will 
continue to receive an enhanced split, the split will be reduced in 
small crowds where the impact on ROTs is more pronounced.
    Finally, the Exchange also proposes to codify the Two-for-One and 
New Unit Split provisions, as amended herein, into new Options Floor 
Procedure Advice B-6 for ease of reference on the trading floor. 
Similarly, to improve the organization of Rule 1014, the Phlx also 
proposes to reorganize Phlx Rule 1014 by numbering the Two-for-One 
Split provisions as Rule 1014(g)(ii) and by moving the New Unit Split 
provisions from Commentary .17 to Rule 1014(g)(iii).
    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)\10\ in that the 
proposal is designed to promote just and equitable principles of trade, 
to prevent fraudulent and manipulative acts and practices, and to 
protect investors and the public interest. Specifically, as the 
Commission stated in approving the New Unit Split and the Two-for-One 
Split, enhanced specialist participation for equity and index option 
parity trades may serve to aid the Exchange in attracting and retaining 
well capitalized specialist units to the Exchange without unreasonably 
restraining competition or harming investors.\11\

    \10\15 U.S.C. 78f(b)(5) (1988).
    \11\See Exchange Act Release Nos. 34109, supra note 6, and 34606 
supra note 7.
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    Further, the Commission believes that it is appropriate to amend 
the Two-for-One and New Unit Splits to state that the enhanced 
participations apply when an equity or index option specialist is on 
parity with controlled accounts and not just with ROT orders. The 
Commission's main concern in originally approving the enhanced 
specialist participations was ensuring that customer orders were not 
disadvantaged by the application of the enhanced splits.\12\ Because 
the definition of controlled account excludes customer accounts, the 
protection afforded to customer orders is not in anyway diminished by 
this proposal.

    \12\Id.
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    Finally, the only other substantive amendment in the current 
proposal is to alter the Two-for-One Split in situations where the 
specialist is on parity with less than three controlled accounts. 
Because the effect of this amendment is merely to reduce the benefit 
given to specialists on parity trades and, accordingly, to minimize the 
impact of the Two-for-One Split on controlled accounts, the Commission 
believes that the proposal does not raise any new issues that were not 
adequately addressed when the Two-for-One Split was originally 
approved.\13\

    \13\See Exchange Act Release No. 34606, supra note 7.
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    The Commission believes that the remaining proposed amendments are 
non-substantive and, therefore, do not raise any material regulatory 
issues. Specifically, the proposal to reorganize the structure of Rule 
1014 and to incorporate the New Unit and Two-for-One Splits, as 
amended, into a new Options Floor Procedure Advice, may reduce 
potential confusion by providing easier to use references to the 
enhanced participation provisions.
    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 2 merely clarifies the manner in which the 
Two-for-One Split will be applied and corrects an erroneous cross-
reference, neither of which raise any new regulatory issues that were 
not addressed in the original proposal. Accordingly, the Commission 
believes it is consistent with Section 6(b)(5) of the Act to approve 
Amendment No. 2 to the Phlx's proposal on an accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2. 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 
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 the File No. SR-Phlx-94-59 and should be 
submitted by March 29, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-Phlx-94-59), as amended is 
hereby approved.

    \14\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\

    \15\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-5580 Filed 3-7-95; 8:45 am]
BILLING CODE 8010-01-M