[Federal Register Volume 60, Number 188 (Thursday, September 28, 1995)]
[Notices]
[Pages 50225-50226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24096]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36271; File No. SR-Phlx-95-66]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to P/A Orders

September 22, 1995.
    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 
September 15, 1995, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. 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 is proposing to amend: (i) Phlx Rule 1066\1\ by adding new 
paragraph (h), P/A Orders (Principal Acting as Agent); and (ii) Phlx 
Rule 1015\2\ by adding new paragraph (c). Below is the text of the 
proposed rule change. Proposed new language is in italics.

    \1\ Philadelphia Stock Exchange Guide, Options Rules, Rule 1066 
(CCH) para.3066.
    \2\ Philadelphia Stock Exchange Guide, Options Rules, Rule 1015 
(CCH) para.3015.
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Options Rules

* * * * *
Certain Types of Orders Defined
Rule 1066
* * * * *
    (h) P/A Order (``Principal Acting as Agent'')--A P/A order is an 
order received on the Exchange in the name (``give-up'') of a 
registered floor trader on another national options exchange (i.e., an 
``N'' account type) sent while that floor trader is holding a similar 
customer order in that same option series for the account of a public 
customer for which price improvement is sought on the basis that the 
PHLX is displaying a superior bid or offer.
* * * * *
Quotation Guarantees
Rule 1015
* * * * *
    (c) P/A Orders--the P/A order type shall only exist with respect to 
those multiply traded equity options for which the originating options 
exchange affords reciprocal P/A treatment. P/A orders received on the 
PHLX must be provided with the customer volume guarantees of Rules 1015 
and 1033, if the PHLX specialist agreement to accept P/A orders is 
reciprocated by the sending floor trader in the same option on another 
national options exchange. P/A orders may not be for more than the 
number of contracts on the customer's order and must be market or 
marketable limit orders. An order does not qualify as a P/A order if 
the customer's order on the other exchange was given an execution prior 
to the time the P/A order is sent on its behalf.
* * * * *

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 if 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 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to create a new equity 
options order designator, the P/A order, to ensure that when a floor 
trader (i.e., Specialist, market maker, Registered Options Trader, Lead 
Market Maker or Designated Primary Market Maker) from another options 
exchange in possession of a public customer order sends a mirror-image 
order \3\ to the Phlx to obtain price improvement for that customer, 
the customer will receive the benefit of that better execution price, 
notwithstanding that the mirror-image order has been sent in the name 
of floor trader. Similarly, the P/A order is intended to ensure that 
when a Phlx floor trader sends such an order to another options 
exchange, the customer for whom the Phlx order is sent receives the 
benefit of the better price available on that exchange.

    \3\ A mirror-image order is an order sent by the floor trader 
for the exact number of contracts specified in the customer order.
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    The proposed rule change recognizes that orders received on 
national options exchanges in the name of public customers are provided 
firm quotes and volume guarantees not available to orders received in 
the name of broker-dealers. These volume guarantees are not 
insignificant, established by rule as a minimum of ten contracts and 
are frequently much higher.
    Because orders emanating from the floor of one exchange and sent to 
another in multiply-listed options normally are sent in the name of the 
floor trader, they are often deprived of the opportunity to receive 
such guarantees. For example, a customer buy order may be ``stopped'' 
by a floor trader on the receiving exchange at that 

[[Page 50226]]
exchange's displayed price of 2\3/4\ while that floor trader sends a 
mirror-image order to an exchange displaying an offer price of 2\5/8\. 
The floor trader sends such order under his own broker-dealer give-up. 
The receiving exchange's floor traders do not know that the order is 
for the benefit of a customer and are under no obligation to provide 
the order with its exchange customer guarantee. Consequently, the order 
may not be executed and the quote, in accordance with the ``trade or 
fade'' rules on the options exchanges, may then be changed to a 2\3/4\ 
offer. Once the quote has faded to 2\3/4\, the customer is deprived of 
an opportunity to receive a 2\5/8\ fill, as the floor trader who sent 
the order may then fill the customer at his own exchange's displayed 
price of 2\3/4\, without the concern of creating a trade-through.
    As proposed herein, the P/A designator would serve to inform 
receiving markets that a customer order is being represented by the 
floor trader's order.\4\ Knowledge that the order is for the benefit of 
a customer will form the basis for such orders to be provided with 
those customer volume guarantees currently afforded to customer orders 
received directly by the various exchanges. Use of the P/A designator 
therefore will ensure that the customer receives the volume guarantee 
provided on the exchange displaying the superior price and will reverse 
the deleterious effects the trade-or-fade rules may have had in 
promoting fades of such prices, at least in instances where a customer 
order is involved. By providing orders placed in the name of floor 
traders, but for the benefit of customers, with public customer volume 
guarantees, the proposal promotes objectives of the national market 
system in the options marketplace. Specifically, the proposal promotes 
the practicability of brokers executing investors' orders in the best 
market.\5\ In addition, the proposal is intended to assure the 
economically efficient execution of securities transactions.\6\

    \4\ The Phlx will surveil for compliance with the provision to 
assure that its traders are sending orders on behalf of a bona fide 
customer account prior to such customer order being executed on the 
exchange where that order was routed to receive the benefit of the 
better price available on that exchange. The Phlx expects equivalent 
surveillance to be conducted on all participating exchanges.
    \5\ 15 U.S.C. 78k-1(a)(1)(C)(iv).
    \6\ 15 U.S.C. 78k-1(a)(1)(C)(i).
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    As an interim step toward implementing these national market system 
objectives in the equity options marketplace, the use of the P/A 
designator would be adopted on a voluntary basis by Phlx floor traders 
and available to any reciprocating floor traders on other national 
options exchanges who have agreed to execute Phlx P/A orders in the 
same multiply-listed options on the same basis. In preparation for such 
implementation, the Exchange has identified its multiply-listed options 
participating in the voluntary P/A designation.
    To qualify as a P/A order, the mirror-image order sent by the floor 
trader must be for no more than the number of contracts on the 
customer's order in-hand and must be either a market or a marketable 
limit order. An order would not qualify as a P/A order if the 
customer's order has already been executed prior to the time the 
mirror-image order is sent to the Phlx. To qualify as ``customer,'' the 
account for which price improvement is sought must be a non-broker-
dealer account.
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act \7\ in that it is designed to promote just and equitable principles 
of trade, prevent fraudulent and manipulative acts and practices, 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, as well as to protect investors 
and the public interest, by improving the execution procedure for 
principal-acting-as-agent orders in multiply-listed options.

    \7\ 15 U.S.C. Sec. 78f.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    No written comments were either solicited or received.

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 Phlx 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 Room. 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-95-66 and should 
be submitted by October 19, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-24096 Filed 9-27-95; 8:45 am]
BILLING CODE 8010-01-M