[Federal Register Volume 60, Number 218 (Monday, November 13, 1995)]
[Notices]
[Pages 57028-57031]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27879]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36457; File No. SR-Phlx-95-60]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Regarding Alternate 
Specialists

November 3, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. Sec. 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 

[[Page 57029]]
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. On November 1, 1995, the Exchange submitted to 
the Commission Amendment No. 1 to the proposed rule change.\1\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

    \1\ See letter from Gerald D. O'Connell, First Vice President, 
Phlx, to Glen Barrentine, Team Leader, Division of Market 
Regulation, SEC, dated October 30, 1995. In Amendment No. 1, the 
Exchange clarifies that the ``50% of quarterly opening share 
volume'' requirement has been replaced with ``50% of quarterly trade 
volume.''
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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 Phlx 
Rule 202A, Responsibilities of Alternate Specialists, to reduce the 
number of equity issues in which an individual can serve as Alternate 
Specialist from the current maximum, which is all of the Exchange's 
approximately 2,300 securities, to a new level of 60 securities.
    Moreover, under the proposed rule change, the Exchange would permit 
the ``50% on-floor requirement'' to be met by trade volume, rather than 
share volume. The proposed rule change would also allow Alternate 
Specialists to count trades effected on another national securities 
exchange through the Intermarket Trading System (``ITS'') towards their 
50% on-floor requirement provided that the Alternate Specialist's on-
floor trades outnumber his/her ITS trades by a minimum ratio of three-
to-one. An Alternate Specialist's ITS trades in excess of that ratio 
could not be used to satisfy the 50% requirement. Moreover, unexecuted 
orders of 500 shares or more placed with the Specialist on the Exchange 
at a price on or in-between the consolidated market and maintained on 
the book for an extended period of time would be eligible for the 50% 
on-floor requirement.\2\

    \2\ According to the Exchange, an ``extended period of time'' 
will be determined by the Exchange on a case by case basis. 
Telephone conversation between Edith Hallahan, Special Counsel, 
Regulatory Services, Phlx, and Jennifer S. Choi, SEC, on October 11, 
1995.
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    The Exchange also proposes that, once a member has been assigned as 
an Alternate Specialist, the member must maintain such assignment for 
at least 30 business days, after which the member may terminate the 
assignment by providing written notification to the Exchange on a form 
prescribed by the Exchange.\3\ Terminations will become effective as of 
the opening of trading on the equity floor on the business day 
following the submission.

    \3\ The Exchange notes that the general provision pertaining to 
assignment of Alternate Specialists is Phlx Rule 201A.
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    Moreover, to avoid repetition and improve the clarity of Rule 202A, 
the Phlx proposes to amend several provisions that focus on the 
coordination of Alternate Specialist activities with the respective 
Specialist, the Alternative Specialist's participation on openings, and 
the handling of orders. Specifically, the Exchange proposes to 
consolidate into Rule 202A(a) the provisions relating to an Alternate 
Specialist's affirmative and negative market making obligations, which 
were previously covered by paragraphs (b)-(e) of Rule 202A. Under the 
proposed rule change, Rule 202A(a) defines an Alternate Specialist as 
an individual member of the Exchange registered as an equity Specialist 
on the floor who, in addition to those securities for which he serves 
as Specialist, has agreed to provide liquidity on demand as an 
Alternate Specialist in the execution of customer orders in certain 
other securities on the Exchange. The responsibilities of the Alternate 
Specialist are defined as follows: to provide a bid and/or offer in the 
security upon the request of a Floor Broker or Specialist holding a 
customer order and to only participate in the execution of such orders 
in a manner reasonably calculated to contribute to the maintenance of a 
fair and orderly market.
    Finally, the Exchange proposes to incorporate certain requirements 
previously contained in the Supplementary Materials into new Rule 
202A(c), which will list the criteria for qualifying and maintaining 
the status of an Alternate Specialist. The Exchange also proposes to 
delete the remaining requirements in the Supplementary Materials 
because the Exchange finds them unnecessary in light of other existing 
Exchange rules.

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 self-regulatory organization 
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 self-regulatory organization 
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

1. Purpose
    Currently, Rule 202A, which was adopted in 1987, outlines the 
responsibilities of Alternate Specialists on the Exchange. The Rule 
presently permits equity Specialists to trade in an Alternate 
Specialist capacity in all securities traded on the equity floor. As a 
result, the current rule does not encourage Alternate Specialists to 
focus liquidity in small groups of stocks where more concentration of 
activity could result in a higher degree of liquidity. Therefore, the 
proposal limits the maximum number of Alternate Specialist issues to 60 
per member. The primary purpose of the propose rule change is to 
bolster liquidity provided by the Phlx's Alternate Specialist program 
by concentrating Alternate Specialist activities in a more focused 
manner.
    The current rule also provides that Alternate Specialists must 
comply with two quarterly trading requirements. First, 50% of an 
Alternate Specialist's quarterly share volume (excluding share volume 
in securities in which he is registered as Specialist) must be in 
issues to which he is assigned. In situations where a Floor Official 
requests an Alternate Specialist to participate in trading an issue in 
which he is not assigned, to share volume so accumulated will be 
included as part of the volume required to satisfy the 50% requirement. 
Second, 50% of the quarterly share volume that creates or increases a 
position (``opening'') in an alternative specialist account must result 
from transactions consummated on the Exchange.
    This proposal deletes the first requirement that 50% of the 
Alternate Specialist's share volume must be in assigned issues because 
the Exchange has limited the maximum number of Alternate Specialist 
securities to 60. The other 50% requirement (i.e., that 50% of the 
Alternate Specialist's ``opening'' volume must be effected on the Phlx) 
is retained.\4\ The Exchange, however, proposes to replace the ``50% of 
quarterly opening share volume'' requirement with ``50% of quarterly 
trade volume.'' The Exchange states that it has determined that the 
requirement should no longer be limited to 

[[Page 57030]]
``opening'' positions because measuring all trade volume each quarter 
to ensure that 50% is executed on the Exchange should fulfill the 
Phlx's intent to monitor for true alternate specialist activity and 
obligations. The Exchange also notes that opening transactions are 
difficult to monitor because floor tickets are not marked with an 
opening or closing distinction on the equity floor.

    \4\ See Phlx Rule 202A(c)(iv).
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    Moreover, the 50% on-floor requirement is proposed to be amended 
both to employ trade volume rather than share volume in the calculation 
as well as to include: (1) ITS trades and (2) unexecuted orders placed 
on the Phlx at prices on or between the consolidated market. In this 
regard, the Phlx notes that, consistent with their regulatory 
responsibility to provide fair and orderly markets, Alternate 
Specialists must provide liquidity on the Exchange in assigned 
alternate issues. The ability to inventory or offset securities 
positions is a critical aspect of the National Market System, which 
links equity markets, including the Phlx and seven other equity 
markets, with the goal of best-execution pricing. Thus the Exchange 
believes that it is appropriate to allow one-quarter of the 50% on-
floor requirement to be met by ITS trades effected away from the 
Exchange, because ITS enhances liquidity and provides the linkage vital 
to a true National Market System. Only those ITS trades that do not 
exceed a ratio of three Phlx trades to one ITS trade may be counted. 
For example, if an Alternate Specialist needs to employ ITS trades to 
meet his on-floor requirement, and has executed a total of 2,000 trades 
in that quarter, the requirement could be met by effecting 250 off-
floor ITS trades and 750 on-floor trades.
    Second, the Exchange notes that Alternate Specialists serve an 
important role in providing liquidity and stabilizing the marketplace 
in their Alternate Specialist securities. In offsetting positions or 
responding to market needs, Alternate Specialists routinely place 
orders on the Exchange that add liquidity to the Exchange's market, 
regardless of whether the orders are subsequently availed upon by a 
customer's agent, to facilitate customer interest. In order to give 
proper credit to such stabilizing and liquidity-providing orders placed 
on the Exchange floor by Alternate Specialists that are not executed, 
the Exchange also proposes to count toward the 50% requirement orders 
placed on the Exchange on or in-between the consolidated market, 
notwithstanding that the orders are not executed. The Alternate 
Specialist must evidence for any such claim that the respective bid or 
offer was maintained for an extended period of time.
    As part of the proposed simplification of the Rule, the Phlx 
proposes to delete certain existing provisions, namely former 
Supplementary Material .06, .07 and .09. First, the Exchange proposes 
to delete Commentary .06, which states that Alternate Specialists as a 
group are entitled to participate in opening a security on the Exchange 
with equal standing with respect to any net imbalance (after Specialist 
participation) of purchase and sale orders on the Exchange. This 
provision is being deleted because the Exchange believes that the 
priority of orders is already adequately addressed in Rules 119 and 
120,\5\ which fairly allot participation levels to all members, 
including Alternate Specialists.\6\

    \5\ See Phlx Rule 119 (Precedence of Highest Bid) and Phlx Rule 
120 (Precedence of Offers at Same Price).
    \6\ Therefore, in accordance with Phlx's rules of priority and 
precedence, the level of Alternate Specialists participation would 
depend on price and size. Telephone conversation between Gerald 
O'Connell, Vice President, Phlx, and Jennifer S. Choi, SEC, on 
October 25, 1995.
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    Second, the Phlx also proposes to delete Commentary .07, which 
provides that following the opening, when the bids or offers of one or 
more Alternate Specialists are equal in price to those of the 
Specialist, the Alternate Specialist as a group are entitled to 
participate in the transactions effected thereon to the extent of one-
third of the total shares involved (excluding those needed to satisfy 
public orders). This provision also is being deleted because existing 
parity and priority provisions of Rules 119 and 120 satisfactorily 
allocate shares in today's market environment.\7\

    \7\ Under the Phlx's rules of priority and precedence, the 
number of shares that an Alternate Specialist and a regular 
specialist would be entitled to would depend on price, time, and 
size. Telephone conversation between Gerald O'Connell Vice 
President, Phlx, and Jennifer S. Choi, SEC, on October 25, 1995.
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    Third, the Exchange also proposes to delete Commentary .09, which 
states that, when requested by a Floor Broker, an Alternate Specialist 
must accept and guarantee execution of all 100 share agency orders to 
which his assignment extends that are not accepted by the Specialist. 
This provision is being deleted because the affirmative obligation of 
this provision only pertains to 100 share orders and will be largely 
superseded by new Rule 202A(c)(iv), where the Alternate Specialist's 
affirmative obligation to maintain an adequate presence in his assigned 
issues is more pronounced.\8\

    \8\ The Commission notes that new provision 202A(c)(iv) requires 
that the Alternate Specialist ``maintain an adequate presence in the 
Exchange's market with respect to assigned alternate issues and 
related trade activities for the alternate account,'' and sets forth 
the 50% on floor requirement. This provision, however, does not 
require the alternate specialist to guarantee execution of any 
specific number of shares.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6 of the Act in 
general, and in particular, with Section 6(b)(5), in that it is 
designed to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to 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. The Exchange 
believes that the proposed changes to Rule 202A strengthen its 
requirements by limiting the number of Alternate Specialist issues, 
which, in turn, should prevent fraudulent and manipulative acts and 
practices, and foster consistency with the principles underlying the 
National Market System and Section 11A, as well as favorable specialist 
margin treatment.\9\ Nevertheless, the Exchange also believes that the 
proposed changes with respect to the 50% requirements should protect 
investors and the public interest as well as promote just and equitable 
principles of trade by facilitating the inventory needs of Alternate 
Specialists.

    \9\ Phlx specialists and alternate specialist qualify for 
favorable margin treatment under Rule 12 of Regulation T.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other 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 

[[Page 57031]]
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the 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 at the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Phlx-95-60 and should be 
submitted by December 4, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
FR Doc. 95-27879 Filed 11-9-95; 8:45 am]
BILLING CODE 8010-01-M