[Federal Register Volume 61, Number 16 (Wednesday, January 24, 1996)]
[Notices]
[Pages 1961-1963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1034]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36728; File No. SR-Phlx-95-60]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc; 
Order Granting Approval to Proposed Rule Change and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 2 to Proposed 
Rule Change Relating to Alternate Specialists

January 17, 1996.

I. Introduction

    On September 15, 1995, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``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 Rule 202A, which 
addresses the responsibilities of Alternate Specialists. On November 1, 
1995, the Exchange submitted to the Commission Amendment No. 1 to the 
proposed rule change.\3\

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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 clarified that the ``50% of quarterly opening share 
volume'' requirement has been replaced with ``50% of quarterly trade 
volume.''
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    The proposed rule change and Amendment No. 1 were published for 
comment in Securities Exchange Act Release No. 36457 (Nov. 3, 1995), 60 
FR 57028 (Nov. 13, 1995). No comments were received on the proposal. On 
December 27, 1995, the Exchange submitted to the Commission Amendment 
No. 2 to the proposed rule change.\4\

    \4\ See letter from Gerald O'Connell, First Vice President, 
Phlx, to Glen Barrentine, Team Leader, Division of Market 
Regulation, SEC, dated December 20, 1995. In Amendment No. 2, the 
Exchange clarified that the Alternate Specialist must clear the post 
before sending an order via ITS to obtain credit for the 50% on-
floor requirement. Amendment No. 2 also withdrew the proposal to 
permit Alternate Specialists to count towards the 50% on-floor 
requirement unexecuted orders of 500 or more shares 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.
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    This order approves the proposed rule change, including Amendment 
No. 2 on an accelerated basis.

II. Description of Proposal

    An Alternate Specialist is a registered Phlx specialist, who with 
regard to certain assigned issues has agreed generally to supplement 
the market making activities of Exchange primary specialists. When 
called in to participate by the specialist or a Floor Official, 
Alternate Specialists assist the primary specialists in executing 
public orders during periods of unusual or heavy trading in a 
particular issue.\5\ Phlx Rule 202A sets forth the requirements and 
responsibilities of Alternate Specialists. Currently, equity 
specialists are permitted to trade in an Alternate Specialist capacity 
all securities traded on the equity floor.

    \5\ Phlx specialists and Alternate Specialists qualify for 
favorable margin treatment under Regulation T. Under Rule 12 of 
Regulation T, a creditor may extend good faith margin for any long 
or short position in a security in which a specialist makes a 
market. See 12 CFR 220.12(b)(3). Regulation T defines ``good faith 
margin'' as the amount of margin which a creditor, exercising sound 
credit judgment, would customarily require for a specified security 
position and which is established without regard to the customer's 
other assets or securities positions held in connection with 
unrelated transactions. See 12 CFR 220.2(k).
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    Phlx rule 202A imposes certain trading obligations upon Alternate 
Specialists pursuant to section 11 of the Act and the rule thereunder 
\6\ as well as financial responsibility and reporting requirements. An 
Alternate Specialist is obligated under Rule 202A to effect all of his 
transactions in securities on the Exchange so that they constitute a 
course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market. Moreover, an Alternate 
Specialist at the request of a floor broker must make a bid or offer in 
any security to which he is assigned or in which he is then trading 
such that a transaction effected thereon will contribute to the 
maintenance of a fair and orderly market.

    \6\ 15 U.S.C. 78k. Generally, section 11(b) of the Act governs 
specialist rights and obligations. In particular, Rule 11b-1(a)(2) 
under the Act provides that the rules of an exchange concerning 
specialist registration must include provisions on the following: 
(1) Minimum capital requirements; (2) requirements that the 
specialist engage in a course of dealing for his own account that 
will assist in the maintenance of a fair and orderly market and that 
substantial, continued failure to meet these requirements will 
result in suspension or cancellation of the specialist's 
registration in his specialty stock(s); (3) provisions restricting 
the specialist's dealings to those necessary to maintain a fair and 
orderly market or to act as an odd-lot dealer; (4) provisions 
stating the responsibilities of the specialist as broker; and (5) 
procedures for the effective and systematic surveillance of 
specialist activities. Phlx Alternate Specialists are considered 
specialists as envisioned by Section 11 of the Act.
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    The current rule also provides the criteria for qualifying and 
maintaining the status of an Alternate Specialist. Under the rule, 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. Moreover, 50% of the quarterly share 
volume that creates or increases a position (``opening'') in an 
Alternate Specialist account must result from transactions consummated 
on the Exchange.
    Finally, the current rule contains several provisions that focus on 
the Alternate Specialist's participation on openings and after the 
opening and the handling of orders. Supplementary Material .06 to Phlx 
Rule 202A provides 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. Moreover, 
pursuant to Supplementary Material .07 to Phlx Rule 202A, 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 
Specialists 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). Pursuant to 
Supplementary Material .09 to Rule 202A, an Alternate Specialist must 
also accept and guarantee execution of all 100 share agency orders to 
which his assignment extends that 

[[Page 1962]]
are not accepted by the specialist when requested by a floor broker.
    The Exchange proposes to amend certain obligations and 
responsibilities of Alternate Specialists set forth in Phlx Rule 202A. 
Specifically, the Exchange proposes to consolidate into new Rule 
202A(a) the provisions relating to an Alternate Specialist's 
affirmative and negative market making obligations. The Exchange 
believes that this change will avoid repetition and improve the clarity 
of the rule.
    In new Rule 202A(b), Phlx proposes to limit the number of equity 
issues in which an individual may serve as Alternate Specialist to 60 
securities. Moreover, the Exchange 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 Phlx 
on a form prescribed by the Exchange.\7\ The Exchange states that the 
primary purpose of the proposed rule change is to bolster liquidity 
provided by the Phlx's Alternate Specialist program by concentrating 
Alternate Specialist activities in a smaller number of securities.

    \7\ Terminations will become effective as of the opening of 
trading on the equity floor on the business day following the 
submission.
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    Finally, the Exchange proposes new Rule 202A(c), which will list 
the criteria for qualifying and maintaining the status of an Alternate 
Specialist. This provision incorporates and amends certain previous 
requirements and eliminates others that the Exchange finds to be 
unnecessary in light of other Exchange rules. In particular, the 
Exchange proposes to delete the requirement that 50% of the Alternate 
Specialist's share volume must be in assigned issues. The Exchange 
believes that this requirement is no longer necessary in light of its 
proposal to limit the maximum number of securities in which a 
specialist can act as an Alternate Specialist to 60. Moreover, the 
Exchange proposes to amend the requirement that 50% of the quarterly 
opening share volume in an Alternate Specialist account result from 
transactions consummated on the Exchange (``50% on-floor requirement'') 
by replacing the ``50% of quarterly opening share volume'' with ``50% 
of quarterly trade volume.'' The Exchange states that it has determined 
that the requirement should no longer be limited to ``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.
    The Exchange also proposes to amend the 50% on-floor requirement to 
permit Alternate Specialist to include in the calculation trades 
effected on another national securities exchange through the 
Intermarket Trading System (``ITS'') that do not exceed a ratio of 
three Phlx trades to one ITS trade.\8\ For an ITS trade to count toward 
such a requirement, however, the Alternate Specialist must first 
``clear the post'' before routing an ITS commitment to another 
market.\9\ 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 a linkage that is vital to a true National Market System.

    \8\ 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.
    \9\ Specifically, before sending an order initiated on the 
Exchange floor to another market, the Alternate Specialist must (1) 
request the specialist's quote and (2) make a bid or offer at the 
post for the price and size of his intended interest. See Securities 
Exchange Act Release No. 20331 (Oct. 27, 1983), 48 FR 50649 (Nov. 2, 
1983) (approving a proposed rule change to require all Phlx floor 
members to clear the post for a security on the Phlx floor before 
directly inputting the order into the Intermarket Trading System; 
alternate specialists are also required to bid or offer at the post 
for the price and size of their intended interest prior to 
transmitting a commitment to another market via the ITS).
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    The Phlx also proposes to delete Supplementary Material .06, .07, 
and .09. The Exchange proposes to delete Supplementary Material .06 and 
.07, which pertain to Alternate Specialist's participation, because it 
believes that the priority of orders is already adequately addressed in 
Rules 119 and 120.\10\ The Phlx also proposes to delete Supplementary 
Material .09, which relates to Alternate Specialist's handling of 
orders, because it believes that the obligation on the Alternate 
Specialist to accept and guarantee executions 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.

    \10\ See Phlx Rule 119 (Precedence of Highest Bid) and Phlx Rule 
120 (Precedence of Offers at Same Price).
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III. Discussion

    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, with the requirements of sections 6(b) and 11(b).\11\ In 
particular, the Commission believes the proposal is consistent with the 
section 6(b)(5) requirements that the rules of an exchange be designed 
to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, and, in general, to protect investors 
and the public interest. The Commission also believes that the proposed 
rule change is consistent with the requirement of section 11(b) and 
Rule 11b-1 thereunder \12\ that specialist transactions must contribute 
to the maintenance of fair and orderly markets.

    \11\ 15 u.S.C. 78f(b) and 78k(b).
    \12\ 17 CFR 240.11b-1.
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    The Commission believes that limiting the number of issues in which 
an equity specialist may serve as an Alternate Specialist to 60 would 
assist in adding depth and liquidity to the market. By placing a limit 
on the number of Alternate Specialist issues, the Alternate Specialist 
can more effectively utilize his capital and focus his liquidity 
providing activities on 60 issues rather than on potentially over 2,300 
issues.
    The Commission also believes that the consolidation into new Rule 
202A(a) of the Alternate Specialist's affirmative and negative market 
making obligations is consistent with the purposes of the Act in that 
the requirements of section 11(b) of the Act and Rule 11b-1(a)(2) 
thereunder remain intact: Alternate Specialists must continue to adhere 
to minimum capital requirements as well as the requirement that the 
Alternate Specialist trading contribute to the maintenance of a fair 
and orderly market. Moreover, the proposed rule change does not affect 
the Alternate Specialist's obligations as an equity specialist when he 
is not otherwise acting in his capacity as an Alternate Specialist. 
Finally, Phlx's specialist compliance and surveillance rules continue 
to apply to the Exchange's Alternate Specialist program. Therefore, the 
Commission believes that these rules will ensure that Alternate 
Specialist trading will be beneficial to investors and the market in 
general.
    The Commission also believes that the amendments to the two 
quarterly trading requirements are not inconsistent with the Act. The 
requirement that 50% of the Alternate 

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Specialist's share volume be in assigned issues may be deleted because 
with only 60 securities in which a specialist may serve as an Alternate 
Specialist and the adoption of the new standards in the rule, it is 
permissible for Phlx to decide that an aggregate minimum level of 
Alternate Specialist activity is no longer necessary to ensure that 
Alternate Specialists are acting as section 11(b) specialists. 
Moreover, the 50% requirement spread over potentially 2,300 securities 
did not guarantee significant depth or liquidity in individual stocks. 
The Commission believes that new Rule 202A(c)(iv), which places 
affirmative obligations on the Alternate Specialist to maintain an 
adequate presence in the Exchange's market with respect to assigned 
issues and to execute at least 50% of the trades placed in the 
Alternate Specialist account each quarter on the Exchange, in addition 
to the limitation in the number of securities for which a specialist 
may act as an Alternate Specialist should ensure sufficient Alternate 
Specialist participation on the Exchange and liquidity in individual 
stocks.
    With respect to the 50% on-floor requirement, the Exchange proposes 
to calculate the percentage of quarterly trade volume rather than 
``opening'' share volume. The Commission believes that with this 
amendment the Exchange can monitor the frequency of Alternate 
Specialist participation on the Exchange, which would be as helpful as 
the prior requirement in measuring whether Alternate Specialists are 
fulfilling their obligations to provide liquidity on the Exchange. 
Moreover, eliminating the ``opening'' distinction will make it easier 
for the Exchange to monitor compliance with the requirement.
    Moreover, the Commission believes that amending the 50% on-floor 
requirement to permit Alternate Specialist to include in the 
calculation ITS trades will not be inconsistent with the purposes of 
the Act. The Exchange specifically requires that the Alternate 
Specialist clear the post before routing an ITS commitment to another 
market. Where one of the primary obligations of Alternate Specialists 
is to provide liquidity on demand, permitting Alternate Specialists to 
count ITS trades towards their 50% on-floor requirement would encourage 
and recognize Alternate Specialists activities that contribute to the 
liquidity of the National Markets. Moreover, the Commission recognizes 
that an Alternate Specialist who initiates an order on the floor and 
clears the post should not be penalized if there is no interest in the 
crowd or on the limit order book against which the Alternate 
Specialist's order can be executed and if the specialist does not 
accept that order for placement in the book. The Commission finds that 
it is reasonable for the Exchange to assume that an Alternate 
Specialist who makes a good faith effort to participate as dealer on 
the Exchange floor is engaged in bona fide specialist activity even 
though the transaction ultimately can be consummated only by exposing 
the Alternate Specialist's order to all interest in the National Market 
System. Moreover, the Commission finds that the limit on the amount of 
ITS trades that may be counted towards the 50% on-floor requirement 
should ensure that the Alternate Specialists are actually engaging in 
bona fide equity specialist activity on the Phlx floor entitled to 
exempt credit.
    Finally, the Commission finds that the Exchange's rules of priority 
and precedence of orders adequately address the concerns in 
Supplementary Material .06 and .07. Moreover, the Commission believes 
that the Exchange's proposal to delete Supplementary Material .09 is 
not inconsistent with the purposes of the Act. Although the affirmative 
obligations upon Alternate Specialist in the proposed rule change do 
not require the Alternate Specialist to guarantee execution of any 
specific number of shares, Phlx rules require Alternate Specialists to 
maintain an adequate presence on the Exchange with respect to assigned 
alternate issues and related trade activities for the alternate 
account. This standard will ensure that, when needed, the Alternate 
Specialist will be available to assist in executions as required of all 
specialists under section 11(b) of the Act.\13\

    \13\ Indeed, the Commission would question whether regular or 
alternate specialists were fulfilling their Section 11(b) 
obligations if they refused to accept for execution certain orders 
(e.g., 100 share agency orders).
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    Moreover, 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. Amendment No. 2 merely 
clarified a requirement on the Alternate Specialist to clear the post 
before routing an order to another market through ITS \14\ and withdrew 
from consideration of the proposed rule change an amendment to permit 
Alternate Specialists to count towards the 50% on-floor requirement 
unexecuted orders of 500 or more shares placed with the Specialist on 
the Exchange. Both these changes to the proposal strengthen the Phlx's 
Alternate Specialist rules. In addition, the Exchange's original 
proposal was published in the Federal Register for the full statutory 
period and no comments were received.\15\ Based on the above, the 
Commission finds that there is good cause, consistent with Section 
6(b)(5) of the Act, to accelerate approval of Amendment No. 2.

    \14\ See supra note 9.
    \15\ See Securities Exchange Act Release No. 36457 (Nov. 3, 
1995), 60 FR 57028 (Nov. 13, 1995).
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IV. Solicitation of Comments

    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 statement 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 February 14, 1996.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-Phlx-95-60), as amended, is 
approved.

    \16\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\

    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1034 Filed 1-23-96; 8:45 am]
BILLING CODE 8010-01-M