[Federal Register Volume 61, Number 62 (Friday, March 29, 1996)]
[Notices]
[Pages 14188-14189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7702]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37004; File No. SR-Phlx-95-79]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Approving Proposed Rule Change Relating to the Bid Test Exemption
March 21, 1996.
I. Introduction
On January 2, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') submitted to 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
proposal to extend its market maker bid test exemption. The proposed
rule change was published for comment in the Federal Register on
February 7, 1996.\3\ No comments were
[[Page 14189]]
received on the proposed rule change. This order approves the proposal.
\1\ 15 U.S.C. 78s (b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See Securities Exchange Act Release No. 36784 (January 29,
1996), 61 FR 4694.
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II. Description of the Proposal
The Phlx proposes to amend its Rule 1072, Reporting Requirements
Applicable to Short Sales in NASD/NM Securities, to permit affiliated
Registered Option Traders (``ROTs'') to trade for each other's accounts
pursuant to the market maker exemption contained therein. Rule 1072
establishes specific criteria exempting Phlx specialists and ROTs from
the National Association of Securities Dealers, Inc.'s (``NASD'') ``bid
test'' applicable to Nasdaq/National Market (``NM'') securities.\4\
\4\ ``Bid test'' or ``short sale'' rule.
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In 1994, the NASD adopted a bid test rule applicable to NM
securities traded through Nasdaq prohibiting short sales of NM
securities at or below the current inside bid when that bid is below
the previous inside bid.\5\ An exemption from this rule exists for
option market makers hedging positions with the underlying securities
of that option; qualifying short sales are referred to as ``exempt
hedge transactions.'' Pursuant to this market maker exemption, the Phlx
adopted Rule 1072 establishing specific criteria for a short sale to
qualify as an ``exempt hedge transaction'' in ``designated'' NM
issues.\6\ Generally, option specialists may designate as exempt short
sales in NM securities underlying their specialist equity options, and
index options if at least 10% of the value of the index is comprised of
NM securities. A ROT only may designate as exempt short sales in NM
securities underlying no more than 20 of the options or index options
to which the ROT has been assigned.
\5\ Securities Exchange Act Release No. 34277 (June 6, 1994), 59
FR 34885 (granting temporary approval). NASD Rules of Fair Practice,
Art. III, Section 48.
\6\ Securities Exchange Act Release No. 34632 (September 2,
1994), 59 FR 46999. In general, an ``exempt hedge transaction'' is a
short sale in an NM security that is effected to hedge, and in fact
serves to hedge, an existing offsetting options position or an
offsetting options position that was created in one or more
transactions contemporaneous with the short sale. Phlx Rule
1072(c)(2)(i). The other options exchanges adopted rules similar to
Phlx Rule 1072. See CBOE Rule 15.10, NYSE Rule 759A, Amex Rule 957,
and PSE Rule 4.19. Securities Exchange Act Release No. 34632.
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Proposed Phlx Rule 1072(c)(2)(iii)(A) would allow a ROT to effect
bid test exempt short sales in a Nasdaq/NM security which that ROT has
not designated as qualifying for the exemption, provided that the
security is a designated Nasdaq/NM security of another ROT of the same
member organization, and further provided that such other ROT is not
also present or represented by a Floor Broker in the same trading crowd
at the time of the bid test exempt sale. The Exchange notes that this
amendment is similar to a CBOE provision that permits nominees of a
market maker organization to qualify for the exemption.\7\
\7\ Securities Exchange Act Release No. 35281 (January 26,
1995), 60 FR 6575.
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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, the requirements of Section 6(b)(5) \8\ that the rules of
an exchange be designed to promote just and equitable principles of
trade, prevent fraudulent and manipulative acts, and, in general,
protect investors and the public interest. The Commission approved the
NASD's short sale rule on June 29, 1994,\9\ and in so doing stated that
the short sale rule, together with the market maker exemption, is a
reasonable approach to regulating short sales of Nasdaq/NM securities.
The Commission believes that the Exchange's proposal is consistent with
the NASD's bid test rule and addresses the limitations established by
the NASD concerning the applicability of the market maker exemption.
\8\ 15 U.S.C. 78f(b)(5) (1988).
\9\ Securities Exchange Act Release No. 34277, supra note 5.
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Proposed Phlx Rule 1072(c)(2)(iii)(A) will give a member
organization more flexibility to manage its market making obligations
by allowing a ROT of such organization to effect short sales of
securities as bid test exempt even though the ROT has not designated
such securities as bid test exemption eligible, Provided that the
securities have been designated bid test exempt eligible by another
nominee of the same member organization, and further provided that the
bid test exempt eligible ROT is not present on the trading floor. The
Commission believes this is a reasonable provision designed to address
instances where a ROT is absent from the trading floor due to illness,
or personal or other business. The Commission further believes that
this provision is consistent with the intent of the market maker
exemption to the short sale rule, in that the exemption continues to be
limited to those Nasdaq/NM securities which are used to hedge options
transactions in the primary classes in which the member organization
makes markets.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-Phlx-95-79) is approved.
\10\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\ 17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7702 Filed 3-28-96; 8:45 am]
BILLING CODE 8010-01-M