[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