[Federal Register Volume 62, Number 32 (Tuesday, February 18, 1997)]
[Notices]
[Pages 7289-7291]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3919]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38265; File No. SR-Phlx-96-23]


Self-Regulatory Organizations; Order Approving and Notice of 
Filing and Order Granting Accelerated Approval of Amendment No. 1 to 
Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating 
to Options Specialist Evaluations.

February 11, 1997.
    On July 1, 1996, 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 modify its procedures for 
evaluating options specialists units. Notice of the proposal was 
published for comment and appeared in the Federal Register on September 
12, 1996. The exchange subsequently filed Amendment No. 1 to the 
proposed rule change on December 2, 1996.\3\ No comment letters were

[[Page 7290]]

received on the proposal. This order approves the Phlx proposal as 
amended.
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    \1\ U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, Phlx, to Jon Kroeper, Esquire, Office of 
Market Supervision, Division of Market Regulation, SEC, dated 
November 27, 1996. Amendment No. 1 amends Rule 511 to clarify that 
the Allocation, Evaluation, and Securities Committee (``Committee'') 
has the authority to hold a hearing in the event that a registrant 
has failed to fulfill minimum performance standards, and to allow 
the Committee to take action against a registrant who does not 
attend a scheduled informal meeting or hearing.
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I. Description of the Proposal

    Since at least 1978, the Exchange has been evaluating its options 
specialists based on the same questionnaire in use today. Subjective 
series of questions answered by the floor brokers that have traded with 
the particular specialists over the last quarter. The results of the 
questionnaire are used by the Committee when making allocation and 
reallocation decisions regarding option specialist privileges. The 
Exchange has represented that the Committee's current review system is 
very complicated and needs to be simplified in order to be more 
effective. The evaluations are now scored on a scale of 1 through 10, 
and any unit with an overall score below 5 on the questionnaire in one 
quarter, a score of below 5 for three or more questions in one quarter, 
or a score below 5 on the same question for three consecutive quarters 
is deemed to have performed below minimum standards and is subject to 
review by the Committee.
    The Phlx proposal, as amended, modifies the survey and revises the 
process by which the Committee uses the questionnaires to evaluate the 
specialists' performance.

1. Survey Modification

    The survey is revised such as to request information that the 
Exchange believes would be more directly indicative of a specialist's 
performance. The new survey has 15 all-new questions. It would be 
answered every six months by floor brokers who would have traded at 
least a minimum number of times in the specialist's issues over the 
past six months.\4\ Only specialist units (not individual specialists) 
would now be graded as allocations are made to units, not individual 
specialists; however, separate evaluations will be conducted for each 
quarter or half turret post at which a unit has a specialist operation. 
Thus, a large specialist unit which is spread out over the floor may 
receive two or three separate evaluation scores so that the Committee 
could focus on exactly where a problem may be occurring. The same 
questionnaire will be used for equity option specialists, index option 
specialists \5\ and foreign currency option specialists.
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    \4\ Floor brokers surveyed will be chosen according to Exchange 
records. The number of trades may vary but will be predetermined by 
the Committee.
    \5\ Currently, all of the specialist units that have been 
allocated index options are also equity option specialists; however, 
if a unit only traded index options, the survey would be equally 
applicable.
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    Each question must be answered by giving the unit a score of 1 
through 9 (very poor to excellent). Any question that is answered with 
a score of 4 or less must be accompanied by a written explanation. 
Floor brokers who submit negative comments about a particular 
specialist unit may, but are not required to, speak directly with a 
representative of the specialist unit in order to try to resolve any 
problems that may exist; Exchange staff may attend such a meeting. 
Floor brokers who do not complete and return the surveys will continue 
to be subject to fines pursuant to Options Floor Procedure Advice C-8.
    The questions asked will cover a wide range of specialist 
responsibilities such as the degree of liquidity provided, the 
tightness of quotes, timeliness of quote updates, ability to fill small 
lot orders, timeliness of reports, ability to conduct opening 
rotations, maintenance of crowd control, and clerical staffing.

2. Evaluation Procedure

    Under the proposed new language in Supplementary Material .02 to 
Rule 515, the Committee \6\ would review the survey as well as 
regulatory history, written complaints, timeliness of openings, trading 
data, and any other relevant information in order to determine if 
minimum performance standards have been met in areas such as quality of 
markets, observance of ethical standards, and administrative 
responsibilities. If a specialist unit is ranked by score in the bottom 
10% of all units as a result of a semi-annual review, it will be 
presumed to have failed to meet the minimum performance standards.\7\ 
The Committee may also make such a presumption if the information on 
the survey or the other information reviewed by the Committee supports 
such a finding.
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    \6\ The Committee may conduct such reviews or it may delegate 
that responsibility to the Quality of Markets Subcommittee. Exchange 
Rule 509 is being amended to note this function as a specific 
responsibility of this subcommittee.
    \7\ Under the current procedure, a specialist unit that receives 
an average score under 5.00 in any one quarter would be deemed to 
have performed below minimum standards.
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    If the Committee makes such a presumption of failure to meet 
minimum performance standards, it may elect to hold an informal meeting 
with the specialist unit. If the unit refuses to meet without 
reasonable justification, or if the evaluation scores are not improved, 
the Committee may proceed with a formal hearing in accordance with Rule 
511(e). The Committee may only impose sanctions such as removal of 
specialist privileges in one or more options classes or a prohibition 
from new allocations as the result of a formal hearing. The hearing 
procedures set forth in Rule 511(e) will not change as a result of this 
rule proposal and decisions will still be subject to appeal to the 
Board of Governors as provided for under By-Law Article XI, Section 11-
1.

II. 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 Sections 6(b)(5) in that it is designed 
to prevent fraudulent, manipulative acts and practices and to promote 
just and equitable principles of trade, and to remove impediments to 
and protect the mechanism of a free and open market and to protect 
investors and the public interest.
    The Commission believes that the adoption of a new, expanded survey 
is a more precise measurement of specialist units' performance and will 
serve to enhance the options specialists evaluation procedures; these 
evaluation procedures are designed to help the Exchange maintain the 
quality and integrity of its markets by setting minimum standards of 
specialist performance and providing a means to identify specialist 
units which fail to meet minimum performance standards. Specifically, 
the evaluation procedures should further the Phlx's ability to ensure 
liquid and continuous markets for options by permitting the Exchange to 
enforce more effectively the affirmative and negative obligations 
imposed on specialist units.
    The Commission also believes that the Committee's consideration of 
the floor broker survey results in allocating options to specialist 
units should provide an incentive for improved specialist performance.
    Moreover, the Commission finds the Phlx's program is substantially 
similar to those of the Chicago Board Options Exchange (``CBOE'') \8\ 
and Pacific Stock Exchange (``PSE'') \9\ which have been in operation 
for several years. In particular, the Commission believes that the 
purposes for conducting the questionnaires will not be compromised

[[Page 7291]]

by distributing the questionnaires semi-annually instead of quarterly. 
The Commission notes that the CBOE and PSE also evaluate their trading 
crowds and market makers on a semi-annual basis.
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    \8\ CBOE Rule 8.60.
    \9\ PSE Option Floor Procedure Advice B-13.
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    Finally, the Commission believes that more stringent formalized 
specialist standards will further enhance the integrity of the options 
markets and contribute to investor confidence and protection.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. Amendment No. 1 
made clarifying technical changes to the text of the rule, and did not 
propose new substantive provisions to the submitted rule change. 
Accordingly, the Commission believes that consistent with Sections 
6(b)(5) and 19(b)(2) of the Act, good cause exists to accelerate 
approval of Amendment No. 1.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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, 
N.W., Washington, D.C. 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-96-23 and 
should be submitted by March 11, 1997.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\10\ that the proposed rule change (SR-Phlx-96-23), as amended, is 
approved.

    \10\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3919 Filed 2-14-97; 8:45 am]
BILLING CODE 8010-01-M