[Federal Register Volume 62, Number 124 (Friday, June 27, 1997)]
[Notices]
[Pages 34730-34731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16912]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38755; File No. SR-PHLX-97-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. To Amend Specialist and 
Registered Options Trader Trading Requirements

June 23, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on April 
23, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange 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. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Phlx proposes to amend Floor Procedure Advice (``Advice'') B-3, 
Trading Requirements, and delete Advice A-4, Specialist as Registered 
Option Trader (``ROT), in order to count specialist trading activity 
toward the quarterly ROT trading requirements.

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
    Pursuant to Rule 1014, a Phlx ROT is permitted to trade options for 
his own account on the trading floor. ROTs are subject to certain 
market making obligations, including that their transactions constitute 
a course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market. ROTs are also prohibited from 
entering into transactions or making bids/offers inconsistent with such 
a course of dealings. Further, ROTs are assigned to certain options, 
which take precedence respecting their trading activity. In assigned 
options, ROTs must fulfill additional obligations, including bidding/
offering within established quotation spread parameters. Currently, 
ROTs are subject to two quarterly trading requirements, pursuant to 
Rule 1014 and Advice B-3: (1) In-Person: quarterly requirement to trade 
the greater of 1,000 contracts or 50% of contract volume in person (and 
not through the use of orders); and (2) Assigned: quarterly requirement 
to trade 50% of contract volume in assigned options. Heightened 
requirements apply to off-floor orders.\1\
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    \1\ Phlx ROTs entering orders from off-floor may receive market 
maker margin for such orders, provided they execute each calendar 
quarter the greater of 1,000 contracts or 80% of contract volume in 
person, as well as 75% in assigned options. Securities Exchange Act 
Release No. 36137 (August 23, 1995), 60 FR 44923 (August 29, 1995) 
(SR-Phlx-95-14).
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    Specialists are also subject to extensive Exchange requirements. 
Pursuant to Rule 1020, specialists are required to engage in a course 
of dealings to assist in the maintenance of a fair and orderly market, 
including contributing to price continuity with reasonable depth and 
minimizing the effects of a temporary disparity between supply and 
demand. Further, Rule 1019 requires specialists to afford precedence to 
orders entrusted to the specialist as agent. Advice A-4 currently 
states that specialists who are also ROTs shall not have their 
specialist activity included in the calculation for required trading as 
an ROT.
    The purpose of these ROT and specialist requirements is to ensure 
that ``market maker'' status under Section 11(a) of the Act \2\ and 
``specialist'' status under Regulation T of the Federal Reserve Board 
\3\ are properly afforded. Pursuant to Section 11(a), members are 
generally prohibited from executing on an exchange transactions for 
their own account. Market maker status is an exception for dealers 
acting in the capacity of a market maker and enables ROTs to act as 
such on the Exchange trading floor. Secondly, under Regulation T and 
pertinent Exchange rules, a member of an exchange who is registered and 
acting as a specialist is exempt from the margin requirements normally 
applicable to customers, and can be extended ``good faith'' credit for 
transactions in a security in which the specialist makes a market. 
Exchange trading requirements are intended to ensure that market makers 
comply with their market making obligations, including adding liquidity 
and contributing to the maintenance of a fair and orderly market on the 
Exchange. Compliance with these obligations is integral to the 
determination that margin treatment respecting option transactions 
initiated and effected by the ROT on the floor in the capacity of an 
ROT is appropriately extended. Trading requirements thus help ensure 
the stability and orderliness of exchange markets.
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    \2\ 15 U.S.C. 78k(a).
    \3\ 12 CFR 220.12.
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    The Exchange proposes to delete Advice A-4, and adopt the following 
language into Advice B-3 as paragraph (c): Specialists who are also 
ROTs may have their Specialist activity included in the calculation for 
the trading requirements above. The Exchange has found that some 
specialist also maintain ROT accounts in order to provide liquidity in 
other Phlx options, whether in person in neighboring options, or 
through a floor broker. In these situations, the specialists/ROTs would 
have difficulty satisfying the in-person trading requirement by either 
not trading the required 1,000 contract minimum in person (because 
their ROT activity was executed using floor brokers), or by trading 
more than 1,000 contracts, but not 50% in-person. The Exchange proposes 
to count specialist activity towards all of the trading requirements of 
Advice B-3, including the in-person, in-assigned and off-floor 
requirements.
    The purpose of this proposal is to facilitate a specialist acting 
as an ROT in non-specialty issues, which Phlx believes promotes depth 
and liquidity on the Exchange. The Exchange believes that, in light of 
the requirements for specialist and ROT status, the proposal is both 
necessary and appropriate. The Exchange recognizes the important role 
that specialist/ROTs play in providing liquidity to the marketplace, 
noting that, as specialists, they are consistently present on the 
trading floor. Phlx believes that because specialists are present and 
making markets on the Exchange floor, counting specialist activity 
toward the trading requirements of specialist/ROTs is consistent with 
this important purpose of trading requirements. The Exchange 
understands that specialist/ROTs may meet their trading requirements 
primarily through specialist activity and thus, receive market maker 
treatment for transactions in non-specialty options, without meeting a 
separate trading

[[Page 34731]]

requirement solely for non-specialty options. Nevertheless, Phlx 
believes that specialist/ROTs warrant market maker status because they 
are subject to market making obligations. For instance, such ROTs could 
be requested to provide markets pursuant to Rule 1014. The Exchange 
recognizes that, although specialist are constrained from departing 
from the trading crowd of their specialty options, specialist/ROTs may 
provide markets where requested by way of Floor Broker representation. 
The Exchange may also assign an ROT to a particular option, pursuant to 
Rule 1014, Commentary .05. Thus, the proposed changes to specialist/ROT 
trading requirements preserve the obligation to provide markets in 
assigned options.
    Phlx believes that this proposal is necessary to permit specialist/
ROTs to retain their ROT status and, in turn, provide liquidity in Phlx 
options. Specifically, specialist/ROTs utilizing Floor Brokers to enter 
orders to facilitate customer interest play a crucial role in providing 
liquidity. Specifically, units often possess the large capital required 
to trade large sizes, where liquidity is most often needed. The 
Exchange believes that specialist /ROTs regularly improve the size, and 
sometime the price, of markets made on the Phlx floor. This proposal is 
a reasonable effort to accommodate the needs of specialist/ROTs to meet 
their market making responsibilities.
    In approving changes to trading requirements, the Commission has 
previously stated that trading requirements reduce the extent to which 
traders can effectively function as privileged investors by entering 
the trading floor long enough to drop off orders with a Floor Broker, 
without actually making competitive quotations or otherwise 
affirmatively functioning as market makers.\4\ The Exchange does not 
believe that this proposal raises such concerns, because specialist/
ROTs have specialist-related requirements to be present on the trading 
floor. Thus, the Exchange believes that the proposal balances the need 
to protect against misuse of market maker status with the liquidity-
providing role that specialist/ROTs play in today's marketplace. The 
Exchange emphasizes that specialist/ROTs will continue to be subject to 
market making obligations, including the requirement to contribute to 
the maintenance of a fair and orderly market. The existence of 
substantive obligations should ensure that specialist/ROTs act as bona 
fide market makers and do not otherwise use the Exchange floor.
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    \4\ Securities Exchange Act Release No. 35786 (May 31, 1995), 60 
FR 30122 (June 7, 1995) (SR-Amex-94-514).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act in general, and in particular, with Section 
6(b)(5),\5\ in that it is designed to promote just and equitable 
principles of trade, and protect investors and the public interest, by 
supporting the liquidity-providing role of specialist/ROTs without 
diminishing market maker status.
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    \5\ 15 U.S.C. 78f(b)(5).
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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 longer 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 
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, 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 Room. 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-97-19 and 
should be submitted by July 18, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16912 Filed 6-26-97; 8:45 am]
BILLING CODE 8010-01-M