[Federal Register Volume 62, Number 130 (Tuesday, July 8, 1997)]
[Notices]
[Pages 36600-36602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17662]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38785; File No. SR-Phlx-97-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to the 
Minimum Size Guarantee

June 30, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 28, 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.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange pursuant to Rule 19b-4 of the Act, proposes to amend 
Phlx Rule 1015 (Quotation Guarantees); Phlx Rule 1033 (Bids and 
Offers--Premium); and Floor Procedure Advice (``Advice'') A-11 
(Responsibility to Make Ten-Ups Markets), to reflect that the minimum 
size guarantee applicable to Phlx equity and index options may be 
larger than ten contracts. References to ten-up markets in these 
provisions are proposed to be replaced with ``minimum size guarantee.'' 
Advice A-11 will thus be retitled ``Responsibility to Make Markets of 
the Minimum Size Guarantee.''
    The Exchange also proposed that broker-dealer (``BD'') orders for 
less than the minimum size guarantee that are represented at the 
trading post by a Floor Broker be treated the same as orders of ROTs 
for that amount (i.e., such bids/offers will not be disseminated and 
will have no standing in the crowd).
    In addition, the Exchange proposes to reorganize Phlx Rule 1015 by 
adding sub-paragraphs (1) and (2) to paragraph (a) to differentiate the 
requirements applicable to floor traders from the agency provisions. 
The Exchange is also proposing to require that broker-dealer electronic 
messages (sometimes used in lieu of floor tickets) be marked B/D. 
Lastly, the Exchange is clarifying that the best quoted bid or offer 
(``BBO'') referred in this Rule is the Exchange's displayed BBO.

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

    Pursuant to Phlx Rule 1033(a), the Exchange requires that public 
orders be filled to a minimum depth of at least ten contracts at the 
BBO. This is often referred to as the ``ten-up'' requirement. Phlx Rule 
1015 and Advice A-11 delineate the obligations of floor traders 
respecting Exchange quotation guarantees. Since 1987, these provisions 
have been intended to benefit customers by establishing ten contracts 
as the minimum depth to which such orders are entitled an execution at 
the best bid or offer.\3\ The intent was also to encourage floor 
traders to be more competitive and make size markets. In order for 
these purposes to be achieved, the Commission recognized that the floor 
traders' markets cannot be exhausted by competitors to the detriment of 
customers.\4\
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    \3\ See Securities Exchange Act Release Nos. 24580 (June 11, 
1987) 52 FR 23120 (June 17, 1987) (File No. SR-Phlx-87-09), and 
26669 (March 27, 1989), 54 FR 13282 (March 31, 1989) (File No. SR-
Phlx-89-02).
    \4\ See Securities Exchange Act Release No. 34400 (July 19, 
1994), 59 FR 38011 (July 26, 1994) (File No. SR-Phlx-91-45).
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    In recent years, higher minimum guarantees have been established in 
certain options--higher than the traditional minimum size guarantee of 
ten contracts. These higher guarantees correspond to the maximum size 
of orders eligible for the Phlx Automated Options Market (``AUTOM'') 
system's automatic execution feature, AUTO-X.

[[Page 36601]]

Currently, the maximum order size permissible for AUTO-X is 50 
contracts.\5\
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    \5\ See Securities Exchange Act Release No. 36601 (December 18, 
1995), 60 FR 66817 (December 26, 1995) (File No. SR-Phlx-95-39).
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    Under this proposal, the ten-up requirement would be replaced by 
the higher minimum size guarantee for purposes of Phlx Rule 1015 and 
Advice A-11.\6\ For example, in an option for which the minimum size 
guarantee is 20 contracts, Phlx Rule 1015 would require that a floor 
trader (i.e., Specialists and ROTs) at the BBO be responsible for not 
just ten contracts, but the entire minimum size guarantee of 20 
contracts. Where the BBO consists of more than one ROT, those ROTs 
together are responsible for 20 contracts.
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    \6\ Similarly, Phlx Rule 1033(a) will expressly refer to the 
minimum size guarantee requirements of Phlx Rule 1015.
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    Second, ROT orders (represented by Floor Brokers) for less than the 
minimum size guarantee are not currently disseminated as the BBO. 
However, ROT bids/offers must nevertheless be firm for the entire 
minimum size guarantee. The Exchange proposes to amend sub-paragraph 
(iv) of Rule 1015 to treat broker-dealer orders for less than the 
minimum size guarantee the same as ROT orders by not displaying 
them.\7\
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    \7\ See Securities Exchange Act Release No. 28722 (December 28, 
1990), 56 FR 542 (January 7, 1991) (File No. SR-Phlx-89-57).
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    Currently, the reason for not including ROT orders for less than 
ten contracts is that the BBO must be firm for the amount of the 
minimum size guarantee. Pursuant to the Phlx Rule 1015 and Advice A-11, 
an order availing upon the BBO will be filled by the ROT order, but if 
the ``availing'' order is greater than the ROT order, the difference up 
to the minimum size guarantee in that option must be filled by the 
floor traders with the immediately prior best bid or offer. For 
instance, if the market is 2-1/4-3/8, with an ROT order to sell 5 
contracts at 3/8 comprising the offer, then the BBO is really 2-1/4-1/
2, because the ROT order is not part of the BBO. If it were, the floor 
traders offering at \1/2\ would be required to fill the other five 
contracts of an incoming order to buy 10 at 3/8, where the minimum size 
guarantee is ten contracts. Not including ROT orders less than the 
minimum size guarantee prevents this outcome. Nevertheless, this 
outcome does result under current rules when customer or broker-dealer 
orders for less than the minimum size guarantees comprise the BBO. This 
proposal would treat BD orders for less than the minimum size guarantee 
the same as ROT orders. The Phlx asserts that BDs, unlike customers, 
are not entitled to the ten-up guarantee and thus should not generate 
quote distortions to the detriment of floor traders, who must honor the 
size difference.
    The purpose of this change is to prevent floor traders with the 
immediate prior best bid or offer from having to fill the remainder (up 
to the minimum size guarantee) at the better price as a result of a 
non-customer bid/offer creating the BBO. Thus, only where a bid/offer 
for less than the minimum guarantee is on behalf of a customer shall it 
be reflected as the BBO, requiring floor traders to supply the 
additional contracts. According to the Phlx, this proposal should 
encourage larger minimum size guarantees by freeing floor traders from 
the fear that they will be frequently providing guarantees better than 
their own true market to make up the size difference for broker-dealer 
orders at a better price.
    In the course of preparing these amendments to Phlx Rule 1015 and 
Advice A-11, an Exchange review of these provisions revealed that 
certain organizational changes are needed to update and clarify them. 
Thus, the Exchange proposes to reorganize Phlx Rule 1015 by adding sub-
paragraphs (1) and (2) to paragraph (a) to differentiate the 
requirements applicable to floor traders from the agency provisions. In 
addition, the Exchange is proposing to require that broker-dealer 
electronic messages (sometimes used in lieu of floor tickets) be marked 
B/D. Lastly, the Exchange is clarifying that the BBO referred in this 
Rule is the Exchange's displayed BBO.
    The Exchange represents that the proposal at hand is similar to the 
rules and policies of other exchanges. For instance, market maker bids/
offers for less than 20 contracts on the Pacific Exchange are 
represented in the trading crowd, but not disseminated. Similarly, 
broker-dealer proprietary orders that are represented by a Floor Broker 
for less than 10 contracts in the S&P 100 Index option (``OEX'') are 
not disseminated on the Chicago Board Options Exchange.\8\
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    \8\ See, e.g., Securities Exchange Act Release No. 36880 
(February 23, 1996), 61 FR 7839 (February 29, 1996) (File No. SR-
CBOE-95-70).
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    The proposed rule change is consistent with Section 6 of the Act in 
general, and in particular, with Section 6(b)(5), in that it is 
designed to promote just and equitable principles of trade and protect 
investors and the public interest by recognizing that in order to 
preserve option customer size guarantees, broker-dealer orders for less 
than the minimum size guarantee should not affect the displayed BBO, 
because such broker-dealers do not have the concurrent obligation, as 
do floor traders, to honor that market up to the guaranteed size for 
the Exchange's customers. The proposed rule change does not permit 
unfair discrimination between customers, issuers, brokers and dealers, 
because the proposal is intended to ensure the fair operation of 
display requirements and preserve customer guarantees, without unfairly 
burdening the floor traders who must honor such guarantees.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The self-regulatory organization 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 with respect 
to the proposed rule change.

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 NW., Washington, DC 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. Sec. 552, will be

[[Page 36602]]

available for inspection and copying at the Commission's Public 
Reference Section, 450 Fifth Street NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at the 
principal office of the Phlx. All submissions should refer to File No. 
SR-Phlx-97-15 and should be submitted by July 29, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-17662 Filed 7-7-97; 8:45 am]
BILLING CODE 8010-01-M