[Federal Register Volume 62, Number 237 (Wednesday, December 10, 1997)]
[Notices]
[Pages 65117-65119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32309]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39393; File No. SR-Phlx-97-51]


Self-Regulation Organizations; Filing of Proposed Rule Change by 
the Philadelphia Stock Exchange, Inc. Relating to the Allocation of 
Options Trades

December 3, 1997.
    Pursuant to Sections 19(b)(1) of the Securities Exchange Act of 
1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 22, 1997, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``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. 78s(b)(1).
    \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 Phlx, pursuant to Rule 19b-4 of the Act, proposes to provide 
that the seller or largest participant to an option transaction is 
responsible for allocating an executed trade. Specifically, the

[[Page 65118]]

Exchange proposes to amend two Floor Procedure Advices (``Advices''): 
F-2, Allocation, Time Stamping, Matching and Access to Matched Trades; 
and F-12, Responsibility for Assigning Participation.

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 Phlx 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 Phlx 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

a. Advice F-2

    Currently, Advice F-2 states that it is the duty of the largest 
participant in an options transaction to both match and time stamp the 
order tickets involved. There is currently no specific provision for 
who allocates options trades among trade participants. The purpose of 
the proposed rule change to Advice F-2 is to assign the responsibility 
or properly allocating option trades to the largest participant (or 
seller)\3\ involved in the trade. Violations of this new responsibility 
will be subject to the existing fine schedule accompanying Advice F-2. 
Paragraphs (b) concerning ticket preservation and (c) concerning member 
access to matched trades, of Advice F-2, remain unchanged.
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    \3\ The seller has the responsibility only when there are two 
parties to a trade. When there are multiple participants, the 
largest participant is responsible for allocating the trade.
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    Trade allocation includes the determination, based on existing 
rules, policies and practices, as to who is considered to be on a bid/
offer, who participants in a trade and for what size. The Exchange 
believes that permitting the largest participant, which normally will 
be the Floor Broker who represents the original order in the trading 
crowd, to allocate trade participation should render the process more 
efficient and therefore accelerate execution reporting.
    As previously stated, existing Exchange rules do not clearly 
address the process of, or parties responsible for, ensuring proper 
options trade allocation. The practice in most options crowds is that 
specialists announce trade splits by saying to the trading crowd, ``You 
did 10, you did 5,'' etc. This practice may differ, especially where a 
specialist unit is not involved in a trade, or where a great deal of 
trading and quote activity renders specialist allocating trades 
impractical. In these situations, Floor Brokers have assisted in this 
function, consistent with their duty to match and time stamp the trade, 
as well as their duty to ensure the best execution of orders.\4\
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    \4\ See Phlx Rule 1063.
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    In determining how to assign this responsibility, the current duty 
of the largest participant (or seller) to match and time stamp the 
trade was decisive in determining who allocates option trades. 
Extending this responsibility to the largest participant (or seller)\5\ 
is a logical extension of the current requirements of Advice F-2. In 
adopting and amending this Advice, the intent has been to facilitate 
prompt and accurate trade reporting.\6\
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    \5\ See note 3, supra.
    \6\ See e.g., Securities Exchange Act Release No. 33512 (January 
24, 1994) 59 FR 4759 (February 1, 1994).
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b. Advice F-12.

    The purpose of the proposed rule change to Advice F-12 is to extend 
its requirements regarding how trades are allocated to the equity/index 
options floor. Currently, Advice F-12 only applies to foreign currency 
options trading. In addition, Advice F-12 is proposed to be amended to 
only detain in the crowd actual trade participants and simplify ticket 
submission requirements.
    Specifically, Advice F-12 requires that trade participants: (a) 
Must confirm and immediately inform the largest participant of their 
contra-side participation; (b) should not leave the crowd absent such 
confirmation; (c) should not submit tickets absent participation; and 
(d) must handle disputes properly. The Phlx believes that the extension 
of Advice F-12 to equity/index options trading should improve the 
certainty of trade allocation and maintain order during the allocation 
process. This is consistent with the original intent of Advice F-12 to 
facilitate the orderly operation of the option floor, especially for 
trades involving a number of market participants.\7\
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    \7\ Securities Exchange Act Release No. 29580 (August 16, 1991) 
56 FR 41876 (August 23, 1991).
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    The Phlx also believes that the proposed amendments to Advice F-12 
will bolster its effectiveness in controlling the trade allocation 
process. Under the proposed amendments, no one who has participated in 
the trade would be allowed to leave the crowd until the level of his/
her participation in the trade has been confirmed by the largest 
participant. Previously, this obligation also applied to those who 
believed they may have participated in a trade. This change is intended 
to require only those who actually participated in a trade to remain in 
the trading crowd to confirm their participation in the trade. The Phlx 
states that the language concerning belief was difficult to administer 
and did not capture violations necessary to improve the post-trade 
process.
    Further, Advice F-12 currently provides that no person in the crowd 
shall submit a ticket for matching on a trade when that person has or 
should have grounds to believe that he is not due participation in the 
trade. The Phlx asserts that by deleting the reference to ``belief,'' 
the proposal is designed to simplify trade ticket submission, and as a 
result, establish the practice that a person who did not participate in 
a trade should not submit a ticket. Thus, a violation of Advice F-12 
may result from submitting a ticket where no participation is due, even 
though the participant believed he/she participated. As cited by the 
Commission in the original approval of Advice F-12, it is reasonable to 
require trade participants to notify other parties of their 
participation levels and to resolve those levels at such time.\8\ The 
Exchange believes the proposed amendments are consistent with those 
goals, because they continue to facilitate the prompt determination of 
participation levels.
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    \8\ Id.
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    Advice F-12 currently contains a fine schedule, which is proposed 
to apply to the entire options floor. The proposal thus amends the 
Exchange's minor rule violation enforcement and reporting plan (``minor 
rule plan''),\9\ by amending the text of both Advices, as well as by 
extending the application of Advice F-12 to the equity/index options 
floor. The complete text of the proposed rule change may be examined at 
the places specified in Item IV below.
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    \9\ The Phlx's minor rule plan, codified in Phlx Rule 970, 
contains floor procedure advices, such as Advice F-2, with 
accompanying fine schedules. Rule 19d-1(c)(2) authorizes national 
securities exchanges to adopt minor rule violation plans for summary 
discipline and abbreviated reporting; Rule 19d-1(c)(1) requires 
prompt filing with the Commission of any final disciplinary actions. 
However, minor rule violations not exceeding $2,500 are deemed not 
final, thereby permitting periodic, as opposed to immediate, 
reporting.
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2. Basis
    For these reasons, the proposed rule change is consistent with 
Section 6 of

[[Page 65119]]

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, prevent 
fraudulent and manipulative acts and practices, as well as to protect 
investors and the public interest, by facilitating prompt and accurate 
trade processing and reporting.

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

    The Phlx 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 date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days or such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Phlx consents, the Commission will:
    (A) By order approve such proposed rule change, or,
    (B) Institute proceedings to determine whether the proposed rule 
change should 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. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW, 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the Phlx. All 
submissions should refer to File No. SR-Phlx-97-51 and should be 
submitted by December 31, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32309 Filed 12-9-97; 8:45 am]
BILLING CODE 8010-01-M