[Federal Register Volume 62, Number 238 (Thursday, December 11, 1997)]
[Notices]
[Pages 65300-65302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32369]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39401; File No. SR-Plx 97-48]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Philadelphia Stock Exchange, Inc. Relating to the Extension and 
Amendment of the Pilot Program for Equity and Index Option Specialist 
Enhanced Parity Splits

December 4, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 5, 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 Exchange. On November 14 1997, the Exchange 
filed with the Commission Amendment No. 1 to the proposed rule 
change.\2\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Amendment No. 1 is a report which discusses the impact of 
the Exchange's Pilot Program for Equity and Index Option Specialist 
Enhanced Parity Splits. See Letter from Michele R. Weisbaum, Vice 
President and Associate General Counsel, Exchange, to Michael 
Walinskas, Esquire, Division of Market Regulation, Commission, dated 
November 7, 1997.
---------------------------------------------------------------------------

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

    The Exchange proposes to extend until December 31, 1998, the 
Exchange's enhanced parity split pilot program for equity and index 
option specialists (``Pilot Program''). The Pilot Program is currently 
scheduled to expire on December 31, 1997. The Exchange also seeks to 
modify the application of the Pilot Program so that: (i) the enhanced 
parity split would not apply to all index options, in addition to 
applying to 50% of each specialist's equity options and all new options 
allocated to the specialist during the year; and (ii) specialists would 
be permitted to revise the list of eligible equity options on a 
quarterly basis, rather than annually. The proposed rule change will 
revise Exchange Rule 1014(g) ``Equity Option and Index Option Priority 
and Parity,'' and its corollary Option Floor Procedure Advice B-6.
    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of an 
Statutory Basis for the Proposed Rule Change

    In its filing with the Commission, the Exchange 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 Exchange 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
    On August 26, 1994, the Commission approved the Exchange's Pilot 
Program to provide enhanced specialist participation in parity equity 
option trades.\3\ Initially, the Pilot Program was approved for a one 
year period ending August 26, 1995. On November 30, 1994, the 
Commission approved the Exchange's request to include index option 
specialists in the Pilot Program.\4\ The Pilot Program was later 
revised on March 1, 1995, with respect to situations where less than 
three controlled accounts are on parity with the specialist.\5\ The 
Pilot Program has subsequently been renewed on three

[[Page 65301]]

occasions,\6\ most recently until December 31, 1997.
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 34606 (Aug. 26, 1994), 
59 FR 45741 (Sept. 2, 1994).
    \4\ Securities Exchange Act Release No. 35028 (Nov. 30, 1994), 
59 FR 63151 (Dec. 7, 1994).
    \5\ Securities Exchange Act Release No. 35429 (Mar. 1, 1995), 60 
FR 12802 (Mar. 8, 1995).
    \6\ Securities Exchange Act Release Nos. 36122 (Aug. 18, 1995), 
60 FR 44530 (Aug. 28, 1995); 37524 (Aug. 5, 1996), 61 FR 42080 (Aug. 
13, 1996); and 38924 (Aug. 11, 1997), 62 FR 44160 (Aug. 19, 1997).
---------------------------------------------------------------------------

    The Pilot Program works as follows: when an equity or index option 
specialist is on parity with one controlled account \7\ and the order 
is for more than five contracts, the specialist will receive 60% of the 
contracts and the controlled account will receive 40%. When the 
specialist is on parity with two controlled accounts and the order is 
for more than five contracts, the specialist will receive 40% of the 
contracts and each controlled account will receive 30%. When the 
specialist is on parity with three or more controlled accounts and the 
order is for more than five contracts, the specialist will be counted 
as two crowd participants when dividing up the contracts. In any of 
these situations, if a customer is on parity, he will not be 
disadvantaged by receiving a lesser allotment than any other crowd 
participant, including the specialist.
---------------------------------------------------------------------------

    \7\ A controlled account is defined as ``any account controlled 
by or under common control with a member broker-dealer.'' Customer 
accounts, which include discretionary accounts, are defined as all 
accounts other than controlled accounts and specialists accounts. 
See Exchange Rule 1014(g).
---------------------------------------------------------------------------

    It should be noted that the application of this enhanced parity 
split is mandatory. Therefore, with respect to any equity or index 
options transaction that implicates that enhanced parity split, the 
specialist is required to accept the preferential allocation and may 
not decline the enhancement.\8\
---------------------------------------------------------------------------

    \8\ The proposed rule change would not alter the mandatory 
application of the enhanced parity split. Telephone conversation 
between Michele R. Weisbaum, Vice President and Associate General 
Counsel, Exchange, and Michael L. Loftus, Attorney, Division of 
Market Regulation, Commission (November 26, 1997).
---------------------------------------------------------------------------

    Presently, the enhanced parity split is not made available to all 
equity and index options traded on the Exchange. Rather, the enhanced 
parity split applies to only 50% of each specialist unit's issues 
listed as of the renewal date of the pilot each year, and to all option 
classes listed after that date.\9\ The Exchange seeks to continue to 
study these rules under the auspices of the Pilot Program. However, the 
Exchange proposes to modify the application of the Pilot Program in the 
following respects: (i) While equity options would continue to be 
included in the pool of options from which each specialist chooses 50%, 
all index options would receive the enhanced parity split; and (ii) 
specialists would be allowed to revise the list of eligible equity 
options on a quarterly basis, instead of on an annual basis. It also 
should be noted that all new option classes listed after the renewal 
date of the Pilot Program each year will continue to receive the 
enhanced parity split. The Exchange has represented that these changes 
were made to better match the enhancement with the options in which 
specialists are expending the most money, time and effort in making 
competitive, liquid markets. Accordingly, the Exchange requests that 
the Pilot Program, as amended, be extended until December 31, 1998.
---------------------------------------------------------------------------

    \9\ The Exchange also has a different enhanced parity split 
program in place for ``new'' option specialist units trading newly 
listed options classes where the specialist is on parity with two or 
more registered options traders. See Securities Exchange Act Release 
No. 34109 (May 25, 1994), 59 FR 28570 (June 2, 1994), That program 
was approved on a permanent basis and, therefore, is not included in 
the subject of this filing.
---------------------------------------------------------------------------

    In connection with the most recent extension of the Pilot 
Program,\10\ it was noted that prior to granting another extension or 
permanent approval of the Pilot Program, the Commission would require 
the Exchange to submit a report (``Report'') discussing: (i) Whether 
the Pilot Program has generated any evidence of any adverse effect on 
competition or investors, in particular, or the market for equity or 
index options, in general; (ii) whether the Exchange has received any 
complaints, either written or otherwise, concerning the operation of 
the Pilot Program; and (iii) whether the Exchange has taken any 
disciplinary action against, or commenced any investigations, 
examinations, or inquiries concerning the operation of the Pilot 
Program, as well as the outcome of any such matter. The Report, which 
the Exchange filed on November 14, 1997, as Amendment No. 1, is 
summarized below.
---------------------------------------------------------------------------

    \10\ Securities Exchange Act Release No. 38924 (Aug. 11, 1997), 
62 FR 44160 (Aug. 19, 1997).
---------------------------------------------------------------------------

    With respect to the issue of competition, the Exchange found that 
the enhanced parity split as originally proposed was overly burdensome 
when only one or two controlled accounts were on parity with the 
specialist. Consequently, the Pilot Program was amended on March 1, 
1995, in order to make the enhanced parity split more equitable in 
those situations.\11\ Later that year, the Exchange established a 
subcommittee composed of four specialists, four Registered Options 
Traders (``ROTs''), and one floor broker. The composition of the 
subcommittee was intended to represent all of the different interests 
on the trading floor and in the market. The subcommittee has met on 
numerous occasions to analyze the Pilot Program and its effect on 
competition, investors, and the market in general. The subcommittee 
members have discussed the operation of the Pilot Program and have 
concluded there is not evidence of any adverse effects on competition 
or investors or the market for equity or index options.
---------------------------------------------------------------------------

    \11\ Securities Exchange Act Release No. 35499 (Mar. 1, 1995), 
60 FR 12802 (Mar. 8, 1995).
---------------------------------------------------------------------------

    As to the second issue concerning complaints about the Pilot 
Program, the provision requiring the specialist to assure that the 
customer is not disadvantaged has been strictly enforced without 
incident and the Exchange has not received any complaints either orally 
or in writing from investors or Exchange members regarding inequitable 
splits or the Pilot Program in general.
    Finally, as to the third pilot relating to disciplinary actions, 
investigations, examinations or inquiries; no violations were either 
investigated or commenced this year. However, two years ago the 
Exchange did bring one disciplinary case against an equity option 
specialist for making an inequitable split among himself and the ROTs 
in the crowd.\12\ In that instance, the specialist was censured and 
suspended for one week as part of a settlement.\13\
---------------------------------------------------------------------------

    \12\ Enforcement No. 95-12, Business Conduct Committee, 
Exchange.
    \13\ The Commission again notes that in connection with any 
future request by the Exchange for the Commission to either further 
extend or permanently approve the Pilot Program, the Exchange will 
be required to submit a Report discussing: (i) Whether the Pilot 
Program has generated any evidence of any adverse effect or 
competition or investors, in particular, or the market for equity or 
index options, in general; (ii) whether the Exchange has received 
any complaints, either written or otherwise, concerning the 
operation of the Pilot Program; and (iii) whether the Exchange has 
taken any disciplinary action against or commenced any 
investigation, examinations, or inquiries concerning the operation 
of the Pilot Program, as well as the outcome of any such matter.
---------------------------------------------------------------------------

    The Exchange further notes that its Options Committee is continuing 
to review the effectiveness of the Pilot Program and the effectiveness 
of the existing review criteria and system of selecting subject 
options. The Exchange expects the Options Committee to complete its 
review during the upcoming year.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\14\ in general, and with Section 
6(b)(5),\15\ in particular, in that it is designed to promote just and 
equitable principles of trade; to prevent fraudulent and manipulative 
acts and

[[Page 65302]]

practices; to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in securities; to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system; and to protect investors and the public interest. 
Specifically, the Exchange believes that the proposal balances the 
competing interests of specialists and market makers while assisting 
specialists in making tight and liquid markets in assigned issues. The 
proposal also protects the public interest by requiring quarterly 
reviews and assuring that a customer's participation is never 
disadvantaged by the enhanced parity split.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not believe 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

    The Exchange did not solicit or receive written comments with 
respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) does not become operative for 30 days from November 14, 1997, 
the date on which it was filed,\16\ and the Exchange provided the 
Commission with written notice of its intent to file the proposed rule 
change at least five business days prior to the filing date, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \17\ and 
Rule 19b-4(e) (6) \18\ thereunder.
---------------------------------------------------------------------------

    \16\ The proposed rule change filing is deemed filed as of the 
date Amendment No. 1 was received by the Commission.
    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(e)(6).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 submissions, 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 persons, 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 Exchange. All 
submissions should refer to File No. SR-Phlx-97-48 and should be 
submitted by January 2, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 97-32369 Filed 12-10-97; 8:45 am]
BILLING CODE 8010-01-M