[Federal Register Volume 63, Number 26 (Monday, February 9, 1998)]
[Notices]
[Pages 6589-6591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3119]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39606; File No. SR-PHLX-97-42]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to a Floor 
Broker's Responsibility to be Loud and Audible and Positioned to be 
Heard by a Majority of the Trading Crowd

February 2, 1998.

I. Introduction

    On August 27, 1997, 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,\1\ a proposed rule change to amend Floor Procedure Advice 
C-7 to specify a Floor Broker's responsibility to be loud and audible 
and positioned to be heard by a majority of the trading crowd.
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    \1\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 39404 (December 4, 1997), 62 FR 65467 
(December 12, 1997). No comments were received on the proposal.

II. Description of the Proposal

    The Exchange, pursuant to Rule 19b-4 of the Act,\1\ proposes to 
amend Floor

[[Page 6590]]

Procedure Advice (``Advice'') C-7, Responsibility to Represent Orders 
to the Trading Crowd, to adopt a new paragraph (b) in order to specify 
a Floor Broker's responsibility to be loud and audible and positioned 
to be heard by a majority of the trading crowd.
    Currently, Advice C-7 states that once an option order has been 
received on the floor, it must be represented to the trading crowd 
before it may be represented away from the crowd. This paragraph would 
be designated as paragraph (a). Proposed paragraph (b) would state that 
a Floor Broker must be loud and audible when requesting a market and/or 
representing an order in the trading crowd. Further, a Floor Broker 
must make reasonable efforts to position himself in the trading crowd 
to be heard by the majority of the trading crowd.
    A fine schedule, pursuant to the Exchange's minor rule violation 
enforcement and reporting plan (``minor rule plan''),\2\ is proposed to 
be levied for minor violations of proposed paragraph (b). Specifically, 
violations will be subject to the following fine schedule, which will 
be implemented on a one year running calendar basis: 1st Occurrence--
$100; 2nd Occurrence--$250; 3rd Occurrence and Thereafter--Sanction is 
discretionary with Business Conduct Committee (``BCC''). This fine 
schedule is proposed to be adopted into, and thus amend, the Exchange's 
minor rule plan. Instances not deemed minor, as with all floor 
procedure advices subject to the minor rule plan, would be forwarded to 
the BCC. Violations of paragraph (a) would continue to be referred to 
the BCC, as no fine schedule applies. However, language indicating that 
such matters are subject to review by the BCC is proposed to be added. 
The proposal will take effect upon notice to the membership.
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    \2\ The Phlx's minor rule plan, codified in Phlx Rule 970, 
contains floor procedure advice, such as Advice C-7, 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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    First adopted in 1987,\3\ Advice C-7 was designed to ensure that 
brokered orders receive the maximum interaction with orders competing 
for the other side of the trade, before they may be represented away 
from the crowd. The Exchange stated in its filing that this requirement 
improves the functioning of the auction market and the quality of 
customer executions. Similarly, the Exchange said it believed that the 
proposed loud and audible and crowd positioning requirements are 
intended to promote maximum interaction with other interest in the 
crowd, by improving the likelihood that Floor Brokers are heard and 
facilitating price discovery.
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    \3\ Securities Exchange Act Release No. 24309 (April 7, 1987), 
52 FR 11894 (April 13, 1987) (SR-PHLX-86-49).
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    The Exchange stated in its filing that the proposal is 
appropriately codified into Advice C-7, which deals with Floor Broker 
responsibilities, and, more specifically, with representing orders in 
the trading crowd. Furthermore, the Exchange said the new requirement 
is appropriate for the minor rule plan, because it involves actions 
that are objective and easily verifiable. The reference in the fine 
schedule to infractions of paragraph (a) being referred to the BCC is 
intended to bolster the distinction between provisions subject to fines 
and those referred directly to BCC; it does not imply that violations 
of paragraph (a) cannot result in fines or disciplinary action.
    The Exchange further stated that the loud and audible requirement 
is rooted in Phlx Rule 110, which requires bids and offers to be made 
in an audible tone of voice, as well as Rule 707, which prohibits 
members and member organizations from engaging in conduct inconsistent 
with just and equitable principles of trade. Floor Brokers are also 
required to utilize due diligence in representing orders, pursuant to 
Phlx Rules 155 and 1063. Specifically, Floor Brokers are responsible 
for using due diligence to execute an order at the best price 
available, which implies complete crowd interaction. Proposed paragraph 
(a) would apply to Floor Brokers requesting a market (quoting) as well 
as representing a market, including bidding, offering, canceling, 
executing and inquiring as to the status of orders or bids/offers.
    Similarly, the Exchange stated that the requirement that Floor 
Brokers position themselves so as to be heard by a majority of the 
trading crowd is also rooted in Phlx Rules 707, 155 and 1063, and is 
also intended to maximize order interaction. The Phlx notes that the 
proposal's intent is similar to that of Phlx Rule 1063(a) and Advice C-
1, which require that a Floor Broker, prior to executing an order, 
ascertain that at least one Registered Options Principal (``ROT'') is 
present in the trading crowd.\4\ ROT presence is intended to confirm 
pricing, prevent errors, and witness specialist-Floor Broker activity. 
The proposal should also promote an orderly environment, where Floor 
Brokers choose their crowd positioning centrally to comply with the 
requirement, and prevent unnecessary roughness and disorderly behavior 
by crowd participants attempting to hear a Floor Broker.
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    \4\ Prior to the adoption of a minor rule plan, this requirement 
appeared in Phlx Rule 1014.06. Securities Exchange Act Release No. 
23296 (June 4, 1986), 51 FR 21430 (June 12, 1987) (SR-PHLX-86-11).
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    The proposed rule change is designed to preserve and enhance 
auction market principles and the process of representing orders by 
open outcry, which is integral to exchange options trading. As stated 
previously, the proposal should ensure that Floor Brokers are heard. 
This, in turn, should help prevent errors by allowing verification of 
market quotes and orders by other crowd participants. As with paragraph 
(a), proposed paragraph (b) should prevent fraudulent and manipulative 
activity. The Exchange believes that expressly codifying these 
requirements into an Advice should help deter such activity, due to the 
potential imposition of fines for minor infractions. The Exchange 
believes that the proposal is appropriately codified into Advice C-7, 
which deals with Floor Broker responsibilities, and, more specifically, 
with representing orders in the trading crowd. Furthermore, the 
Exchange believes that the new requirement is appropriate for the minor 
rule plan, because it involves actions that are objective and easily 
verifiable. The reference in the fine schedule to infractions of 
paragraph (a) being referred to the BCC is intended to bolster the 
distinction between provisions subject to fines and those referred 
directly to BCC; it does not imply that violations of paragraph (a) 
cannot result in fines or disciplinary action.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 6(b) of the Act \5\ and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with the requirements of Section 6(b)(5) of the Act 
\6\ in that the rules of an exchange be designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing

[[Page 6591]]

information with respect to, and facilitating transactions in 
securities, to prevent fraudulent and manipulative acts, and, in 
general, to protect investors and the public. Specifically, the 
Commission finds that the proposal promotes just and equitable 
principles of trade in that it enhances the ability of Floor Officials 
to ensure that Floor Brokers represent their orders to the trading 
crowd in a manner that maximizes order interaction and preserves 
auction market principles.
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    \5\ 15 U.S.C. 78f(b). In approving this rule, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that the proposal can be fairly implied 
in existing standards of the Exchange, including Rules 110, 707, 155, 
and 1063, as described above. Floor officials already have the 
authority to determine that an order has been clearly communicated. 
Nevertheless, the Commission concurs with the Exchange that by 
incorporating the requirements of the proposal into the minor rule 
violation plan, Floor Officials will be better equipped to facilitate 
an orderly market, to prevent errors by allowing verification of market 
quotes and orders by other crowd participants, and to prevent 
fraudulent and manipulative acts. Furthermore, the Commission concurs 
with the Exchange that the new requirement is appropriate for the minor 
rule plan, because it involves actions that are objective and easily 
verifiable.
    Finally, the Commission notes that by including certain provisions 
of Exchange Rules into Advice C-7, the Exchange is not implying that 
all violations of Advice C-7 are minor in nature. Rather, as with many 
other important, substantive provisions in Exchange rules that are 
codified into advices, this system merely allows for the efficient 
handling of minor violations. Any violation of the procedure which has 
been deemed serious by the Phlx will be referred directly to the 
Exchange's Business Conduct Committee where stronger sanctions may 
result. As the Phlx notes, however, this language does not affect the 
other floor procedure advices administered pursuant to the plan which 
do not specifically contain this statement; infractions cited pursuant 
to the plan are minor in nature regardless of whether this specific 
language was added to the advice.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-PHLX-97-42) is approved.

    \7\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200-30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3119 Filed 2-6-98; 8:45 am]
BILLING CODE 8010-01-M