[Federal Register Volume 63, Number 55 (Monday, March 23, 1998)]
[Notices]
[Pages 13901-13902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7370]



[[Page 13901]]

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

 SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39754; File No. SR-Phlx-97-53]


 Self-Regulatory Organizations; Philadelphia Stock Exchange, 
Inc.; Order Granting Approval to Proposed Rule Change Relating to 
Amending Its Floor Procedure Advice A-1 Regarding Displaying Best Bids 
and Offers

March 13, 1998.

I. Introduction

     On November 3, 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,\2\ a proposed rule change to amend its floor procedure 
Advice A-1 regarding displaying best bids and offers. On December 23, 
1997, and January 20, 1998, respectively, the Exchange filed Amendments 
1 and 2 to the proposal with the Commission.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, Phlx, to David Sieradzki, Attorney, 
Division of Market Regulation (``Division''), Commission dated 
December 18, 1997 and letter from J. Keith Kessel, Phlx, to David 
Sieradzki, Attorney, Division, Commission dated January 16, 1998. 
Amendments 1 and 2 made several changes to clarify the purpose 
section of the filing.
---------------------------------------------------------------------------

    The proposed rule change and Amendments 1 and 2 thereto were 
published for comment in the Federal Register on January 29, 1998.\4\ 
No comments were received on the proposal. This order approves the 
proposal as amended.
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 39571 (January 22, 
1998), 63 FR 4515 (January 29, 1998).
---------------------------------------------------------------------------

II. Description of the Proposal

     The Phlx is proposing to amend its Advice A-1, regarding 
Displaying Best Bids and Offers to require Floor Brokers and Registered 
Options Traders (``ROTs'') to immediately remove stale bids/offers. 
Currently, Advice A-1 requires that Specialists use due diligence to 
ensure that the best available bid and offer is displayed for those 
option series in which s/he is assigned. Under Advice A-1, bids and 
offers for the Specialist's own account, bids and offers on the book, 
and bids and offers established in the crowd are deemed to be available 
for display purposes. The Phlx proposes: (1) To designate the foregoing 
provisions from the current advice as a paragraph (a) of Advice A-1 and 
(2) to create new paragraph (b), to govern situations where a member of 
the trading crowd is no longer bidding and offering. In the latter 
situations, under the proposal, the Floor Broker or ROT would be 
required to use due diligence to inform the Specialist when s/he is no 
longer bidding/offering at that price. Under the proposal, the Floor 
Broker or ROT must immediately inform the Specialist when s/he is 
``out'' of that bid/offer, including due to an execution or departure 
from the crowd.
     New paragraph (b) is being proposed to address situations where 
members have been ``out'' of a bid/offer, yet failed to inform the 
Specialist. Often, that member is no longer present in the trading 
crowd. In that instance, if a trade occurs because someone accepted the 
stale bid/offer, either the member who initiated the bid/offer, the 
Specialist or the other members of the trading crowd will be required 
to honor the trade. Regardless of who honors the trade, the intent of 
this proposal is to deter these occurrences by imposing fines for such 
conduct. The proposed language refers to being ``out'' of a market for 
reasons including (but not limited to) an execution or a departure from 
the crowd. Other reasons may also apply, but the Exchange determined 
that an exhaustive list is neither possible, nor necessary, and, 
therefore, the violation involves the general failure to inform the 
Specialist, regardless of the particular reason for being ``out.''
    A member that fails to meet the obligations imposed upon it by new 
paragraph (b) will be subject to a fine.\5\ Under the proposal, fines 
would be imposed by Option Floor Officials who would determine whether 
a member should be fined based upon whether a stale quote was caused by 
a Specialist not using due diligence to ensure that the best available 
bid and offer is displayed pursuant to paragraph (a) or whether it was 
caused by a Floor Broker or ROT not using due diligence to inform the 
Specialist that it was no longer bidding/offering at that price, 
pursuant to paragraph (b) of the Advice. The Exchange believes that 
violations of proposed new paragraph (b) of the Advice involving a 
failure to notify the Specialist when a Floor Broker or ROT is ``out'' 
of a market are within the purview of Phlx Rule 970, concerning minor 
rule violations, and are otherwise designed to be easily verifiable and 
objective. The Exchange notes that the proposed fines are comparable to 
those in other advices, such as Advices A-2 (Types of Orders to be 
Accepted onto the Specialist's Book), B-4 (PHLX ROTs Entering Orders 
from On-Floor and Off-Floor for Execution on the Exchange) and B-5 
(Agency-Principal Restrictions).
---------------------------------------------------------------------------

    \5\ The fine schedule applicable to proposed new paragraph (b) 
of the Advice will be as follows:
      1st Occurrence: $250.00.
      2nd Occurrence: $500.00
      3rd and Thereafter: Sanction is discretionary with Business 
Conduct Committee.
    The fine schedule applicable to specialists, which will remain 
unchanged, is as follows:
      1st Occurrence: $50.00.
      2nd Occurrence: $100.00.
      3rd Occurrence: $250.00.
      4th and Thereafter: Sanction is discretionary with Business 
Conduct Committee.
---------------------------------------------------------------------------

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b).\6\ Specifically, the 
Commission believes that the proposal is consistent with the Section 
6(b)(5) \7\ requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, and, in general, to protect investors and the 
public interest. The proposal is also consistent with the Section 
6(b)(6) \8\ requirement that the rules of an exchange provide that its 
members and persons associated with those members be appropriately 
disciplined for violations of an exchange's rules and the Act.\9\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78f(b)(6).
    \9\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The proposal is consistent with Exchange Act Section 6(b)(5) 
because it should help to discourage Floor Brokers and ROTs from 
walking away from quotes that they have posted. The proposal also is 
consistent with Exchange Act Section 6(b)(6) in that it provides for an 
appropriate penalty to be assessed against those who violate the 
advice.
    Maintaining accurate option quotes is integral to the Specialist's 
role in the marketplace. Although a member posting a bid/offer is 
generally not held to that market after leaving the trading crowd, the 
purpose of the proposed rule change is to discourage stale markets by 
giving the Exchange the ability to impose fines for failure to remove 
such a bid/offer. Failure to remove a bid/offer may cause the member 
making the bid/offer or other crowd participants to have to honor an 
incorrectly disseminated

[[Page 13902]]

quote that may have attracted order flow, including Phlx Automatic 
Execution System orders. To avoid this result, the Commission believes 
that it is appropriate for the Phlx to require Floor Brokers and ROTs 
to use due diligence to inform the Specialist when they are ``out'' of 
a bid/offer.
    The Commission notes that the proposed rule is similar to a Chicago 
Board Options Exchange rule, requiring Floor Brokers, Designated 
Primary Market-Makers and Order Book Officials causing a bid/offer to 
be disseminated to be responsible for having the bid/offer removed once 
the order is filled or canceled.\10\
---------------------------------------------------------------------------

    \10\ See CBOE Rule 8.51, Commentary .02
---------------------------------------------------------------------------

    The Exchange has represented that this rule will be enforced under 
Exchange Rule 970, which is the Exchange's minor rule violation 
enforcement and reporting plan (``MRP'').\11\ The Commission believes 
that enforcing Floor Procedure Advice A-1, paragraph (b) under the 
Exchange's MRP is consistent with Section 6(b)(6) of the Act. The 
purpose of the Exchange's MRP is to provide a response to a violation 
of the Exchange's rules when a meaningful sanction is needed but when 
initiation of a disciplinary proceeding pursuant to Exchange Rule 960.2 
\12\ is not suitable because such a proceeding would be more costly and 
time-consuming than would be warranted given the nature of the 
violation. Violations of Floor Procedure Advice A-1, paragraph (b) can 
be appropriately handled through expedited proceedings because they are 
objective in nature and easily verifiable. Noncompliance with the 
provisions may be determined objectively and adjudicated quickly 
without the complicated factual and interpretive inquiries associated 
with more sophisticated Exchange disciplinary proceedings.
---------------------------------------------------------------------------

    \11\ The Phlx's minor rule plan, codified in Phlx Rule 970, 
contains floor procedure advices, such as Advice A-1, along with the 
accompanying fine schedules. Rule 19d-1(c)(2) under the Act 
authorizes national securities exchanges and other self-regulatory 
organizations (``SRO''s) to adopt minor rule violation plans for 
summary discipline and abbreviated reporting. Rule 19d-1(c)(1) under 
the Act requires that SROs promptly file notice with the Commission 
of any final disciplinary actions. However, minor rule violations 
not exceeding $2,500 where the sanctioned person has not sought an 
adjudication, including a hearing, or otherwise exhausted his 
administrative remedies at the SRO with respect to the matter are 
deemed not final for purposes of Rule 19d-1(c)(1), thereby 
permitting periodic, as opposed to immediate, reporting. See Phlx 
Rule 970 and 17 CFR 240.19d-1(c).
    \12\ Phlx Rule 960.2 governs the initiation of disciplinary 
proceedings by the Exchange for violations within the disciplinary 
jurisdiction of the Exchange.
---------------------------------------------------------------------------

    Finally, the Commission finds that the imposition of the 
recommended fines for violations of Floor Procedure Advice A-1, 
paragraph (b) should result in appropriate discipline of members in a 
manner that is proportionate to the nature of such violations.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Phlx-97-53) is approved.

    \13\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-7370 Filed 3-20-98; 8:45 am]
BILLING CODE 8010-01-M