[Federal Register Volume 63, Number 81 (Tuesday, April 28, 1998)]
[Notices]
[Pages 23331-23333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11166]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39889; File No. SR-Phlx-97-51]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to the 
Allocation of Options Trades

April 20, 1998.

I. Introduction

    On October 22, 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 two Floor Procedure 
Advices (``Advices''): F-2, Allocation, Time Stamping, Matching and 
Access to Matched Trades; and F-12, Responsibility for Assigning 
Participation. The proposed rule change was published for comment in 
the Federal Register on December 10, 1997.\3\ No comments were received 
on the proposal. This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 39393 (December 3, 
1997), 62 FR 65117 (December 10, 1997).
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II. Description of the Proposal

    The Phlx proposes to amend the two Advices to provide that the 
seller or largest participant to an option transaction is responsible 
for allocating an executed trade.

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 Phlx 
represents that the practice in most options crowds is that specialists 
announce trade splits by saying to the trading crowd, for example, 
``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 specialists allocating 
trades impractical. In these situations, Floor Brokers have assisted in 
allocating trades, along with performing their duty to match and submit 
the trade and ensure the best execution of orders.\4\ The purpose of 
the proposed rule change to paragraph (a) of Advice F-2 is to assign 
the responsibility of properly allocating option trades to the largest 
participant (or seller)\5\ involved in the trade, which normally will 
be the Floor Broker who represents the original order in the trading 
crowd. The Exchange asserts that the amendment will promote the 
original intent of Advice F-2 (i.e., the facilitation of prompt and 
accurate trade reporting).\6\ Paragraphs (b) concerning ticket 
preservation and (c) concerning member access to matched trades, of 
Advice F-2, remain unchanged.
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    \4\ See Phlx Rule 1063.
    \5\ 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.
    \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. Specifically, Advice F-12 currently requires that 
foreign currency option 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 Exchange additionally proposes that Advice F-12 
is proposed to be amended to only detain in the crowd actual trade 
participants and simplify ticket submission requirements.
    The Phlx 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 trades 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. Thus, a violation of Advice F-12 currently may result from 
submitting a ticket where no participation is due, even though the 
participant believed he/she participated. 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.

C. Minor Rule Plan

    Violation of the new responsibility under Advice F-2 will be 
subject to the existing fine schedule accompanying Advice F-2. 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''),\7\ 
by amending the text of

[[Page 23332]]

both Advices, as well as by extending the application of Advice F-12 to 
the equity/index options floor.
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    \7\ The Phlx's minor rule plan, codified in Phlx Rule 970, 
contains 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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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).\8\ Specifically, the 
Commission believes that the proposal is consistent with: the Section 
6(b)(5) \9\ 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 Section 6(b)(6) \10\ requirement that the rules of 
an exchange provide that its members be appropriately disciplined for 
violations of an exchange's rules and the Act; and the Section 6(b)(7) 
\11\ requirement that the rules of an exchange provide a fair procedure 
for the disciplining of members.\12\
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(6).
    \11\ 15 U.S.C. 78f(b)(7).
    \12\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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A. Advice F-2

    Trade allocation includes the determination, based on existing 
rules, policies and practices, as to who is considered to be on a bid/
offer, who participates in a trade and for what size. The Commission 
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 Commission understands that Floor Brokers 
historically have assisted in options trade allocation, along with 
their duties to match and time stamp the trade and ensure the best 
execution of orders.\13\ The Commission believes that is reasonable to 
assign the responsibility of trade allocation to the same individual 
that currently matches and time stamps the trade, namely the largest 
participant (or seller) to the trade. In this way, one person is 
performing all three functions. The Commission finds that extending 
this responsibility to the largest participant (or seller) \14\ is a 
reasonable extension of the current requirements of Advice F-2.
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    \13\ See Phlx Rule 1063.
    \14\ See note 3, supra.
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B. Advice F-12

    First, the Commission 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. The 
Commission also believes that such an extension is consistent with the 
original intent of Advice F-12 to facilitate the orderly separation of 
the option floor, especially for trades involving a number of market 
participants.\15\
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    \15\ Securities Exchange Act Release No. 29580 (August 16, 1991) 
56 FR 41876 (August 23, 1991).
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    Second, 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. As cited by the 
Commission in the original approval of Advice F-12, it is reasonable to 
require each participant to a large trade to take steps to ensure that 
the other parties to the transaction are aware of his or her 
participation.\16\ The Commission believes the proposed amendment is 
consistent with this goal because it continues to facilitate the prompt 
determination of participation levels by removing confusion as to who 
actually participated in a trade.
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    \16\ Id.
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    Third, as previously stated, Advice F-12 also 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 submissions, and as a result, establish the practice that a 
person who did not participate in a trade should not submit a ticket. 
As previously stated, the original approval of Advice F-12 noted that 
it is reasonable to require trade participants to notify other parties 
of their participation levels and to resolve those levels at such 
time.\17\ The Commission believes the proposed amendments are 
consistent with those goals because they continue to facilitate the 
prompt determination of participation levels.
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    \17\ Id.
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C. Minor Rule Plan

    The Exchange has represented that the proposed amendments to 
Advices F-2 and F-12 will be enforced under Phlx Rule 970, the minor 
rule plan. The Commission believes that an exchange's ability to 
effectively enforce compliance by its members and member organizations 
with Commission and Exchange rules is central to its self-regulatory 
function. The inclusion of a rule in an exchange's minor rule violation 
plan, therefore, should not be interpreted to mean that it is not an 
important rule. On the contrary, the Commission recognizes that the 
inclusion of minor violations of particular rules under a minor rule 
violation plan may make the exchange's disciplinary system more 
efficient in prosecuting more egregious or repeated violations of these 
rules, thereby furthering its mandate to protect investors and the 
public interest.
    The Commission believes that amending the minor rule plan by 
changing the text of both Advices, as well as extending the application 
of Advice F-12 to the equity/index options floor, is consistent with 
the Act. The purpose of the minor rule plan 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 
Phlx Rule 960.2 \18\ is not suitable because such a proceeding would be 
more costly and time-consuming than would be warranted given the nature 
of the violation. Exchange Rule 970 provides for an appropriate 
response to minor violations of certain Exchange rules while preserving 
the due process rights of the party accused through specified required 
procedures.\19\
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    \18\ Phlx Rule 960.2 governs the initiation of disciplinary 
proceedings by the Exchange for violations within the disciplinary 
jurisdiction of the Exchange.
    \19\ The minor rule plan permits any person to contest the 
Exchange's imposition of a fine through submission of a written 
answer, at which time: (1) the matter will be dismissed, (2) the 
alleged violator will pay the original fine or contest the matter 
before a hearing panel, (3) the fine will be modified and the 
alleged violator will pay the modified fine or contest the matter 
before a hearing panel or (4) the matter will become the subject of 
a formal disciplinary action and the issuance of a complaint will be 
authorized pursuant to Exchange Rule 960.2.

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[[Page 23333]]

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-Phlx-97-51) is approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-11166 Filed 4-27-98; 8:45 am]
BILLING CODE 8010-01-M