[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)]
[Notices]
[Pages 1849-1851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-593]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40876; File No. SR-Phlx 98-56]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Partial Accelerated Approval to Proposed Rule Change by the
Philadelphia Stock Exchange, Inc. Relating to the Enhanced Parity Split
Pilot Program for Equity and Index Option Specialists and the Adoption
of an Enhanced Parity Split for Specialists that Develop and Trade New
Products
December 31, 1998.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 28, 1998, the Philadelphia Stock Exchange, Inc.
(``Exchange'' or ``Phlx'') 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. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons and to grant
partial accelerted approval to the proposed rule change.
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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 Exchange seeks the extension of an permanent approval of its
enhanced parity split pilot program for equity and index option
specialists (``Pilot Program''). The Pilot Program is currently
scheduled to expire on December 31, 1998. In addition, the Exchange
proposes to amend Exchange Rule 1014(g) ``Equity Option and Index
Option Priority and Parity,'' and its corollary Option Floor Procedure
Advice B-6 to provide an enhanced parity split for Exchange specialists
that develop and trade new products.
The text of the proposed rule change is available at the Office of
the Secretary, the Exchange, and at the Commision.
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 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
a. Permanent Approval of the Pilot Program. On August 26, 1994, the
Commission approved the Pilot Program to provide Exchange specialists
with an enhanced 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 proposal 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 was subsequently
renewed without change on three occasions.\6\
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\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 44170 (Aug. 19, 1997.
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Most recently, the Pilot Program was extended to December 31, 1998,
and modified so that (1) the enhanced parity split applies to all index
options, in addition to applying to 50% of each specialist's equity
option issues and 100% of all new option classes allocated to the
specialist during the year; and (2) specialists may revise the list of
eligible equity options on a quarterly basis, rather than annually.\7\
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\7\ Securities Exchange Act Release No. 39401 (Dec. 4, 1997), 62
FR 65300 (Dec. 11, 1997). The Exchange has noted that it maintains a
separate, permanent enhanced parity split program for ``new'' option
specialist units that trade newly listed options. See Exchange rule
1014(g)(iii), ``New Unit/New Option Enhanced Specialist
Participation'' and Securities Exchange Act Release No. 34109 (May
25, 1994), 59 FR 28570 (June 2, 1994).
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The Exchange now seeks the extension \8\ of and permanent approval
\9\ of the Pilot Program. The Pilot Program currently works as follows:
When an equity or index option specialist is on parity will one
controlled account \10\ 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, the customer will not be disadvantaged by
receiving a lesser allotment than any other crowd participant,
including the specialist.\11\
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\8\ The Exchange has requested that the Commission accelerate
approval of the proposed rule change for the portion relating to the
extension of the enhanced parity split Pilot Program for a six-month
period or until the Commission approves the Exchange's request for
permanent approval of the Pilot Program, whichever occurs first.
\9\ Under the proposal, the text of Exchange Rule 1014 and its
corollary Option Floor Procedure Advice B-6 would be revised to
eliminate references to an expiration date.
\10\ 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 specialist accounts. See
Exchange Rule 1014(g).
\11\ As the Commission noted in the most recent order extending
the Pilot Program, the application of the enhanced parity split is
mandatory. Therefore, with respect to any equity or index options
transaction that implicates the enhanced parity split, the
specialist is required to accept the preferential allocation and may
not decline the enhancement. See Securities Exchange Act Release No.
39401 (Dec. 4, 1997), 62 FR 65300 (Dec. 11, 1997).
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[[Page 1850]]
In connection with the most extension of the Pilot Program,\12\ the
Commission noted that prior to granting another extension or permanent
approval of the Pilot Program, the Exchange would be required 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.
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\12\ Id.
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The Exchange incorporated the findings of its Report into the
proposed rule change filing. According to the Exchange, its regulatory
personnel have not observed during the past year evidence of any
adverse effects on competition, investors, or the market for equity or
index options. As to the second issue, the Exchange has not received
any complaints, either orally or in writing, from investors or Exchange
members regarding the Pilot Program. Finally, regarding disciplinary
actions, investigations, examinations or inquiries; the Exchange
reports that it did not commence any investigations relating to the
Pilot Program this past year.
b. Enhanced Parity Split for Exchange Specialists that Develop and
Trade New Products. The Exchange separately proposes to adopt an
enhanced parity split for Exchange specialists that develop and trade
new products.\13\ The proposal provides that when the specialist is on
parity with three or more controlled accounts in the crowd, the
specialist will receive 40% of the contracts and the controlled
accounts will receive the remaining 60%. When the specialist is on
parity with less than three controlled accounts in the crowd, the
specialist will receive 60% of the contracts and the controlled
accounts will receive 40%. In either of these situations, if a customer
is on parity, the customer may not receive a lesser allotment than any
other crowd participant, including the specialist.
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\13\ The Exchange previously filed this proposal with the
Commission in the form of a pilot program. See File No. SR-Phlx-98-
47. However, in accordance with the Commission's request, the
Exchange has withdrawn the previous proposal and now seeks permanent
approval of the proposed rule change.
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The Exchange stated that this proposal is intended to encourage
specialist units to develop and trade new products, and to provide
liquidity in such products, thereby attracting order flow to the
Exchange. The Exchange believes the proposal balances the competing
interests of specialists and Registered Option Traders, while
encouraging specialists to take an active role in supporting and
marketing a new product, both important activities in a competitive
environment. The Exchange has indicated that the proposal is limited to
new products developed and traded by the same specialist unit.
Therefore, if one specialist unit develops a new product but another
specialist unit is allocated specialist privileges in that same new
product,\14\ the specialist unit trading the new product would not be
entitled to the proposed enhanced parity split. The Exchange's Options
Committee will determine whether a specialist ``developed'' a new
product.
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\14\ Allocation determination are governed by Exchange Rules
500-526.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6 of the Act,\15\ in general, and with section
6(b)(5),\16\ in particular, in that it is designed to promote just and
equitable principles of trade; prevent fraudulent and manipulative acts
and practices; foster cooperation and coordination with persons engaged
in regulating, clearing, settling, processing information with respect
to, and facilitating transactions in securities; remove impediments to
and perfect the mechanism of a free and open market and a national
market system; and protect investors and the public interest. The
Exchange further 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. Finally, the
Exchange believes the proposal protects the public interest by assuring
that a customer's participation is never disadvantaged by the enhanced
parity split.
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\15\ 15 U.S.C. 78f.
\16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will not 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
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 of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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-98-56 and should be
submitted by February 2, 1999.
V. Commission's Findings and Order Granting Partial Accelerated
Approval of Proposed Rule Change
The Commission has carefully reviewed the Exchange's proposed rule
change and believes, for the reasons set forth below, the proposal is
consistent with the requirements of section 6 of the
[[Page 1851]]
Act \17\ and the rules and regulations thereunder applicable to a
national securities exchange. Specifically, the Commission believes the
proposal is consistent with section 6(b)(5) of the Act \18\ because it
will promote just and equitable principles of trade; remove impediments
to, and perfect the mechanism of a free and open market; and protect
investors and the public interest.\19\
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\17\ 15 U.S.C. 78f.
\18\ 15 U.S.C. 78f(b)(5).
\19\ In granting partial accelerated approval of this proposed
rule change, the Commission notes that it has considered the
proposal's impact on efficiency, competition, and capital formation.
15 U.S.C. 78c(f).
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The Exchange has requested partial accelerated approval of the
proposed rule change so that the Pilot Program may continue to operate
without interruption. Specifically, the Exchange has requested that the
Commission accelerate approval of the proposed rule change for the
portion relating to the extension of the enhanced parity split Pilot
Program for a six-month period or until the Commission approves the
Exchange's request for permanent approval of the Pilot Program,
whichever occurs first. As noted earlier, the Pilot Program is due to
expire on December 31, 1998. Therefore, unless the Pilot Program is
immediately extended, the Exchange's equity and index option
specialists will no longer be permitted to avail themselves of the
enhanced parity split.
The Commission finds good cause for granting partial accelerated
approval of the proposed rule change prior to the thirtieth day after
the date of publication of notice therefore in the Federal Register.
The Commission believes it is reasonable that Exchange specialists be
permitted to avail themselves of the enhanced parity split on a
continuous basis without disruption. Therefore, the Commission believes
it is appropriate to grant partial accelerated approval of the proposal
to extend the Pilot Program for six months or until the Commission
approves the Exchange's request for permanent approval of the Pilot
Program, whichever occurs first.
The Commission recognizes that the purpose of the enhanced parity
split is to encourage equity and index option specialists to make deep
and liquid markets in order to attract order flow to the Exchange. The
Commission has previously noted that specialists have responsibilities
that other crowd participants do not share, such as the staff costs
associated with continually updating and disseminating quotes.\20\ As a
result, the Commission believes it is reasonable for the Exchange to
grant certain advantages to specialists, such as the enhanced parity
split, to attract and retain well capitalized specialist at the
Exchange. As long as these advantages do not unreasonably restrain
competition and do not harm investors, the Commission believes that the
granting of such benefits to specialists, in general is within the
business judgment of the Exchange.
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\20\ See e.g. Securities Exchange Act Release No. 35177 (Dec.
29, 1994), 60 FR 2419 (Jan. 9, 1995).
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The Commission notes that the application of the Exchange's
enhanced parity split cannot cause a customer on parity to receive a
smaller participation than any other crowd participant, including the
specialist. The Commission believes this provision adequately protects
customer orders from any negative impact that might flow from
application of the enhanced parity split. As a result, a customer on
parity is ensured a participation that, at a minimum, is equal to that
given any other crowd participant on parity.\21\ Therefore, the
Commission believes it is consistent with section 6(b)(5) and Section
19(b)(2) of the Act to grant partial accelerated approval to the
proposed rule change.\22\
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\21\ The Commission notes that this provision is consistent with
the enhanced parity split that currently applies to the Exchange's
specialists in foreign currency options. See Securities Exchange Act
Release No. 40557 (Oct 15, 1998), 63 FR 56284 (Oct. 21, 1998).
\22\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the Act,
that the portion of the proposed rule change, SR-Phlx-98-56, seeking
the extension of the enhanced parity split Pilot Program for a six-
month period ending June 30, 1999, or until the Commission approves the
Exchange's request for permanent approval of the Pilot Program,
whichever occurs first, is hereby approved on an accelerated basis.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-593 Filed 1-11-99; 8:45 am]
BILLING CODE 8010-01-M