[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