[Federal Register Volume 64, Number 229 (Tuesday, November 30, 1999)]
[Notices]
[Pages 66958-66959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30978]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42161; File No. SR-PHLX-99-39]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Amending Phlx Rule 
1014(g) Regarding Specialist Enhanced Participation

November 19, 1999.
    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 October 4, 1999, the Philadelphia Stock Exchange, Inc. (``Phlx') or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the Phlx. 
On November 4, 1999, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange made technical changes to 
the proposal. See letter from Nandita Yagnik, Phlx, to Richard 
Strasser, Assistant Director, Division of Market Regulation, 
Commission, dated November 3, 1999 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 1014, ``Obligations and 
Restrictions Applicable to Specialists and Registered Options 
Traders,'' and its corollary Option Floor Procedure Advice B-6 to 
revise the enhanced participation available to Exchange specialists. 
Under the proposal, if three or more controlled accounts \4\ are on 
parity with an Exchange specialist, the specialist will receive 30% of 
the contracts of the initiating order.
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    \4\ Pursuant to Phlx Rule 1014(g)(i), a controlled account 
includes any account controlled by or under the common control with 
a member broker-dealer.
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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 Phlx 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 Phlx 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. Background
    On August 26, 1994, the Commission approved the Exchange's proposal 
to adopt and enhanced participation for Exchange specialists in equity 
options.\5\ The enhancement, or ``enhanced parity split,'' provided 
Exchange specialists with a greater participation in parity trades than 
the specialists would otherwise be entitled to receive. Initially, the 
enhanced parity split was approved as a one year pilot expiring August 
26, 1995. On November 30, 1994, the Commission approved the Exchange's 
proposal to make the enhanced parity split available to index option 
specialist.\6\ The enhanced parity split was later revised with respect 
to situations where less than three controlled accounts are on parity 
with a specialist.\7\ The enhanced parity split was renewed unaltered 
and on a continuing pilot basis on three subsequent occasions.\8\ 
Thereafter, the enhanced parity split was extended until December 31, 
1998, and revised or that it would apply to: (1) All index options; (2) 
50% of each specialist's equity options; and (3) all new options 
allocated to a specialist during the year. In addition, specialists 
were permitted to revised the list of eligible equity options on a 
quarterly basis, instead of annually.\9\ Finally, in July 1999, the 
enhanced parity was permanently approved.\10\
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    \5\ See Securities Exchange Act Release No. 34606 (August 26, 
1994), 59 FR 45741 (September 2, 1994).
    \6\ See Securities Exchange Act Release No. 35028 (November 30, 
1994), 59 FR 63151 (December 7, 1994).
    \7\ See Securities Exchange Act Release No. 35429 (March 1, 
1995), 60 FR 12802 (March 8, 1995).
    \8\ See Securities Exchange Act Release Nos. 36122 (August 18, 
1995), 60 FR 44530 (August 28, 1995); 37254 (August 5, 1996), 61 FR 
42080 (August 13, 1996); and 38924 (August 11, 1997), 62 FR 44160 
(August 19, 1997).
    \9\ See Securities Exchange Act Release No. 39401 (December 4, 
1997), 62 FR 65300 (December 11, 1997).
    \10\ See Securities Exchange Act Release No. 41588 (July 1, 
1999), 64 FR 37185 (July 9, 1999). The Exchange also received 
approval to give specialists and enhanced parity split when they 
develop and trade a new product. The enhanced parity split works as 
follows: when the specialist is on parity with three or more 
controlled accounts, the specialist receives 40% of the contracts 
and the controlled accounts receive the remaining 60%. When the 
specialists is on parity with less than three controlled accounts in 
the crowd, the specialist receives 60% of the contracts and the 
controlled accounts receive 40%. In either these situations, if a 
customer is on parity, the customer may not receive a lesser 
allotment than any other crowed participant including the 
specialist.
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    Currently, the enhanced parity split applies to orders for more 
than five contracts. Specifically, when an equity or index option 
specialist is on parity with one controlled account, the specialist 
receives 60% of the initiating order and the controlled account 
receives 40%. When the specialist is on parity with two controlled 
accounts, the specialist receives 40% of the initiating order and each 
controlled account receives 30%. When the specialist is on parity with 
three or more controlled accounts, the specialist is 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.
b. Proposal
    The Exchange proposes to revise the manner in which the enhanced 
parity split operates. Specifically, in those cases where the 
specialist is on parity with three or more controlled accounts, the 
specialist will receive 30% of the contracts instead of being counted 
as two crowd participants. However, if a customer is on parity, the 
customer will not be disadvantaged by receiving a lesser allotment that 
any other crowd participant including the specialist. Pursuant to the 
current text of the rule, the Exchange will continue to limit the 
enhanced parity split to 50% for each of the specialist unit's equity 
issues.
    The Exchange believes that fixing the percentage of an order that a 
specialist receives under the enhanced parity split should provide more 
certainty because a fixed percentage is ascertained more easily than a 
percentage that varies depending on the number of controlled accounts 
on parity. In addition, in larger crowds, a specialist may not receive 
a significant enhanced participation using the current two-for-one 
split because the potentially large number of controlled accounts on 
parity would significantly dilute the specialist's share of the order. 
For example, if there are seventy controlled accounts on parity, and 
there is an initiating order for seventy contracts, the specialist will 
only receive two contracts and the rest of the crowd will divide the 
remaining sixty-eight. However, with the proposed 30% enhanced parity 
split, the specialist will receive twenty-one contracts and the

[[Page 66959]]

rest of the crowd will divide the other forty-nine equally. Thus, the 
30% enhanced parity split should help to ensure that specialists in 
larger crowds receive participations that encourage them to make deep 
and liquid markets.\11\ In addition, the proposal should allow the 
Exchange to recruit and retain well-capitalized specialists who attract 
order flow to the Exchange.
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    \11\ In those instances where three of four controlled accounts 
are on parity, the Exchange recognizes that the proposed 30% 
enhanced parity split will provide specialists with a lesser number 
of contracts than under the current two-for-one enhanced parity 
split. For example, if there is an initiating order of fifty 
contracts, and three controlled accounts are on parity, the 
specialist will currently receive twenty contracts and the 
controlled accounts will each receive ten contracts. In contrast, 
under the proposed 30% enhanced parity split the specialist will 
only receive fifteen contracts. However, the Exchange believes that 
the proposed 30% enhanced parity split will provide a more equitable 
treatment to all specialists such that specialists of both large and 
small crowds shall receive a significant enhanced participation when 
there are five or more controlled accounts on parity. See Amendment 
No. 1, supra note 3.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\12\ in general, and with Section 
6(b)(5),\13\ 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 helping specialists 
protect the public interest by making tight and liquid markets in 
assigned issues.
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    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received 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 self-regulatory organization 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 20549-0609. 
Copies of the submission, 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 person, 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 Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Phlx. All submissions should refer to File No. SR-PHLX-99-39 and should 
be submitted by December 21, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-30978 Filed 11-29-99; 8:45 am]
BILLING CODE 8010-01-M