[Federal Register Volume 66, Number 18 (Friday, January 26, 2001)]
[Notices]
[Pages 7945-7947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-2379]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43859; File No. SR-NYSE-00-62]


Self-Regulatory Organizations; Notice of Filing Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Specialists' 
Specialty Stock Option Transactions

January 18, 2001
    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 22, 2000, the New York Stock Exchange, Inc. (``NYSE'' 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 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend paragraph (l) of the Guidelines to 
NYSE Rule 105 and paragraph (a) of NYSE Rule 98. These proposed 
amendments permit an NYSE Rule 98 approved person of a specialist to 
act as competitive market maker or perform other similar non-primary/
supplemental market-making activities in any option as to which the 
underlying security is a stock in which the related specialist is 
registered.
    Below is the text of the proposed rule change. Proposed new 
language is italicized and proposed deletions are in brackets.
* * * * *

Rule 105. Specialists' Interest in Pools and Options

* * * * *

Guidelines for Specialists' Speciality Stock Options Transactions 
Pursuant to Rule 105 (a) Through (k)--No change

* * * * *
(l) Specialist Shall Not Be Options Market-Maker
    Except as provided below, [N]no equity specialist, his member 
organization, other member, allied member or approved person in such 
member organization or officer or employee thereof shall act as an 
options market-maker or option specialist, or function in any capacity 
involving market-making responsibilities, in any option as to which the 
underlying security is a stock in which the specialist is registered as 
such.
    Notwithstanding the above, an approvedperson is so ating as an 
options market maker pursuant to this paragraph, neither that approved 
person of an equity specialist entitled to an exemption from this rule 
under Rule 98 may act as a competitive market maker, competitive 
options trader, registered options trader, or in a similar non-primary 
market-making capacity in any option as to which the underlying 
security is a stock in which the associated specialist is registered as 
such; provided, however, that if an approved person is so acting as an 
options market maker pursuant to this paragraph, neither that approved 
person, nor any other approved person of the specialist, may act as a 
market maker in any equity security in which the associated specialist 
is registered as such and which underlies an option as to which the 
approved person acts as an options market maker.\3\
---------------------------------------------------------------------------

    \3\ Minor technical corrections have been made to the rule text. 
The NYSE will file an amendment indicating these changes to the rule 
text. Telephone conversation between Jeff Rosenstrock, Esquire, 
Senior Project Specialist, Rule Development, NYSE, and Sapna C. 
Patel, Attorney, Division of Market Regulation, Commission, on 
January 16, 2001.

* * * * *

Rule 98. Restrictions on Approved Person Associated With a 
Specialists' Member Organization

    (a) So long as paragraph (b) of this Rule is complied with, (i) 
each specialist within a member organization that is associated with an 
approved person shall be exempt from the provisions of Rule 104 and 
104.13 as they relate to such approved person, and (ii) the approved 
person that is associated with such member organization shall be exempt 
from (A) the restrictions on trading in specialty stock options as 
provided by Rule 105  and on acting as an options market maker as 
provided in paragraph (l) of the Rule 105 Guidelines, (B) the

[[Page 7946]]

provisions of Rule 113(a) and the prohibition against ``popularizing'' 
as provided by Rule 113.20, provided, that the disclosures specified in 
that Rule are made, and (C) the provisions of Rule 460, except as 
specified therein.
    (b) In order to obtain the exemptions referred to in paragraph (a) 
above, the approved person and the specialist member organization with 
which such approved person is to be associated shall be required to 
obtain the prior written agreement of the Exchange that such approved 
person and such member organization are in compliance with the 
``Guidelines for Approved Persons Associated with a Specialist's Member 
Organization'' as promulgated by the Exchange and as may be amended 
from time to time.
    (c) Whenever the approved person controls, is controlled by, or is 
under common control with, a person, other than the member organization 
with which it is associated, the exemptions provided in paragraph (a) 
above shall be available only so long as the approved person and its 
associated member organization have satisfied the Exchange that the 
relationship between the approved person, the member organization and 
such other person satisfies all of the conditions specified in the 
``Guidelines.''
* * * * *

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
    Currently, paragraph (l) of the Guidelines to NYSE Rule 105 
prohibits Exchange specialists and approved persons of an Exchange 
specialist from acting as an options market maker or options 
specialist, or from functioning in any capacity involving market-making 
responsibilities in any option as to which the underlying security is a 
stock in which the specialist is registered. This prohibition applies 
to all approved persons of specialists, including those who are 
otherwise exempt from specific specialist rules pursuant to NYSE Rule 
98.
    The prohibitions were intended to address potential conflict-of-
interest concerns raised by the possibility of side-by-side stock and 
options trading by a specialist and a specialist affiliate. The 
prohibitions were adopted in the early 1980s when options were not 
listed and traded on more than one exchange as they are today.\4\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 21710 (February 4, 
1985), 50 FR 5708 (February 11, 1985) (approving SR-NYSE-82-2).
---------------------------------------------------------------------------

    The Exchange therefore proposes to amend paragraph (l) of the NYSE 
Rule 105 Guidelines and paragraph (a) of NYSE Rule 98 to permit NYSE 
Rule 98 approved persons of specialists to act as non-primary options 
market makers in options overlying securities in which an affiliated 
specialist is registered.

NYSE Rule 98 Approved Person

    Under Exchange rules, a person or entity entering into any type of 
control relationship with a member organization may be deemed to be an 
approved person of the member organization.\5\ The term ``approved 
person'' refers to an individual or entity that controls a member 
organization, or is engaged in the securities business and is either 
controlled by or is under common control with a member organization. 
Approved persons of specialist member organizations are subject to a 
number of Exchange rules (including NYSE Rule 105) that place 
restrictions on their ability to trade in the specialty stocks of the 
related specialist. NYSE Rule 98 provides exemptive relief for an 
approved person associated with a specialist's member organization that 
complies with the NYSE Rule 98 implementing guidelines.
---------------------------------------------------------------------------

    \5\ NYSE Rule 2 defines control as the power to direct or cause 
the direction of the management or policies of a person whether 
through ownership of securities, by contract or otherwise. A 
presumption of control is made in certain circumstances outlined in 
the rule.
---------------------------------------------------------------------------

    Paragraph (a) of NYSE Rule 98 is proposed to be amended to permit 
an NYSE Rule 98 approved person to act in a non-primary market-making 
capacity in an option overlying a security in which an associated 
specialist is registered.\6\ In order to meet the test for an NYSE Rule 
98 approved person and obtain exemptive relief, an approved person and 
an associated specialist organization must submit a written statement 
to the Exchange describing the internal controls they intend to adopt 
for the establishment of procedures sufficient to restrict the flow of 
privileged information between the approved person and the associated 
specialist organization. The procedures are intended to preclude the 
possibility that privileged information will be made available to be 
used in any way to influence a particular trading decision by a 
specialist in the associated specialist organization, or vice versa. 
These internal control and procedures would apply in situations where 
an NYSE Rule 98 approved person intended to act as a non-primary market 
maker in an option.
---------------------------------------------------------------------------

    \6\ The distinction between primary and non-primary market 
makers for purposes of the proposed rule change is described more 
fully below.
---------------------------------------------------------------------------

Proposed Changes to Paragraph (l) of NYSE Rule 105 Guidelines

    The Exchange proposes to amend paragraph (l) of the NYSE Rule 105 
Guidelines to permit an NYSE Rule 98 approved person of a specialist to 
act as a competitive market maker or perform other similar non-primary/
supplemental market-making activities in any option as to which the 
underlying security is a stock in which the related specialist is 
registered. The prohibition on acting as a primary market maker would 
be retained.
    The difference in treatment between primary market makers and 
competitive (or non-primary) market makers stems from their differing 
obligations on the options exchanges. On the various options exchanges, 
primary market makers (``PMMs''), also called Designated Primary Market 
Makers (``DPMs''), Lead Market Makers (``LMMs''), and Registered Equity 
Market Makers, similar to specialists on the Exchange, are market 
makers with significant responsibilities, including overseeing the 
opening and closing of trading in option classes, and providing 
continuous, two-sided quotations in all of their assigned stock 
options. Competitive Market Makers (``CMMs''), also called competitive 
options traders, registered options traders and non-primary market 
makers, are market makers who quote independently and add depth and 
liquidity to the market, but do not have the primary responsibility to 
maintain a fair and orderly market.
    The Exchange believes that potential conflicts of interest with 
respect to stock and options trading are somewhat less significant with 
respect to supplemental, as opposed to primary, options market-making, 
and in any event the Exchange believes that they are effectively 
addressed by NYSE Rule 98's requirement that material market 
information be kept strictly segregated.

[[Page 7947]]

    The Exchange also proposes to amend paragraph (l) of the NYSE Rule 
105 Guidelines by adding the following additional restriction: if an 
NYSE Rule 98 approved person is acting as an options market maker in an 
option overlying a specialty stock, neither it, nor any other approved 
person of the specialist, may act as a market maker in any speciality 
stock underlying an option as to which the NYSE Rule 98 approved person 
acts as an options market maker. The Exchange believes that this 
restriction will ensure that market information gleaned from the 
options market is not used to gain trading advantages by approved 
persons of the specialist in other equity markets. The potential for 
manipulative activity resulting from the market maker's unique 
informational advantage of seeing ``the book'' of both a stock and its 
underlying option should be substantially lessened; the proposed 
additional restriction would prevent a non-primary market maker in the 
options market from relaying information obtained on the floor (due to 
time and place advantage) to an approved person of the specialist who 
trades the stock underlying the option on a regional exchange or in 
another market.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \7\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \8\ in particular, because it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed fee change will not impose 
any burden on competition that is not necessary or appropriate in the 
furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received written comments on 
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 submission 
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 
NYSE. All submissions should refer to File No. SR-NYSE-00-62 and should 
be submitted by February 16, 2001.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-2(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-2379 Filed 1-25-01; 8:45 am]
BILLING CODE 8010-01-M