[Federal Register Volume 66, Number 32 (Thursday, February 15, 2001)]
[Notices]
[Pages 10547-10549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3801]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43939; File No. SR-Phlx-01-05]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to the Prohibition Against Off-Floor Members 
Functioning as Market Makers.

February 7, 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 January 17, 2001, 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 
Exchange.

[[Page 10548]]

The Exchange has designated the proposed rule change as constituting a 
``non-controversial'' rule change under paragraph (f)(6) of Rule 19b-4 
under the Act,\3\ which renders the proposal effective upon receipt of 
this filing by the Commission. 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\ 17 CFR 240.19b(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Phlx Rule 1080 relating to the 
Exchange's Automated Options Market (AUTOM) and Automatic Execution 
system (AUTO-X),\4\ by adopting Rule 1080(j). This proposed rule would 
prohibit members from entering, or facilitating the entry of, limit 
orders in the same options series, for the account or accounts of the 
same or related beneficial owners, in such a manner that the member or 
the beneficial owner(s) effectively is operating as a market maker by 
holding itself out as willing to buy and sell such options contract on 
a regular or continuous basis.
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    \4\ AUTOM is the Exchange's electronic order delivery and 
reporting system, which provides for the automatic entry and routing 
of equity option and index option orders to the Exchange trading 
floor. Orders delivered through AUTOM may be executed manually, or 
automatically if they are eligible for AUTOM's automatic execution 
feature, AUTO-X. Equity option and index option specialists are 
required by the Exchange to participate in AUTOM and its features 
and enhancements. Option orders entered by Exchange members into 
AUTOM are routed to the appropriate specialist unit on the Exchange 
trading floor.
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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 Exchange included statements 
concerning the purpose of and basis for 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
    The purpose of the proposed rule change is to prevent persons from 
functioning as market makers through Phlx member firms without those 
persons being held to the affirmative obligations and restrictions 
imposed on on-floor market makers (Registered Options Traders, or 
``ROTs'').\5\ Phlx Rule 1014(b) defines a ROT as a regular member or a 
foreign currency options participant of the Exchange located on the 
trading floor who has received permission from the Exchange to trade in 
options for his own account. ROTs are subject to numerous affirmative 
trading, margin and capitalization requirements and prohibitions 
pursuant to the Act and the regulations thereunder, and to Exchange 
rules.\6\
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    \5\ Telephone call between Rick Rudolph, Counsel, Phlx, and 
Jennifer Colihan, Special Counsel, Division of Market Regulation, 
Commission, on January 24, 2001.
    \6\ For example, Exchange Rule 1014, Obligations And 
Restrictions Applicable To Specialists and Registered Options 
Traders, sets forth numerous obligations and restrictions applicable 
to ROTs on the floor on the Exchange, including the obligation of a 
ROT to engage in dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market; limitations on quote 
spread parameters; limitations on price change parameters; the 
requirement to yield priority to customer orders; and in-person, on-
floor quarterly trading requirements. Off-floor traders that enter 
orders through AUTOM and effectively function as market makers are 
not currently subject to such affirmative requirements and 
limitations.
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    Phlx states that recently certain off-floor traders have 
demonstrated their ability to engage in simultaneous or near-
simultaneous entry of limit orders, to buy and sell the same options 
contract. In Phlx's view, persons engaged in such practices are 
effectively functioning as market makers from off the floor of the 
Exchange.
    The proposed rule would prohibit members from entering, or 
facilitating the entry of, limit orders in the same options series from 
off the floor of the Exchange, for the account or accounts of the same 
or related beneficial owners, in such a manner that the off floor 
member or the beneficial owner(s) effectively is operating as a market 
maker by holding itself out as willing to buy and sell such options 
contract on a regular or continuous basis. The Exchange proposes this 
change to prohibit users from acting as market makers through AUTOM and 
AUTO-X.
    In determining whether an off-floor member or beneficial owner 
effectively is operating as a market maker, the Exchange will consider, 
among other things: the simultaneous or near-simultaneous entry of 
limit orders to buy and sell the same options contract; the multiple 
acquisition and liquidation of positions in the same options series 
during the same day; and the entry of multiple limit orders at 
different prices in the same options series.
2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with Section 6(b) \7\ of the Act in general, and with Section 6(b)(5) 
\8\ of the Act in particular, in that it is designed to perfect the 
mechanisms of a free and open market and the national market system, 
protect investors and the public interest and promote just and 
equitable principles of trade by prohibiting AUTOM users from 
functioning as market makers from off the floor of the Exchange.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 that is not necessary or appropriate 
in 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

    The proposed rule change has been filed by the Exchange as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\9\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\10\ Consequently, 
because the foregoing proposed rule change: (1) does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) does not become 
operative for 30 days from the date on which it was filed, and the 
Exchange provided the Commission with written notice of its intent to 
file the proposed rule change at least five days prior to the filing 
date, it has become effective pursuant to section 19(b)(3)(A) of the 
Act and Rule 19b-4(f)(6) thereunder.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest for the protection of investors, or otherwise in 
furtherance of the proposes of the Act.

[[Page 10549]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
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 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 Section. 
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-01-05 and should be submitted by March 8, 2001.

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3801 Filed 2-14-01; 8:45 am]
BILLING CODE 8010-01-M