[Federal Register Volume 66, Number 168 (Wednesday, August 29, 2001)]
[Notices]
[Pages 45721-45723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21791]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44740; File No. SR-Phlx-2001-61]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to Solicited Orders and Anticipatory Hedging 
Activity

August 23, 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 July 10, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') 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 Phlx. On August 7, 
2001, the Phlx submitted to the Commission Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change, as amended, has been 
filed by the Phlx as a ``non-controversial'' rule change under Rule 
19b-4(f)(6) under the Act.\4\ 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\ See letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated August 6, 2001. The substance of 
Amendment No. 1 is incorporated in the description of the proposed 
rule change in Section II below. For purposes of calculating the 60-
day period within which the Commission may summarily abrogate the 
proposed rule change under Section 19(b)(3)(C) of the Act, 15 U.S.C. 
78s(b)(3)(C), the Commission considers that period to commence on 
August 7, 2001, the date the Phlx filed Amendment No. 1.
    \4\ 17 CFR 240.19b-4(f)(6).
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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 1064, ``Crossing, Facilitation 
and Solicited Orders'' by: (1) Amending Phlx Rule 1064(c) to permit a 
member or member organization representing an order (``originating 
order'') to solicit another member, member organization, or non-member 
broker-dealer outside the trading crowd to participate in a transaction 
with the originating order provided that certain specified procedures 
are followed; and (2) adopting new Phlx Rule 1064(d) to prohibit a 
member or person associated with a member from using non-public 
information regarding crossing, facilitation, and solicited orders for 
the member's benefit by trading in the underlying stock or in related 
instruments prior to exposing the order to the trading crowd. The Phlx 
is also proposing corresponding changes to Options Floor Procedure 
Advice (``OFPA'') B-11(c) and (d) and a conforming amendment to OFPA C-
7.
    The text of the proposed rule change is available at the Phlx and 
at the Commission.

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 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 set forth specific 
procedures and guidelines to be followed respecting solicited orders, 
and to prohibit the use of non-public information received during the 
crossing, facilitation, and solicitation processes.
    a. Solicited Orders. Currently, Phlx Rule 1064(c) provides that, if 
a member appears in the trading crowd in response to a solicitation, 
other trading crowd participants must be given a reasonable opportunity 
to respond to the order which prompted the solicitation before the 
solicited member may respond to the order. The proposed rule change 
would add paragraph (c)(ii) to the current rule and to OFPA B-11 to 
permit a member or member organization representing an originating 
order to solicit another member, member organization, or non-member 
broker-dealer outside the trading crowd (``solicited party'') to 
participate in the transaction on a proprietary basis, provided, 
however, that the trading crowd is given an opportunity to participate 
in the transaction by matching or improving the terms of the 
transaction.
    Proposed Phlx Rule 1064(c)(ii) and OFPA B-11(c)(ii) further set 
forth the procedures to be followed when an Exchange member solicits 
another member, member organization, or non-member broker-dealer 
outside the trading crowd. The rule would require the member 
representing the originating order, upon entering the trading crowd to 
execute the transaction, to: (a) Announce to the trading crowd the same 
terms of the originating order that were disclosed to the solicited 
party; (b) bid at the price he/she is prepared to buy from the 
solicited party or offer at the price he/she is prepared to sell to the 
solicited party; and (c) give the trading crowd a reasonable 
opportunity to accept the bid or offer. If a member in the trading 
crowd decides to match or improve the terms of the transaction, the 
proposed rule would grant such member in the trading crowd priority 
over the solicited party.
    In order to ensure full disclosure of such orders, proposed Phlx 
Rule 1064(c)(iii) and OFPA B-11(c)(iii) would require that the word 
``Solicited'' be written clearly and legibly on the order ticket of the 
solicited order.
    The purpose of proposed Phlx Rule 1064(c)(ii) and OFPA B-11(c)(ii) 
is to allow an Exchange member representing an options order to solicit 
a third party outside the trading crowd. The member, however, would 
still have the obligation to represent the originating order to the 
trading crowd prior to execution.
    The purpose of the proposed provision requiring an Exchange member 
representing a solicited order to announce the terms of the order to 
the trading crowd prior to executing that order is to ensure that the 
members of the trading crowd have a reasonable opportunity to 
participate in the transaction by improving or matching the proposed 
price.
    In addition, this provision would benefit the customer whose order 
is represented by the soliciting member by allowing for the possible 
improvement of the ultimate price at which such an order is executed.
    The Exchange believes that granting members in the trading crowd 
priority over the solicited party should ensure that crowd members that 
wish to participate in such a transaction are given a reasonable 
opportunity to do so. The Exchange believes that full disclosure to the 
trading crowd of the terms of orders that comprise solicited 
transactions allows the trading crowd to give full consideration to, 
and the opportunity for improvement of, such terms.
    b. Prohibition Against Anticipatory Hedging. Proposed Phlx Rule 
1064(d) and OFPA B-11(d) would expressly prohibit any member or person 
associated with a member who has knowledge of the material terms and

[[Page 45722]]

conditions of a solicited order, an order being facilitated, or orders 
being crossed, the execution of which are imminent, from entering, 
based on such knowledge, an order to buy or sell an option for the same 
underlying security; an order to buy or sell the security underlying 
such class; or an order to buy or sell any related instrument. The 
prohibition would remain in effect until the terms of such solicited, 
facilitated, or crossed order are disclosed to the trading crowd, or 
until the trade can no longer reasonably be considered imminent in view 
of the passage of time since the order was received.
    In order to allow crowd participants to know what constitutes a 
``related instrument'' in reference to an index option, the proposed 
rule and OFPA clarify that an order to buy or sell a related instrument 
means, in reference to an index option, an order to buy or sell 
securities comprising 10% or more of the component securities in the 
index or an order to buy or sell a futures contract on an economically 
equivalent index.
    The Phlx also proposes new Commentary .01 to Rule 1064 and OFPA B-
11, stating that a violation of this rule may be considered conduct 
inconsistent with just and equitable principles of trade.\5\ The 
purpose of the proposed rule is to expressly prohibit anticipatory 
hedging that is based on inside information. The Exchange believes that 
a codified prohibition, and the proposed Commentary stating that a 
violation of the rule may be considered conduct inconsistent with just 
and equitable principles of trade, should function as a deterrent 
against possible manipulative practices based on inside information.\6\
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    \5\ See Phlx Rule 707, stating that a member, member 
organization, or person associated with or employed by a member or 
member organization shall not engage in conduct inconsistent with 
just and equitable principles of trade. Other Phlx rules expressly 
reference just and equitable principles of trade. See, e.g., Phlx 
Rules 1015(b), 1042.02 and 1051(a). The Phlx states that the lack of 
express reference in other Phlx rules should not be construed as 
waiving the ability to make a violation of Phlx Rule 707 co-exist 
with any other violation, depending on the facts and circumstances 
of the case. The Exchange believes that a violation of the existing 
crossing, facilitation and solicitation provisions of its rules 
could be a violation of just and equitable principles of trade and 
could be subject to disciplinary action as such. In addition, the 
Phlx states a violation of Phlx Rule 1064, OFPA B-11, or OFPA C-7, 
for instance, can be in and of itself a stand-alone violation.
    \6\ The Phlx states that depending on the facts and 
circumstances surrounding individual cases, anticipatory hedging 
activity may be a violation of other Phlx rules or rules under the 
Act.
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    c. Conforming Amendment to OFPA C-7. Currently, OFPA C-7, 
``Responsibility to Represent Orders to the Trading Crowd,'' requires 
that, once an option order has been received on the floor, it must be 
represented to the trading crowd before it may be represented away from 
the crowd.\7\
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    \7\ See Securities Exchange Act Release No. 24309 (April 7, 
1987), 52 FR 11894 (April 13, 1987).
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    Phlx is proposing an amendment to OFPA C-7 to provide that, except 
as otherwise provided in OFPA B-11(c) and Phlx Rule 1064(c), once an 
option order has been received on the floor, it must be represented to 
the trading crowd before it may be represented away from the crowd. 
This would provide Floor Brokers with the ability to solicit third 
parties outside the trading crowd before representing the order in the 
trading crowd.
    The purpose of this amendment is to maintain consistency in the 
Phlx's rules and OFPAs concerning orders represented away from the 
trading crowd.
2. Statutory Basis
    The Phlx believes that the proposed rule change, as amended, is 
consistent with Section 6 of the Act,\8\ in general, and with Section 
6(b)(5) of the Act,\9\ specifically, 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 ensuring that crowd participants are 
given a reasonable opportunity to participate in, and potentially 
improve the bids and/or offers of, solicited orders, and by 
specifically prohibiting anticipatory hedging activity based on inside 
information.
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    \8\ 15 U.S.C. 78f
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Phlx does not believe that the proposed rule change, as amended, 
will 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

    No written comments were solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest and does not 
impose any significant burden on competition and because the Phlx 
provided the Commission with written notice of its intent to file the 
proposed rule change at least five business days prior to the filing 
date, the proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) \11\ thereunder.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing.\12\ 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest.\13\ The Phlx has requested that the 
Commission accelerate the operative date of the proposal so that the 
Exchange may remain competitive with other exchanges that currently 
have similar rules in effect. The Commission, consistent with the 
protection of investors and the public interest, has determined to make 
the proposed rule change operative as of the date August 23, 2001.\14\
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    \12\ See 17 CFR 240.19b-4(f)(6)(iii).
    \13\ Id.
    \14\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of August 7, 2001, 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 
purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549-0609. Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
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

[[Page 45723]]

the principal office of the Phlx. All submissions should refer to File 
No. SR-Phlx-2001-61 and should be submitted by September 19, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21791 Filed 8-28-01; 8:45 am]
BILLING CODE 9010-01-M