[Federal Register Volume 66, Number 186 (Tuesday, September 25, 2001)]
[Notices]
[Pages 49056-49058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-23906]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44809; File No. SR-Phlx-2001-38]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change, and Amendment No. 1 Thereto, by the Philadelphia Stock 
Exchange, Inc., Relating to the Definition of a Controlled Account

September 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 March 12, 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. On August 16, 2001, the Exchange filed Amendment No. 1 to the 
proposal.\3\ The Commission is publishing this notice, as amended, 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 
J. Sanow, Senior Special Counsel, Division of Market Regulation, 
Commission, dated August 15, 2001 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange clarified why the proposal is properly 
filed in response to the Order Instituting Public Administrative 
Proceeding Pursuant to Section 19(h)(1) of the Securities Exchange 
Act Release No. 43268 (September 11, 2000) and Administrative 
Proceeding File 3-10282 (the ``Order''). The Exchange explained that 
in accordance with Section IV.B.j of the Order, the proposal would 
codify a market maker practice pertaining to the allocation of 
orders. Specifically, the proposal is intended to codify the 
practice whereby the term ``controlled account,'' as used in Phlx 
Rule 1014, has been interpreted to yield the priority of non-member 
broker-dealer orders to customer orders, and treat non-member broker 
dealer orders on par with specialists, Registered Options Traders 
and other ``firm proprietary'' accounts.
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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 the definition of controlled accounts 
under Phlx Rule 1014(g)(i) and Option Floor Procedure Advice 
(``Advice'') B-6 to

[[Page 49057]]

include non-member broker-dealers. The Exchange also proposes to make a 
corresponding amendment to the portion of Phlx Rule 1014(g)(i) and 
Advice B-6 that currently requires order tickets to have the ``yield'' 
field circled.

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 statutory 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. The text of the proposed rule change is available at 
the Office of the Secretary, the Phlx, and at the Commission.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to amend Phlx Rule 
1014(g)(i) to expand the definition of the term ``controlled account'' 
to include non-member broker-dealers. Currently, a controlled account 
is defined as any account controlled by or under common control with a 
member broker-dealer. This includes specialist, Registered Options 
Trader (``ROT'') and other ``firm proprietary'' accounts (if for the 
account of a member broker-dealer). Under the current rule, all other 
accounts, including non-member broker-dealer accounts, are customer 
accounts. Thus, the yielding requirements of this rule currently do not 
apply to non-member broker-dealer accounts, with the result that ROTs 
must yield priority to these accounts to the same extent as they must 
yield to ``true'' customers.
    Specifically, with respect to yielding requirements, the rule 
currently provides that orders of controlled accounts are required to 
yield priority to customer orders when competing at the same price. 
Specialists, however, are not subject to the yielding requirements 
placed upon controlled accounts. Orders of controlled accounts must 
yield priority to customer orders, except that ROTs closing in-person 
are not required to yield priority to orders of customer accounts.
    The rule further provides that orders of controlled accounts are 
not required to yield priority to other controlled account orders, 
except that when both an order of a ROT closing in-person and some 
other order of a controlled account are established in the crowd at the 
same price, and then a customer order is established at that price, the 
order of the controlled account must yield to the customer order while 
the order of a ROT closing in-person does not have to so yield.
    This means that, in most circumstances, an order of a non-member 
broker-dealer at a given price takes priority over a same-priced order 
of a ROT, and is on parity with a public customer order. The effect of 
the proposed rule change is to require a non-member broker-dealer order 
to yield priority to a public customer order, and to eliminate the 
requirements that a ROT yields priority to a non-member broker-dealer. 
For instance, under the current rule, where a non-member broker-dealer 
bids for 100 contracts at the same time as a ROT bids for 100 contracts 
at the same price, the non-member broker-dealer has priority over the 
ROT and is entitled to the entire execution of an incoming sell order 
for 100 contracts at that price. Under the proposal, the ROT and the 
non-member broker-dealer would each be entitled to 50 contracts. Thus, 
non-member broker-dealer orders would no longer be treated like 
customer orders for parity/priority purposes and the yielding 
requirements of this Rule.
    A further result of the proposal is that non-member broker-dealers 
would be required to yield to customer accounts. Thus, the proposal 
creates an advantage for customer accounts, which would receive more 
preferential treatment in order execution under Phlx Rule 1014 than 
non-member broker-dealer accounts. Specifically, customers would no 
longer share parity status with non-member broker-dealers, such that, 
depending upon the specific circumstances, customers would be more 
likely to receive more prompt and full executions. For instance, 
currently, where both a customer and a non-member broker-dealer order 
bid for 100 contracts at the same time and at the same price, the 
customer and the non-member broker-dealer would each be entitled to 50 
contracts of an incoming order to sell 100 contracts. Under the 
proposal, the customer's bid would have priority over the non-member 
broker-dealer and would receive the entire execution of an incoming 
sell order for 100 contracts at that price. Thus, ``true'' customers, 
the intended beneficiaries of priority rule in general, would benefit.
    The Exchange believes that changing the status of non-member 
broker-dealers for purposes of controlled account definition is 
consistent with many other instances in Exchange rules where non-member 
broker-dealers are not treated like customers. For instance, non-member 
broker-dealers are not treated like customers for purposes of the 
minimum guarantees of Phlx Rules 1015 and 1033; thus, a non-member 
broker-dealer order must be identified (marked and announced) as ``BD'' 
and would not be entitled to the ten-up (or larger) minimum 
guarantee.\4\ Non-member broker-dealer orders are also not treated like 
customers for purposes of Phlx Rule 1080--accessing the AUTOM and 
AUTO--Z systems.\5\ Access to systems such as AUTOM has long been 
limited to members representing orders of true customers. Non-member 
broker-dealers are also not treated like customers for purposes of 
Exchange fees, which are generally waived for customer options 
transactions, but not for broker-dealer orders.\6\ Thus, the Exchange 
believes it is also appropriate to consider non-member broker-dealers 
as controlled accounts for purposes of parity/priority rules.\7\
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    \4\ See Securities Exchange Act Release No. 44145 (April 2, 
2001), 66 FR 18662 (April 10, 2001) (Notice of, and order granting 
partial accelerated temporary approval to, File No. SR-Phlx-2001-37 
for a Sixty-Day Pilot Program Relating to the Application of the 
Quote Rule to Options Trading). The notice and order adopted new 
Phlx Rule 1082 and amended various other Exchange rules and advices 
(including Phlx Rules 1015 and 1033 as well as Advices A-11 and F-7) 
to conform with Rule 11Ac1-1 under the Act. Under the proposal the 
Exchange proposed to remove the ten-up guarantee, and replace the 
guarantee with new rules that provide for differing firm quote 
requirements for customer orders and broker-dealer orders, as 
permitted by Rule 11Ac1-1(d) of the Act, the amended Quote Rule. 
Subsequently, that portion of the proposal was approved on a 
permanent basis. See Securities Exchange Act Release No. 44383 (June 
1, 2001), 66 FR 30959 (June 8, 2001).
    \5\ AUTOM is the Exchange's electronic order routing and 
delivery system for option orders. AUTO-X is the automatic execution 
feature of AUTOM, which provides customers with automatic executions 
of eligible option orders at displayed markets. Securities Exchange 
Act Release No. 38792 (June 30, 1997), 62 FR 36602 (July 8, 1997) 
(Order approving File No. SR-Phlx-97-24 adopting an AUTOM Rule).
    \6\ See Securities Exchange Act Release No. 43558 (Nov. 14, 
2000) 65 FR 69984 (Nov. 21, 2000) (Notice of File No. SR-Phlz-00-85 
relating to equity transaction charges for broker-dealers and 
firms).
    \7\ Pursuant to Section 11(a) under the Act, a member broker-
dealer, if entering an order from on the floor of the Exchange for 
its own account in reliance upon the exception for ``G'' order 
contained in Section 11(a)(1)(G) may, notwithstanding the operation 
of the Phlx yield requirements, be required to yield to non-member 
broker-dealers.
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    As a consequence of re-defining the term ``controlled account,'' 
the Exchange proposed to change an order ticket marking requirements to 
reflect actual custom and usage. Phlx Rule 1014(g)(i) (and the 
corollary provision in Advice B-6) would no longer require

[[Page 49058]]

that market maker order tickets have the ``yield'' field circled, 
because the tickets used for orders by ROTs and other exchanges' market 
makers (due to the processing needs of clearing firms), do not have 
such a category, as do customer order tickets. This change merely 
corresponds to expanding the definition of controlled account to 
include non-member broker-dealers, such as market makers from other 
exchanges. Other controlled accounts would still be required to circle 
the yield field. Currently, specialists and ROTs market making in 
person are not required to circle the yield field; the requirement 
would not change.
    Broker-dealers are not treated the same as members for all purposes 
under the Exchange's rules. Certain functions and entitlements are 
unique to membership status. For example, only members may transact 
business on the Exchange trading floor.\8\ Nevertheless, the proposal 
would generally place non-member broker-dealers at parity with member 
broker-dealers for purposes of Phlx Rule 1014(g), except that certain 
yielding provisions differ with respect to ROTs and specialists, as 
explained above, due to their unique market making obligations, which 
non-member broker-dealers do not have. Therefore, the Exchange does not 
believe that the proposal is unfairly discriminatory against non-member 
broker-dealers. Parity with certain other broker-dealers is fair and 
consistent with other exchange rules, as described above.
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    \8\ See Phlx Rules 104 and 109 regarding the role of members.
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    For these reasons, the Exchange believes that the proposed rule 
change is consistent with Section 6(b) of the Act,\9\ in general, and 
furthers the objectives of Section 6(b)(5),\10\ 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 equalizing all 
broker-dealers in terms of how their orders are treated in Exchange 
rules, regardless of whether they are members of the Exchange, as well 
as by providing a benefit to customer accounts in terms of execution 
priority. The Exchange also believes that the proposal is consistent 
with the provisions in Section 6(b)(5) \11\ that provides that the 
rules of an exchange not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx does not believe that the proposed rule change 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

    Written comments were neither solicited nor received.

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 Phlx 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 proposal 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-2001-38 and should be 
submitted on or before October 16, 2001.
    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-23906 Filed 9-24-01; 8:45 am]
BILLING CODE 8010-01-M