[Federal Register Volume 66, Number 219 (Tuesday, November 13, 2001)]
[Notices]
[Pages 56888-56891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28277]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45014; File No. SR-Phlx-2001-98]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Philadelphia Stock Exchange, Inc. 
Relating to Remote Specialists

November 2, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
\1\ (``Act''), and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 22, 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 Phlx. The 
Phlx submitted to the Commission Amendment No. 1 on November 1, 2001. 
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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Phlx proposes to establish a remote specialist program. 
Specifically, the Exchange proposes to adopt new Phlx Rule 461, PACE 
Remote Specialists. The text of the proposed rule is set forth in full 
below.

Rule 461  PACE Remote Specialist

    PACE terminals and related equipment will be provided to member 
organizations for trading by remote specialists. The terminals will be 
linked to the PACT Trading System and will provide the same 
functionality as is available to on-floor specialists. All orders to 
remove specialists, including ITS commitments and administrative 
messages, will be processed the same as orders and ITS Commitments to 
an on-floor specialist. Floor Broker orders will be routed to remote 
specialists under the same criteria by which they are routed to on-
floor specialists. There will be no remote floor brokerage services. 
The following shall apply to remote specialists:
    (a) All rules and policies of the Board of Governors of the 
Exchange shall apply except as specifically excluded or amended under 
this section.
    (b) Any specialist unit approved pursuant to Rule 501 may apply to 
the Equity Allocation, Evaluation and Securities Committee (the ``EAES 
Committee'') to trade as a remote specialist, pursuant to this Rule and 
Rule 511(b).
    (c) Unless the EAES Committee specifically authorizes otherwise, 
participating specialist units shall be prohibited from trading 
remotely any securities which are currently being traded on-floor by 
that specialist unit. Individual securities may not be traded by one 
specialist unit in more than one Phlx remote location under any 
circumstances.
    (d) The number and identity of specialty securities that may be 
traded remotely by any specialist unit shall be determined by the EAES 
Committee on a case by case basis.
    (e) All non-electronic layoff orders entered on another exchange 
shall be recorded and submitted to the Exchange pursuant to Exchange 
procedures.
    (f) All rule, by-law and Certificate of Incorporation references 
pertaining to the trading floor of the Exchange shall be deemed to 
include any bids, offers, orders and trading done remotely, and all 
such bids, offers, orders and trades shall be deemed to be Phlx bids, 
offers, orders and executions on the Exchange.
    (g) A written confidentiality policy regarding the location of 
equipment and

[[Page 56889]]

access to information, terminals and equipment must be adopted by the 
firm and filed with and approved by the Exchange prior to the 
commencement of remote trading. Moreover, this policy must conform to 
all of the requirements set forth in the rules of the Exchange, 
including, but not limited to rules dealing with the specialist's book. 
In accordance therewith, reasonable principles must be applied to limit 
access by non-specialists to remote specialist facilities and 
information, and to limit remote specialists' access to and from other 
proprietary trading venues, including access from outcry or visible 
communication, intentional or otherwise. Access to the area designated 
as that of the remote specialist shall be restricted to the specialist, 
assistant specialist, backup specialist, clerks, designated management 
of the specialist, and Exchange authorized personnel, consistent with 
the rules of the Exchange.
    (h) Provisions regarding dress code, smoking and the requirement in 
Rule 108 that birds and offers be made within six feet of the post 
shall not apply. Rule 204, Hours, and Floor Procedure Advice E-1 shall 
not apply, provided that the specialist shall be immediately available 
by dedicated telephone line at all times required by the Floor 
Procedure Committee.
    (i) Exchange correspondence, memoranda, bulletins and other 
publications shall be sent to remote specialists via electronic mail, 
if available, and via U.S. mail or overnight delivery, as well as other 
web-based means, as they become available.
    (j) All remote specialists will have dedicated telephone access to 
the physical trading floor. Any regulatory requirements including 
trading halts, trading practices, policies, procedures or rules 
requiring floor official involvement will be coordinated by Exchange 
personnel with the remote specialist through the dedicated telephone 
line.
    (k) Servicing of PACE terminals and related equipment shall be by 
Exchange authorized personnel only. Remote specialists may not link any 
hardware or software to enhance any of the systems or functionality 
without first requesting in writing and receiving approval to do so 
from the Exchange.
    (l) The Exchange's examination program will include the remote 
specialist operations. Every firm must submit specific supervisory 
procedures, in accordance with the Exchange's Examinations procedures, 
relating to the remote specialist operations and appropriate 
identification of all individuals who will have access to the remote 
specialist operation, including all supervisory personnel.
    (m) Any arbitration or disciplinary action arising out of trading 
activity pursuant to this section would be subject to Rules 950 and 960 
respectively regardless of the remote location of the trade or dispute.
    (n) ``Remote Authorization'' Requirement. Each remote PACE terminal 
assigned and registered by the Exchange will require a non-transferable 
Remote Authorization, and will be subject to the following:
    (1) Each approved specialist unit may be authorized to trade such 
number of issues remotely as the EAES Committee may determine on a case 
by case basis.
    (2) Each remote specialist must have at least one registered 
Exchange membership.
    (A) A specialist unit may be authorized to obtain additional Remote 
Authorizations for qualified registered clerks to access PACE in 
support of the specialist unit.
    (B) All specialists and registered clerk Remote Authorization 
holders must be approved by the EAES Committee after they have 
completed the following:
    (i) File a Remote Authorization application with the Exchange.
    (ii) Completion of the required floor training program. On-site 
floor training would be waived for current floor specialists and 
registered clerks who transfer to remote specialist operations. The on-
site floor training period could also be waived by the EAES Committee 
in exceptional circumstances, if other arrangements are made with and 
approved by the Exchange. In such exceptional circumstances, a waiver 
will be permitted if the Committee is assured that the person 
requesting the waiver has made other arrangements that ensure the 
person meets all of the requirements listed below. However, the on-site 
floor training period will not be waived for easily remedied reasons 
such as geographical location or inconvenience, and will include, among 
other things,
--Questioned trade procedures
--Communication procedures with Floor Brokers, PACE Desk, Surveillance, 
Systems Support, and ITS coordination with the floor
--The remote/competing specialist program and Unlisted Trading 
Privilege (``UTP'') applications and procedures
--Allocations and procedures
--Book or symbol change procedures
--Trading Halt procedures
--Floor official rulings
--Minor Rule Plan Violations policies and application
--Books and Records/reports available
--Explanation of the specialist performance evaluation categories and 
procedures
--Certain other rules and policies deemed appropriate by the Exchange 
(e.g., Limit Order Display Rule, auto-executions, Price Improvement, 
etc.)
--ITS Quick Reference Card
    (iii) Successful completion of any applicable state requirements.
    (iv) Submission of fingerprint records to the Phlx.
    (3) Each remote specialist firm will be evaluated under the 
Exchange's specialist evaluation program.

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

    In its filing with the Commission, 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. 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
    The purpose of the proposed rule change is to establish rules to 
permit competing Phlx specialist units \3\ to conduct specialist 
trading activities off the Phlx trading floor using the PACE terminal/
trading system, including the Exchange's Order Entry Window feature of 
the Exchange's equity trading system.\4\
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    \3\ Currently, only one specialist unit is selected as the 
specialist in any given security. Phlx is filing, contemporaneously 
with this filing, proposed Rule 460, Procedures for Competing 
Specialists, which establishes rules for trading by more than one 
specialist unit in any given security. See SR-Phlx-2001-97.
    \4\ PACE is the Exchange's automatic order routing, delivery, 
execution and reporting system for equity securities which is 
governed by Rule 229, Philadelphia Stock Exchange Automated 
Communication and Execution System. See also proposed Rule 229A in 
SR-Phlx-2001-97.
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    Specialists currently access the PACE system only from the 
Exchange's physical trading floor, and all market making occurs on that 
floor.\5\ Under the remote program being proposed, specialists will 
have the ability to access the PACE system from approved remote 
locations using PACE terminals. Like floor specialists, remote 
specialists will

[[Page 56890]]

receive orders, commitments over the Intermarket Trading System 
(``ITS''), and administrative messages through the PACE system. The 
Exchange will provide Phlx competing specialist firms the option to 
operate remotely under existing Exchange systems and rules, while 
retaining the ability to permit specialists to trade on the physical 
trading floor. All bids, offers, orders and executions, occurring 
within PACE or otherwise, whether conducted on the floor or 
electronically from remote locations, will be considered to be bids, 
offers, orders and executions occurring on the Exchange. All rule, by-
law and Certificate of Incorporation references to the trading floor of 
the Exchange shall be deemed to include bids, offers, orders and 
executions done remotely, which shall also be deemed to be on the 
Exchange.\6\
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    \5\ Eligible order entry firms may route orders into the PACE 
System as well.
    \6\ Consequently, Remote Specialists would be subject to the 
jurisdiction of the Floor Procedure Committee in the same manner 
they would if their operations were conducted on the physical 
trading floor. Remote Specialists would be eligible to serve on 
Board of Governors and in committee positions reserved for persons 
associated with member organizations primarily engaged in business 
on the Exchange's Equity Floor (i.e., in the case of the Board as 
``On-Floor Equity Governors'') even though the member organization 
is not actually on the physical trading floor. Similarly, persons 
associated with Remote Specialist units may not be eligible to serve 
as Off-Floor Governors, even though the member organization conducts 
no business on the Exchange's physical trading floor. A person 
associated with a Remote Specialist unit would be eligible to serve 
as On-Floor Vice Chairman of the Board of Governors. See Article IV, 
Section 4-1 of the Exchange's By-Laws. See also Article IV, Section 
17 of the Exchange's By-Laws regarding the powers of the Board to 
interpret the By-Laws.
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    To authorize the remote specialist program, the Exchange proposes 
to adopt Phlx Rule 461. The introductory part of Phlx Rule 461 
generally provides that the Exchange will provide terminals linked to 
the PACE system for specialist trading in remote locations with the 
same functions that are available to on floor specialists. The 
remainder of proposed Phlx Rule 461 describes how remote specialists 
will operate, discusses the information barrier and other requirements 
that remote specialists must follow, and sets forth the way the 
Exchange will select and surveil remote specialists as well as other 
minimum criteria that remote specialists must satisfy.
    Under this proposal, the ``Primary Specialist'' may not operate 
remotely. Any specialist unit approved to trade as a specialist 
pursuant to existing Rules 506(a) and 511(b), whether such appointment 
occurred prior to or after the commencement of the competing specialist 
program, would be the Primary Specialist in that security. Other 
specialist units would be permitted to apply under new Phlx Rule 460 to 
trade as competing specialists in the security. The Exchange is 
proposing in this filing to permit only competing specialists to trade 
remotely. Specialist units will not be permitted to trade remotely as 
alternate specialists under Phlx Rules 201A and 202A.
    Application of Phlx Rules to Remote Specialists. The Exchange will 
apply all of its membership, net capital, equity, examination, 
specialist performance evaluation, competing specialist, allocation, 
and trading rules and policies to remote specialists in the same way 
that the Exchange applies those rules and policies to on-floor 
specialists, to the extent that such rules are not inconsistent with 
Phlx Rule 461. For example, the Exchange will require remote 
specialists--like other specialists--to make two-sided markets in 
specialty securities, execute customer orders they have accepted, and 
act as odd-lot dealers.
    Remote Specialist Access to PACE system. Remote specialist 
terminals will be linked to the PACE trading systems using dedicated 
lines. These terminals will provide the same functionality that is 
available to on-floor specialists. Like on-floor specialists, remote 
specialists will have access to the Intermarket Trading System. Remote 
specialists will be routed orders, ITS commitments, and administrative 
messages through the PACE terminal. Remote specialists may also receive 
orders by telephone. Remote specialists will be subject to the same 
limit order display requirements that apply to other Phlx specialists. 
Floor broker orders will also be routed to remote specialists under the 
same criteria by which they are routed to on-floor specialists.\7\ 
Servicing of PACE terminals will be by Exchange authorized personnel 
only.
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    \7\ Member will not be able to use the PACE remote specialist 
program to conduct remote floor brokerage services in non-speciality 
securities.
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    Remote Specialist Communication with the Exchange. Phlx Rule 461(e) 
provides that Exchange correspondence, memoranda, bulletins and other 
publications shall be sent to remote specialists via electronic mail, 
if available, and via U.S. mail or overnight delivery, as well as other 
web-based means, as they become available. The Exchange believes that 
there are only limited situations in which a specialist would consult 
with a floor official--trading halts, issues involving ITS, and 
executions at an inferior price. The Exchange will keep a record of any 
situation that requires a floor official ruling involving remote 
specialists. The Exchange will monitor communications between remote 
specialists and Exchange personnel to ensure that such communications 
are done in a timely manner, particularly if the communication involves 
a regulatory issue. Exchange personnel will coordinate floor official 
involvement with remote specialists. The Exchange's disclaimer of 
liability also applies.\8\
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    \8\ Section 12-11 of the Exchange's By-Laws provides that the 
Exchange shall not be liable for any damages sustained by a member 
or member organization growing out of the use or enjoyment by such 
member or member organization of the facilities afforded by the 
Exchange to members for the conduct of their business.
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    Surveillance and Examinations. Before the Exchange begins remote 
specialist trading, it will develop and put into place specific 
information barrier policies and surveillance policies that are 
consistent with the Exchange's existing rules and acceptable to the 
Commission's Office of Compliance Inspection Examinations. The 
Exchange's examination program will include the examination of books 
and records of all non-DEA member firms with remote specialist 
operations. Every firm will be required to submit supervisory 
procedures relating to remote specialist operations and to identify all 
individuals who will have access to remote specialist operations, 
including all supervisory personnel. The Exchange will conduct 
surveillance of limit order display practices by remote specialists to 
ensure that those practices are consistent with all applicable 
requirements including the Commission's limit order display rule. 
Before the Phlx allows remote specialist trading to begin at an off-
site facility, the Exchange must fully investigate that facility, and 
ensure that trading at the facility will be subject to information 
barrier and surveillance policies that address the particular 
circumstances of the facility.
    Selection of Remote Specialists. Specialist units will apply to the 
EAES Committee for approval to operate as a remote specialist unit. The 
EAES Committee will determine the number and identity of securities any 
particular specialist unit may trade remotely, on a case-by-case 
basis.\9\ As a condition of such approval, each clerk and individual 
specialist in the unit must receive a ``Remote Authorization'' as 
provided in Phlx Rule 461(n). The

[[Page 56891]]

Exchange will authorize and approve Remote Authorizations based on 
certain qualifications. Each remote PACE terminal will then be 
individually identified and associated with a particular Remote 
Authorization holder such that all activity on any particular PACE 
terminal will be specifically identified and associated, by the use of 
the Remote Authorization, with an authorized and qualified specialist 
or registered clerk. The Exchange is proposing to issue Remote 
Authorizations primarily as a surveillance tool to monitor its remote 
specialists' operations. Remote Authorization is not transferable and 
is independent of Exchange membership requirements. Although PACE 
remote clerks will be required to obtain a Remote Authorization, there 
is nothing in the Remote Authorization which will grant them any more 
rights or privileges than a current on-floor clerk possesses. Rule 104, 
for example, would continue to restrict members in their dealings with 
non-members, including clerks. Additionally, Rule 748 would require the 
remote location of a specialist unit to be under the supervision and 
control of a member and of an appropriately qualified supervisor. The 
Remote Authorization requirement is designed to permit the Exchange to 
better surveil the activities of specialists and clerks that utilize 
the PACE system remotely.\10\ Remote Authorization holders will be 
subject to an on-floor training program as a condition of Remote 
Authorization, subject to waiver under certain circumstances, pursuant 
to the terms of Phlx Rule 461(n)(2)(B)(ii).
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    \9\ The EAES Committee will approve remote specialist units 
pursuant to this Rule 461 and Rule 511(b). Rule 511(b) will continue 
to govern the allocation of securities to specialist units, whether 
the Primary Specialist or a competing specialist. Those criteria 
will also apply to any determination by the EAES Committee to permit 
a Competing Specialist to trade remotely under Rule 461.
    \10\ See letter from Carla Behnfeldt, Director, Legal Department 
New Product Development Group, Phlx to John Riedel, Attorney 
Adviser, Division of Market Regulation, Commission, dated November 
1, 2001 (``Amendment No. 1'').
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    Implementation. For an initial period, the Exchange intends to 
limit its remote program to specialist member organizations that 
maintain concurrent equity floor operations. The EAES Committee will 
determine the identity and the total number of individual securities 
that will be included in the remote program. In the future, the 
Exchange may determine to accept applications from specialist units 
that do not have concurrent equity floor operations.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \11\ in general, and furthers the 
objectives of section 6(b)(5)\12\ in particular, in that it is designed 
to promote just and equitable principles of trade; to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities; 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; 
and is not designed to permit unfair discrimination between customers, 
issuers, brokers or dealers. Specifically, the Exchange believes that 
the proposed rule change will promote efficiency by potentially 
reducing the costs associated with transactions on the Exchange, and 
will promote liquidity and competition on the Exchange by enabling 
specialists to make markets either on or off of the Phlx's physical 
trading floor. In particular, by allowing Phlx specialists to conduct 
their activities off of the Exchange's physical trading floor, while 
retaining the availability of on-floor market making, the Exchange 
believes that the proposal will permit Phlx specialists to choose the 
most efficient and cost-effective way to conduct business. At the same 
time, remote specialists will have full access to the information and 
functions available on the PACE terminal/trading system, and the PACE 
trading system will maintain and display limit orders represented by 
remote specialists consistent with the practice applicable to other 
Phlx specialists. Accordingly, the Exchange believes that the proposal 
uses technology in a manner that should promote competition in the 
securities markets, consistent with the congressional mandate set forth 
in section 11A of the Act.\13\
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k)a).
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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 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 Phlx has neither solicited nor received written comments 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 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 person 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 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-2001-98 and 
should be submitted by December 4, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
Margaret H. McFarland,
Deputy Secretary.
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    \14\ 17CFR 200.30-3(a)(12).
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[FR Doc. 01-28277 Filed 11-9-01; 8:45 am]
BILLING CODE 8010-01-M