[Federal Register Volume 66, Number 239 (Wednesday, December 12, 2001)]
[Notices]
[Pages 64331-64336]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30655]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45129; File No. SR-Phlx-99-41]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Partial Accelerated Approval of Proposed Rule Change and 
Amendment Nos. 1, 2, and 3 thereto by the Philadelphia Stock Exchange, 
Inc. Relating to the Trading of Trust Shares

DATES: December 4, 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 November 9, 1999, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposal relating to the trading of Trust Shares. On 
July 10, 2000, the Exchange filed Amendment No. 1 to the proposal.\3\ 
On October 1, 2001, the Exchange filed Amendment No. 2 to the 
proposal.\4\ On November 28, 2001, the Exchange filed Amendment No. 3 
to the proposal.\5\ The proposed rule change, as amended, is described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice and order to solicit 
comments on the proposed rule change from interested persons and to 
grant partial accelerated approval to the proposal.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Nandita Yagnik, Attorney, Phlx, to Nancy 
Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated July 7, 2000 (``Amendment No. 
1''). Amendment No. 1 replaced the original proposal in its 
entirety. The original proposal contained provisions related to the 
listing of Trust Shares. These provisions do not appear in Amendment 
No. 1, but were filed in a separate rule proposal, File No. SR-Phlx-
00-54. See Securities Exchange Act Release No. 43717 (December 13, 
2000), 65 FR 80976 (December 22, 2000).
    \4\ See letter from John Dayton, Assistant Secretary and 
Counsel, Phlx, to Nancy Sanow, Assistant Director, Division, 
Commission, dated September 28, 2001 (``Amendment No. 2''). 
Amendment No. 2 replaced Amendment No. 1 in its entirety. Amendment 
No. 2, among other things, omits provisions in the original proposal 
relating to the establishment of Registered Equity Market Makers to 
trade Trust Shares.
    \5\ See letter from John Dayton, Assistant Secretary and 
Counsel, Phlx, to Nancy Sanow, Assistant Director, Division, 
Commission, dated November 28, 2001 (``Amendment No. 3''). Amendment 
No. 3 made certain technical changes to the amended rule proposal.
    \6\ The Exchange requested accelerated approval of all portions 
of the proposal except those that deal with guaranteed specialist 
participation.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to adopt additional rules and rule amendments 
that, if approved, would accommodate the trading of Trust Shares. 
Specifically, the Exchange is proposing to amend Rule 126 to provide 
for the crossing of block orders; Rule 119 to provide for enhanced 
specialist participation in Trust Shares; Rule 229 to provide for at-
the-opening orders and to provide display of bids and offers in Trust 
Shares; Rule 703 to establish a minimum net capital requirement for 
specialists in Trust Shares; and Rule 203 to give precedence to at-the-
opening orders and other market orders at opening.\7\ Amendment No. 2 
replaces the original filing and Amendment No. 1 in their entirety. A 
list of proposed provisions that the Exchange proposes to establish or 
amend, is set forth below, with the name of the pertinent rule noted. 
This is followed by proposed rule text. Proposed new language is in 
italics; proposed deletions are in brackets.
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    \7\ Telephone conversation between John Dayton, Assistant 
Secretary and Counsel, Phlx, and Steven Johnston, Special Counsel, 
Division, Commission on October 2, 2001 (clarifying that proposed 
changes to Rules 229 would apply to certain other securities as well 
as Trust Shares.)

[[Page 64332]]



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            Rule provision                        Name of rule
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Rule 119(g)...........................  Enhanced Specialist
                                         Participation for Trust
                                         Shares.*
Rule 126(f) and (g)...................  Crossing Orders.*
Rule 203..............................  Agreement of Specialists.
Rule 229..............................  PACE.
Rule 703..............................  Financial Responsibility and
                                         Reporting.*
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*These provisions would apply only to Trust Shares.

Rule 119 Precedence of Highest Bid

Enhanced Specialist Participation for Trust Shares
    (g) When the registered specialist in Trust Shares is on parity 
with a controlled account as defined below, in accordance with Exchange 
Rules 119 and 120, the specialist is entitled to receive 30% of the 
initiating order, except in the following circumstances:
    (1) where there is one controlled account on parity, the specialist 
is entitled to receive 60% of the initiating order; or
    (2) where there are two controlled accounts on parity, in which 
case the specialist is entitled to receive 40% of the initiating order. 

    Further, no customer order which is on parity may receive a smaller 
participation than any other crowd participant including the 
specialist. For purposes of this provision, a controlled account 
includes any account controlled by or under common control with a 
member broker-dealer. Customer accounts are all other accounts. 

Rule 126 ``Crossing Orders''

* * * * *
Supplementary Material:
* * * * *
    (f) When a member has an order to buy and an order to sell an 
equivalent amount of the same Trust Share, and both orders are of 
25,000 Trust Shares, and both orders are of 25,000 Trust Shares or more 
and are for the accounts of persons who are not members or member 
organizations, the member may ``cross'' those orders at a price at or 
within the prevailing quotation. The member's bid or offer shall be 
entitled to priority at such cross price, irrespective of pre-existing 
bids or offers at that price. The member shall follow the crossing 
procedures of Rule 451(d), and another member may trade with either the 
bid or offer side of the cross transaction only to provide a price 
which is better than the cross price as to all or part of such bid or 
offer. A member who is providing a better price to one side of the 
cross transaction must trade with all other market interest having 
priority at that price before trading with any part of the cross 
transaction, in whole or in part, at the cross price. A transaction 
effected the cross price in reliance on this Supplementary Material (f) 
shall be printed as ``Stopped Stock''
    (g) Orders to cross 25,000 shares or more Trust Shares, where one 
or both sides of such cross is for the account of a member or member 
organization, will be permitted to establish precedence based on size 
so long as the orders are represented at the post when a sale removing 
all bids and offers from the Floor takes place. Once the precedence of 
such orders of 25,000 Trust Shares or more has been established, the 
broker handling the cross must then bid and offer the security in 
accordance with Rule 451.

Rule 203 Agreement of Specialists

* * * * *
    (e)(i) At an opening, all market orders (whether entrusted to or 
left with the specialist or represented by a broker or brokers in the 
Trading Crowd) including at the opening market orders, shall have 
precedence over limit orders and shall be executed at one price.
    (ii) In connection with an opening:
    (A) A limited price order to buy which is at a higher price than 
the price at which the security is to be opened, and a limited price 
order to sell which is at a lower price than the price at which the 
security is to be opened, are to be treated as market orders.
    (B) A market order to sell short is not to be treated as other 
market orders, but is to be treated as a limited price order to sell at 
the price of the first permissible short sale. A limited price order to 
sell short which is at a lower price than the price at which the 
security is to be opened, is to be treated as a limited price order to 
sell at the price of the first permissible short sale. Such orders are 
to be treated as market orders only if the opening price is higher than 
the first permissible short sale price.

Rule 229 Philadelphia Stock Exchange Automated Communication and 
Execution System

* * * * *
Commentary .01
    Member organizations wishing to participate in PACE may send to the 
Philadelphia trading floor market, [and] limit, and at-the-opening 
orders up to the maximum number of shares in securities traded under 
PACE as shall be fixed by the Exchange from time to time. All orders in 
eligible securities shall be executed in whole or in part on a first in 
first out basis. An at-the-opening order is a market, or limited price 
order which is to be executed on the opening trade or not at all, and 
any such order or the portion thereof not so executed is to be treated 
as cancelled.
* * * * *
Commentary .15
    Orders to which special conditions are attached may be accepted 
under PACE. The following are the types of orders which will be 
accepted under PACE:

All or none
Do not increase
Do not reduce
Limit
Market
Open (GTC, day, etc.)
Round-lot, odd-lot, partial round-lot
Stop
Stop limit
With or without
At-the-opening order

* * * * *

Commentary .20

    A specialist is responsible for the visibility to the trading crowd 
of screen displaying the bids and offers for Trust Shares.

Rule 703 Financial Responsibility and Reporting

    (a) Financial Responsibility Standards.--Each member organization 
and foreign currency option participant organization effecting 
securities transactions shall comply with the capital requirements set 
forth below:
* * * * *
    (v) An assigned Specialist in Trust Shares, as defined in Rule 
803(i), that are listed on the Exchange, shall be required to maintain 
a minimum of $1,000,000 in net capital. The assigned Specialist shall 
immediately inform the Examinations Department upon failure to be in 
compliance with such requirement. The Exchange may waive the financial 
requirements of this Rule in unusual circumstances.
    (vi) a member organization or foreign currency option participant 
organization shall promptly notify the Exchange if it ceases to be in 
compliance with the net capital requirements of SEC Rule 15c3-1 and/or 
the provisions of paragraphs (a)(iii) and (a)(iv) above.

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

    In its filings with the Commission, the self-regulatory 
organization included

[[Page 64333]]

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 self-regulatory organization 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
    On November 8, 1999 the Exchange submitted to the Commission a 
proposal to adopt new rules and rule amendments to accommodate the 
trading of Trust Shares, securities that represent interests in a unit 
investment trust operating on an open end basis and holding a portfolio 
of securities.\8\ The rule amendments deal with the manner in which 
Trust Shares are expected to trade.
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    \8\ Each Trust will provide investors with an instrument that 
(1) closely tracks the underlying portfolio of securities; (2) 
trades like a share of common stock; and (3) pays holders of the 
instrument periodic dividends proportionate to those paid with 
respect to the underlying portfolio of securities, less certain 
expenses (as described in the Trust prospectus).
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    PACE. The Exchange is proposing amendments to Rule 229, 
Philadelphia Stock Exchange Automated Communication and Execution 
System (``PACE''). PACE is the Exchange's automatic order routing and 
execution system on the equity trading floor. PACE accepts orders for 
manual and automatic execution in accordance with the provisions of 
Rule 229, which governs PACE and defines its objectives and parameters. 
The Exchange proposes to amend sections .01 and .15 of the 
Supplementary Material accompanying Rule 229 to provide for an at-the-
opening order for the trading of securities accepted over PACE. An at-
the-opening order would be defined as a market or limited price order 
which is to be executed on the opening trade in a security or not at 
all, with any such order (or the portion thereof) not so executed to be 
cancelled.\9\ This order type is particularly important for retail 
investors, institutions, and professional traders who may require 
execution at the opening price to fulfill their special timing or 
liquidity needs.
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    \9\ The proposed definition generally tracks the definition of 
``at the opening order'' found in American Stock Exchange LLC 
(``Amex'') Rule 131(f) and New York Stock Exchange (``NYSE'') Rule 
13.
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    Single Price Opening. The Exchange is proposing to amend Rule 203 
to codify single price opening for Trust Shares and other 
securities.\10\ Proposed subsection (e) of Rule 203 would provide that 
at an opening, all market orders (whether entrusted to or left with the 
specialist or represented by a broker or brokers in the trading crowd) 
including at-the-opening market orders, would have precedence over 
limit orders and would be executed at one price. Market orders receive 
priority over limit orders in that situation because they must be 
executed instantaneously at the market price. Provided that there is 
sufficient liquidity, limit orders at the opening price may be executed 
with market orders. Limit orders that are not near the opening price 
will remain on the specialist's book until they come due.
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    \10\ Telephone conversation between John Dayton, Assistant 
Secretary and Counsel, Phlx, and Steven Johnston, Special Counsel, 
Division, Commission on December 4, 2001 (clarifying the scope of 
securities eligible for single-price opening.)
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    Proposed subsection 203(e)(ii) would provide that a limited price 
order to buy which is at a higher price than the price at which the 
security is to be opened, and a limited price order to sell which is at 
a lower price than the price at which the security is to be opened, are 
to be treated as market orders. It also would provide that a market 
order to sell short would be treated as a limited price order to sell 
at the price of the first permissible short sale. A limited price order 
to sell short which is at a lower price than the price at which the 
security is to be opened would be treated as a limited price order to 
sell at the price of the first permissible short sale. Such orders 
would be treated as market orders only if the opening price were higher 
than the first permissible short sale price.
    The specialist, who may base the price upon the index value as well 
as the last sale price and other market factors, would determine the 
opening price. This differs from the current method of opening for non-
primary listed securities, which is based upon the primary market's 
opening price. Other exchanges have comparable rules.\11\
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    \11\ See, e.g., Amex Rule 108(a) and (b).
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    Block Orders. The Exchange is also proposing new Supplementary 
Material (f) to Phlx Rule 126, ``Crossing Orders.'' The proposed new 
Supplementary Material would apply only to the crossing of block orders 
in Trust Shares and not to the trading of any other securities on the 
Exchange's equity floor. The proposed rule amendment would permit a 
member to ``cross'' at a price at or within the prevailing quotation an 
order to buy and an order to sell an equivalent amount of the same 
Trust Share if both orders are for 25,000 Trust Shares or more and are 
for the accounts of persons who are not members or member 
organizations. The member's bid or offer would be entitled to priority 
at the cross price, regardless of pre-existing bids or offers at that 
price. Another member could trade with either the bid or offer side of 
the cross transaction only to provide a price which is better than the 
cross price as to all or part of such bid or offer. A member providing 
a better price to one side of the cross transaction would be required 
to trade with all other market interest having priority at that price 
before trading with any part of the cross transaction at the cross 
price.
    In addition, new Supplementary Material (g) would permit a member 
to ``facilitate'' the crossing of orders at a price at or within the 
prevailing quotation, when the member has an order to buy or sell and 
one or both of the orders to be crossed are for persons who are members 
or member organizations and both orders are for 25,000 shares or more, 
so long as the orders are represented at the post when a sale removing 
all bids and offers from the Floor takes place. The Phlx understands 
that these cross transactions, like other exchange transactions, remain 
subject to section 11(a) of the Act and the rules thereunder. For 
example, a member relying on the exception provided by Rule 11a2-2T may 
need to utilize an ``independent'' floor broker to satisfy the 
requirements of that Rule. Other exchanges have similar provisions.\12\ 
The Exchange represents that its proposed crossing provision is 
appropriate given the large size of Trust Share orders that the 
Exchange anticipates will be generated by investors.
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    \12\ See NYSE Rule 72.1(b) (Priority of Agency Cross 
Transactions); Amex Rule 126, Commentary sections .01 and .02 
(Precedence of Bids and Offers); and Chicago Stock Exchange Rule 23, 
Interpretations and Policies section .02 (Cross Transactions of 
25,000 Shares or More).
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    Enhanced Participation for Trust Shares. Proposed new section (g) 
of Rule 119, which is based upon Phlx Options Rule 1014(g)(i) and (ii), 
Equity Option and Index Option Priority and Parity, provides for 
splits, which means trade participation among the crowd. The new 
subsection would provide Phlx equity specialists in Trust Shares with 
an enhanced participation in ``parity trades'' or trades where there 
are several participants bidding/offering the same

[[Page 64334]]

price.\13\ While a parity trade is generally divided evenly among the 
crowd participants on parity, enhanced participation would give the 
specialist a greater share of trades than he would normally receive. 
The purpose of the proposed enhanced parity split is to encourage 
specialists to make deep and liquid markets in order to attract order 
flow to the Exchange. Specialists have responsibilities that other 
crowd participants do not share, such as staffing costs associated with 
continually updating and disseminating quotes.\14\ Therefore, the 
Exchange represents that granting certain advantages to specialists, 
such as the proposed enhanced parity split, is a reasonable measure for 
attracting and retaining well-capitalized specialists.
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    \13\ Under Phlx Rules 119 and 120, when bids and offers are made 
simultaneously, or when it is impossible to determine clearly the 
order of time in which they were made, all such bids and offers 
shall be on parity. For example, suppose a floor broker holding a 
sell order for 100 Trust Shares announces his order to the crowd. In 
response, three crowd participants might simultaneously bid to buy 
the 100 Trust Shares at the same price. The bids are on parity.
    \14\ The Exchange is also proposing in this rule filing a 
$1,000,000 minimum net capital requirement for the specialist in 
Trust Shares listed on the Exchange.
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    The Exchange also represents that application of the proposed 
enhanced parity splits would under no circumstances cause a customer on 
parity to receive a smaller participation than any other crowd 
participant, including the specialist. Under the proposal, a customer 
on parity is ensured a participation that, at a minimum, is equal to 
that given any other participant on parity.
    Current Phlx Rule 199(g) defines a ``controlled account'' as any 
account controlled by or under common control with a member broker-
dealer, and defines ``customer accounts,'' which include discretionary 
accounts, as all accounts other than controlled accounts and specialist 
accounts. Proposed Rule 119(g) provides that when the specialist in 
Trust Shares is on parity with one controlled account, the specialist 
is entitled to receive 60% of the initiating order and the controlled 
account would receive 40%. When the specialist is on parity with two 
controlled accounts, the specialist is entitled to receive 40% of the 
initiating order and each controlled account would receive 30%. When 
the specialist is on parity with three or more controlled accounts, the 
specialist is entitled 30% of the initiating order remaining after any 
customer accounts on parity have been filled. As noted above, in any of 
these situations if a customer were on parity, the customer would not 
be disadvantaged by receiving a lesser allotment than any other crowd 
participant, including the specialist.
    Enhanced parity is intended to encourage specialist units to trade 
and to provide liquidity in Trust Shares, thereby attracting order flow 
to the Exchange. The Exchange believes the proposal balances the 
competing interests of specialists and market makers.
    Financial Responsibility and Reporting. Currently, specialists are 
required to have $100,000 in net capital to trade equity securities. 
Trust Shares, which are to be listed on the Exchange, can be expected 
to entail a substantial financial commitment on the part of the 
specialist assigned to them. Because of the potential risk associated 
with listed Trust Shares, the Exchange is proposing to establish a 
minimum net capital requirement of $1,000,000 for the trading of listed 
Trust Shares by specialists. The Exchange believes that imposing a 
higher net capital requirement is one way to ensure that the Trust 
Share specialist can carry out his duties to maintain a fair and 
orderly market. The Exchange notes that in the past it has required 
higher net capital requirements for specialists in FLEX 
options. Specialists in those options are also required to have 
$1,000,000 in net capital.\15\ The proposed higher net capital 
requirement for specialists in Trust Shares traded at the Phlx on a 
primary basis (contained in proposed new Rule 703(a)(v)) would not 
apply to Trust Shares traded on an unlisted trading privileges basis.
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    \15\ See Phlx Rule 1079(c).
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2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the Act 
\16\ in general and furthers the objectives of section 6(b)(5) \17\ in 
particular in that it is designed to facilitate 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.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden of 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

    No written comments were either solicited or 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 self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Exchange has requested that the Commission find good cause, 
pursuant to Section 19(b)(2) of the Act, \18\ for approving, prior to 
the thirtieth day after publication in the Federal Register, portions 
of the rule proposal related to the following: proposed subsections (f) 
and (g) of Supplementary Material to Rule 126; proposed subsection (e) 
of Rule 203; proposed Commentary .20, and proposed amendments to Rule 
Commentary .01 and .15, to Rule 229; and proposed amendments to 
subsection (a) of Rule 703.
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    \18\ 15 U.S.C. 78s(b)(2).
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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 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

[[Page 64335]]

the principal office of the Exchange. All submissions should refer to 
File No. SR-Phlx-99-41 and should be submitted by January 2, 2002.

V. Commission's Findings and Order Granting Partial Accelerated 
Approval of Proposed Rule Change

    The Phlx has requested that the Commission approve the amended rule 
proposal on an accelerated basis, except for portions of the amended 
proposal concerning enhanced participation of specialists. The Exchange 
notes that the changes for which it seeks accelerated approval would 
result in rule provisions that are substantially similar to previously 
approved rules of other exchanges. Further, the Phlx represents that 
granting approval of the changes would be consistent with the 
protection of investors and the public interest.
    The Commission finds that the portions of the rule change proposal 
for which the Exchange has requested accelerated approval are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. 
Specifically, the Commission finds that the amendments are consistent 
with section 6(b)(5) of the Act,\19\ which requires that the rules of 
an exchange be 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.
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    \19\ 15 U.S.C. 78s(b)(5).
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    The Exchange has proposed to amend Rule 203 to codify a single 
price opening for Trust Shares and other securities for which the 
Exchange is the primary market. In a single-price opening, the 
specialist seeks to achieve a balance between buy orders and sell 
orders by setting and displaying a price where there is roughly equal 
interest on both sides of the market. The price at which this balance 
is achieved becomes the opening price. Market orders are used to 
ascertain this balance and, at opening, have precedence over limit 
orders. The Commission finds the proposal to establish a single price 
opening is consistent with previously approved rule provisions,\20\ and 
should provide for efficient opening of trading in Exchange securities 
for which the Phlx is the primary market.
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    \20\ See Amex Rule 108(a) and (b).
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    The Exchange proposal would also accommodate the crossing of block 
trades in Trust Shares. The specific crossing procedures that would be 
used differ, depending on whether a cross involves an order for the 
account of an exchange member (a proprietary cross) or no orders for 
the account of an exchange member (an agency cross). In the proprietary 
cross situation, orders to be crossed are only permitted to establish 
precedence based on size if they are represented at the post when a 
sale has taken place and removed all other bids and offers from the 
trading floor. In addition, before a member may cross an order with an 
order for the member's own account, the member would have to satisfy 
procedural requirements in Rule 451. To take securities in the cross, 
for example, the member would need to have offered the same securities 
in the open market at a price higher than the member's bid by the 
minimum trading increment permitted in those securities; to supply 
securities in the cross, the member would need to have bid for the 
securities on the open market at a price lower than the member's offer 
by the minimum trading increment permitted in those securities.
    In the agency cross situation, a member's bid or offer would be 
entitled to priority over pre-existing bids or offers at the cross 
price. The member would be required to satisfy the procedure in Rule 
451(d), which permits a member to ``report to his principal a 
transaction made with the member himself when he has orders from two 
principals to buy and to sell the same security,'' as long as the 
member adds to his name on that report the words ``on order.'' Another 
member would be permitted to trade with either side of a pending cross 
transaction (i.e., ``break up'' the cross), but only if that other 
member: (1) offers an improved price to either side of the pending 
cross transaction; and (2) trades with all market interest that has 
priority over the price-improving member at the improved price. If 
these conditions are satisfied, the price-improving member may trade 
with all or part of either the bid or offer side of the pending cross 
at the improved price.
    As the Phlx noted, the use of a proprietary cross to execute trades 
raises the issue of compliance with section 11(a) of the Act. For a 
proprietary cross to avoid violating section 11(a), it must be 
accomplished consistent with an exception to that section's general 
prohibition against exchange members trading for their own accounts. As 
noted by the Exchange in Amendment No. 2 to the proposal, rule 11a2-
2(T), Transactions Effected by Exchange Members Through Other Members, 
is one such exception,\21\ and an Exchange member seeking to rely upon 
that rule may need to utilize an independent floor broker. The 
Commission recognizes that the Exchange is aware of and has addressed 
the relationship between continued compliance with section 11(a) and 
the proposed proprietary crossing provision.
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    \21\ The rule was adopted by the Commission pursuant to its 
authority under Section 11(a)(1)(H) and (a)(2). See Securities 
Exchange Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 
17, 1978).
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    The Exchange also proposed to impose a new net capital requirement 
pertaining to Trust Shares and to make specialists responsible for 
displaying bids and offers in Trust Shares to the crowd. The Commission 
finds that the proposed net capital requirement is consistent with the 
Exchange's expectation that Trust Shares may entail a substantial 
financial commitment by specialists and that the display requirement is 
essential to ensuring price transparency.
    The Commission finds good cause for partially approving the 
proposed rule change, and Amendment Nos. 1, 2, and 3 thereto, prior to 
the thirtieth day after the date of publication of the notice thereof 
in the Federal Register pursuant to section 19(b)(2) of the Act.\22\ 
The portions of the proposed and amended rule change pertaining to the 
crossing of block trades in Trust Shares, single price openings, and 
at-the-opening orders conform to rule provisions previously approved 
for use on the Amex. In addition, the proposal to impose special net 
capital requirements in connection with the trading of Trust Shares is 
consistent with a previously approved proposal of the Boston Stock 
Exchange, and the proposal to display bids and offers in Trust Shares 
is necessary to ensure transparent trading of this new securities 
product.
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    \22\ 15 U.S.C. 78f(b)(2).
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    Amendment No. 1 to the proposed rule change, among other things, 
eliminated portions of the original proposal pertaining to the listing 
of Trust Shares. The Exchange subsequently filed, and the Commission 
approved, a separate rule proposal on that topic. Amendment No. 2, 
among other things, also eliminated from the proposal provisions 
pertaining to the establishment of Registered Equity Traders in Trust 
Shares. Amendment No. 2 also strengthens the original proposal by 
carefully delineating between procedures applicable to proprietary 
cross transactions versus those the Phlx would apply to agency cross 
transactions. Amendment No. 3 further strengthens the proposal by

[[Page 64336]]

correcting certain technical errors in the rule proposal. Accordingly, 
the Commission finds good cause for granting partial accelerated 
approval to the rule proposal, as amended.\23\
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    \23\ The proposed rule change to Rule 119(a), Enhanced 
Specialist Participation, is not being approved but is only being 
noticed for comment by the Commission for review under section 
19(b)(2) of the Act (15 U.S.C. 78s(b)(2)).
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VI. Conclusion

    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\24\ that proposed amendments to Phlx Rule 126, Rule 203, Rule 229, 
and Rule 703 are hereby approved.\25\
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    \24\ 15 U.S.C. 78s(b)(2).
    \25\ In approving the proposals, the Commission has considered 
their impact on efficiency, competition, and capital formation.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30655 Filed 12-11-01; 8:45 am]
BILLING CODE 8010-01-M