[Federal Register Volume 66, Number 250 (Monday, December 31, 2001)]
[Notices]
[Pages 67609-67610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-32031]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45182; File No. SR-PHLX-2000-20]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment Nos. 1 and 2 Thereto 
Relating to the Trading of Nasdaq Securities on the Floor of the 
Exchange

December 20, 2001.

I. Introduction

    On November 16, 2000, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and rule 19b-4 
thereunder,\2\ a proposed rule change regarding the trading of Nasdaq 
securities on the floor of the Exchange, pursuant to unlisted trading 
privileges (``UTP''). Notice of the proposed rule change was published 
in the Federal Register on December 14, 2000.\3\ On May 14, 2001, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\4\ 
Amendment No. 1 was published in the Federal Register on July 16, 
2001.\5\ On June 22, 2001, the Exchange submitted Amendment No. 2 to 
the proposed rule change.\6\ The Commission received two comment 
letters on the proposed rule change and a response from Phlx.\7\ This 
order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 43692 (Dec. 8, 2000), 65 
FR 78240.
    \4\ See Form 19b-4 dated May 14, 2001 (``Amendment No. 1'').
    \5\ Securities Exchange Act Release No. 44533 (July 10, 2001), 
66 FR 37083.
    \6\ See letter from Diana Tenenbaum, Phlx, to Nancy J. Sanow, 
Senior Special Counsel [sic], Division of Market Regulation, SEC, 
dated June 21, 2001 (``Amendment No. 2''). In Amendment No. 2, the 
Exchange corrected a citation to SEC ``Rule 11Ac1-1'' on page 22 of 
the amended Form 19b-4, deleted a reference to subsection ``(ii)'' 
on page 25 of the amended Form 19b-4, and changed all references to 
``issue'' and ``issues'' in the proposed Rule 516 to read 
``security'' and ``securities,'' respectively.
    \7\ See letters to Jonathan G. Katz, Secretary, SEC, from 
Michael T. Dorsey, Senior Vice President and General Counsel, Knight 
Trading Group, Inc., dated December 19, 2000 (``Knight Letter''); 
William W. Uchimoto, Executive Vice President and General Counsel, 
Ashton Technology Group, Inc., dated February 23, 2001 (``Ashton 
Letter''); and Edith Hallahan, Deputy General Counsel, Phlx, dated 
April 2, 2001 (``Phlx Letter'').
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II. Description of the Proposal

    The Phlx proposes to reinstate trading in certain over-the-counter 
(``OTC'') securities, i.e., Nasdaq National Market Securities 
(``Nasdaq/NM Securities''), on the floor of the Exchange, pursuant to 
UTP under section 12(f) of the Act.\8\ Therefore, Phlx seeks 
reinstatement of the pilot program and accompanying rules to permit the 
trading of Nasdaq/NM Securities on the Exchange pursuant to UTP (``Phlx 
OTC/UTP Pilot Program'' or ``Pilot'').\9\ Generally, the Exchange 
proposes to make only minor changes to the Phlx rules that specifically 
govern trading of Nasdaq/NM Securities, such as to revise the term 
``Nasdaq/NM Securities.'' The Phlx has, however, proposed a new 
allocation procedure for Nasdaq/NM Securities. The Phlx has proposed to 
reinstate its Pilot to trade Nasdaq/NM Securities on a six-month pilot 
basis.
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    \8\ 15 U.S.C. 781(f).
    \9\ The Commission notes that the Phlx began trading Nasdaq/NM 
Securities pursuant to the Pilot in February 1993. See Securities 
Exchange Act Release No. 31672 (Dec. 30, 1992), 58 FR 3054 (Jan. 7, 
1993). The effectiveness of the Pilot was extended four times before 
the Phlx decided to cease trading such securities pending 
reorganization of its OTC/UTP Pilot Program as a whole. See 
Securities Exchange Act Release No. 36087 (Aug. 10, 1995), 60 FR 
42637, 42638 (Aug. 16, 1995). The Phlx OTC/UTP Pilot Program expired 
on February 12, 1996. Id.
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III. Summary of Comments

    The Commission received two comments on the proposed rule change 
and a response from Phlx.\10\ One commenter, Knight, opposed the 
proposal. In its letter, Knight argued that the proposal should not be 
approved because: (1) Phlx has failed to demonstrate how permitting 
Phlx specialists to trade certain Nasdaq/NM Securities pursuant to the 
Pilot will maintain fair and orderly markets (as required by section 
12(f)(1)(E)(i) of the Act \11\) (of particular concern to Knight is the 
fact that members of regional UTP exchanges will be held to the less 
stringent rules of regional exchanges than NASD market maker members); 
(2) members of regional UTP exchanges trading Nasdaq/NM Securities 
currently act in a manner inconsistent with the SEC Rule 11Ac1-1 \12\ 
(the ``Firm Quote Rule''), by failing to execute transactions at prices 
that were displayed in the Nasdaq Montage; and (3) members of regional 
UTP exchanges trading Nasdaq/NM Securities currently act in a manner 
inconsistent with NASD's Locked/Crossed Market Rule \13\ and Trade-or-
Move Rule.\14\
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    \10\ See note 7 supra.
    \11\ 15 U.S.C. 781(f)(1)(E)(i).
    \12\ 17 CFR 240.11Ac1-1.
    \13\ NASD Rule 4613(e).
    \14\ NASD Rule 4613(b)(2).
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    The Phlx responded to the Knight Letter. In its response letter, 
the Phlx countered each of Knight's arguments by contending that: (1) 
The SEC has already determined that permitting regional exchanges and 
their specialists and dealers to trade Nasdaq/NM Securities pursuant to 
the OTC/UTP Plan \15\ is consistent with fair and orderly markets; (2) 
the Knight Letter offers no evidence that members of regional UTP 
exchanges routinely violate the Firm Quote Rule; and (3) even through 
regional exchange specialists are not bound by the NASD's Locked/
Crossed Market and Trade-or-Move Rules, regional specialists on a 
voluntary basis routinely comply with Trade-or-Move messages received 
by them pre-opening. Moreover, the Phlx noted that it does not intend 
to trade or quote during the pre-opening session.
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    \15\ The OTC/UTP Plan refers to the Joint Self-Regulatory 
Organization Plan Governing the Collection, Consolidation, and 
Dissemination of Quotation and Transaction Information for Nasdaq-
Listed Securities Traded on Exchanges on an Unlisted Trading 
Privileges Basis. The participants of the OTC/UTP Plan are the 
American Stock Exchange LLC, the Chicago Stock Exchange, Inc., the 
Cincinnati Stock Exchange, Inc., the National Association of 
Securities Dealers, Inc., the Pacific Exchange, Inc., and the 
Philadelphia Stock Exchange, Inc.
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    The other commenter, Ashton, supported the proposal. Ashton 
operates the eVWAP trading system (``eVWAP'') as a facility of the Phlx 
through its Universal Trading Technologies Corporation subsidiary. 
eVWAP is a pre-opening order matching session for the electronic 
execution of large-sized stock orders at a standardized volume weighted 
average price. Ashton noted that the Phlx soon will be filing 
amendments to Phlx Rule 237 (The eVWAP Morning Session) to expand 
eligibility of certain Nasdaq/NM

[[Page 67610]]

Securities to eVWAP. Ashton stated that many eVWAP participants have 
requested the addition of Nasdaq issues for eVWAP matching.
    Ashton also responded to the Knight Letter. In the Ashton Letter, 
Ashton counters two of Knight's arguments by contending that: (1) The 
SEC has already determined that UTP trading of Nasdaq/NM securities is 
in furtherance of fair and orderly markets; and (2) the federal 
statutory and regulatory scheme dictates that self-regulatory 
organizations' rules govern their own members (Ashton questions whether 
Knight is requesting a complete overhaul of the Act to impose a single 
self-regulatory, NASDR, over all market participants trading Nasdaq/NM 
Securities).

IV. Discussion

    The Commission finds that the proposed rule change, as needed, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and in particular, with the requirements of section 6(b)(5) of the 
Act.\16\ The Commission believes that Phlx has proposed rules that 
should ensure that trading in Nasdaq/NM Securities on its floor occurs 
in an orderly fashion,\17\ consistent with the requirements of the Act. 
The Commission, therefore, believes that the proposal should remove 
impediments to and perfect the mechanism of a free and open market in a 
manner that is consistent with the protection of investors and the 
public interest.\18\ The Commission also notes that Phlx's response to 
the comments raised in the Knight Letter were sufficient.\19\
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    \16\ 15 U.S.C. 78f(b)(5).
    \17\ The Commission notes that trading in Nasdaq/NM Securities 
will occur on the Phlx's equity floor, which is separate from the 
Phlx's options floor. Therefore, Phlx's proposal does not raise any 
side-by-side trading concerns. In addition, Phlx Rule 1014, which 
prohibits Registered Options Traders (``ROTs'') from executing 
proprietary options transactions in Phlx-listed options on OTC 
securities, if, during the preceding hour, the ROT was physically at 
the trading post where such OTC security trades, will apply during 
the Pilot.
    \18\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \19\ The Commission notes that the Phlx's rules regarding short 
sales do not require an exemption from the Commission's short sale 
rule, Rule 10a-1, since Nasdaq securities currently are excluded 
from the Rule. See CFR 240.10a-1(a)(ii), However, Nasdaq has applied 
to become a national securities exchange. See Securities Exchange 
Act Release No. 44396 (June 7, 2001), 66 FR 31952 (June 13, 2001). 
If Nasdaq becomes a registered exchange, Nasdaq securities will be 
exchange-listed and the exemption in subparagraph (ii) of Rule 10a-1 
will no longer be available. Accordingly, trading in Nasdaq 
securities would be subject to Rule 10a-1 unless Phlx obtains an 
exemption from the Rule. The Commission notes that Nasdaq has 
requested an exemption from Rule 10a-1.
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    Furthermore, the proposed rule change is consistent with section 
12(f)(2) of the Act,\20\ which grants the Commission explicit authority 
to approve UTP in OTC securities. Section 12(f)(2) of the Act requires 
the Commission, before approving UTP, to determine that the granting of 
UTP is consistent with the maintenance of fair and orderly markets and 
the protection of investors. The Commission believes that the proposed 
rule change is consistent with these goals and thus, the Commission is 
approving the proposed rule change, subject to the Phlx complying with 
the requirements of the OTC/UTP Plan.
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    \20\ 15 U.S.C. 781(f)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-Phlx-2000-20), as amended, 
is approved on a pilot basis effective for a six month period beginning 
on the date trading begins.\22\
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    \21\ 15 U.S.C. 78s(b)(2).
    \22\ Phlx has advised the Commission that it expects to begin 
trading in January 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).

      
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-32031 Filed 12-23-01; 8:45 am]
BILLING CODE 8010-01-M