[Federal Register Volume 67, Number 29 (Tuesday, February 12, 2002)]
[Notices]
[Pages 6570-6572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3303]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45391; File No. SR-Phlx-2001-33]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. and Amendment Nos. 1 
and 2 Relating to Solicitation of Trading Interest on the Exchange 
Floor

February 4, 2002.
    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 8, 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 Exchange. On May 
11, 2001, the Exchange filed Amendment No. 1 to the proposed rule 
change with the Commission.\3\ On November 21, 2001, the Exchange filed 
Amendment No. 2 to the proposed rule change with the Commission.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, 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, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated May 10, 2001 (``Amendment No. 
1''). In Amendment No. 1, the Exchange amended the filing to request 
accelerated approval under section 19(b)(2) of the Act, as opposed 
to the proposal being immediately effective upon filing under 
19(b)(C)(A) of the Act.
    \4\ See Letter from Richard S. Rudolph, Counsel, Phlx, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated November 
21, 2001 (``Amendment No. 2''). In Amendment No. 2, the Exchange 
amended the proposal to clarify that (1) the proposed rule change 
pertains to an order of a size greater that the AUTO-X guarantee; 
(2) a single crowd participant may voice a bid or offer that is 
independent of the trading crowd's collective response; (3) orders 
under the proposed rule change would be allocated pursuant to Phlx 
Rule 1014(g); (4) other proposed rule changes have been submitted to 
further foster competitive quoting among market makers; and (5) the 
Exchange believes that the proposed rule change should not impact 
the Quote Rule or the priority of customer orders.

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[[Page 6571]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to adopt Phlx Rule 1033(a)(ii) and Options Floor 
Procedure Advice (``OFPA'') F-32 pertaining to the solicitation of 
quotations. The following is the text of the proposed rule change:
    Additions are in italics.
    Rule 1033 (a)(i) Size of Bid/Offer and Disseminated Size Guarantee. 
All bids or offers on the Floor for option contracts shall be deemed to 
be one for one option contract unless a specific number of option 
contracts is expressed in the bid or offer. A bid or offer for more 
than one option contract shall be deemed to be for the amount thereof 
or a smaller number of option contracts. Responsibility for ensuring 
that customer orders are filled to a minimum of the disseminated size 
at the disseminated price is as set forth in Exchange Rules 1082 and 
1015.
    (ii) Solicitation of Quotations. In response to a floor broker's 
solicitation of a single bid or offer, the members of a trading crowd 
(including the specialist and ROTs) may discuss, negotiate and agree 
upon the price or prices at which an order of a size greater than the 
AUTO-X guarantee can be executed at that time, or the number of 
contracts that could be executed at a given price or prices. 
Notwithstanding the foregoing, a single crowd participant may voice a 
bid or offer independently from, and differently from, the members of a 
trading crowd (including the specialist and ROTs).
* * * * *

F-32  Solicitation of Quotations

    In response to a floor broker's solicitation of a single bid or 
offer, the members of a trading crowd (including the specialist and 
ROTs) may discuss, negotiate and agree upon the price or prices at 
which an order of a size greater than the AUTO-X guarantee can be 
executed at that time, or the number of contracts that could be 
executed at a given price or prices. Notwithstanding the foregoing, a 
single crowd participant may voice a bid or offer independently from, 
and differently from, the members of a trading crowd (including the 
specialist and ROTs).

II. Self-Regulatory Organization's Statements 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.

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 adopt Phlx Rule 
1033(a)(ii) and OFPA F-32, which would permit the members of a trading 
crowd (including the specialist and Registered Options Traders 
(``ROTs'')) to discuss, negotiate and agree upon the price or prices at 
which an order of a size greater than the AUTO-X guarantee can be 
executed at that time, or the number of contracts that can be executed 
at a given price or prices in response to a floor broker's request. The 
proposal is intended to codify and expressly permit a collective 
response by trading crowd members.\5\
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    \5\ On September 11, 2000, the Commission issued an order in 
relation to the settlement of In the Matter of Certain Activities of 
Options Exchanges, which requires the Exchange (as well as the other 
options exchanges) to implement certain undertakings. One such 
undertaking to adopt new, or amend existing, rules to include any 
practice or procedure whereby market makers trading any particular 
option class determine by agreement the spreads or option prices at 
which they will trade any option class, or the allocation of orders 
in that option class. This proposed rule change is intended to 
effect the changes required by this undertaking. See Section IV.B.j. 
of Securities Exchange Act Release No. 43268 (September 11, 2000) 
(``Order'').
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    Ordinarily, in meeting their obligation to make fair and orderly 
markets, Phlx specialists and ROTs make independent business decisions 
concerning what market to quote at a particular point in time, in lieu 
of discussing or agreeing with other members of the trading crowd on 
what should be the market for a particular option. In order to make 
fair and orderly markets and to respond efficiently to the needs of 
investors, however, the Phlx believes that there are circumstances 
where some coordination among ROTs and specialists is both necessary 
and beneficial.
    For example, when a request for a market to buy or sell a large 
number of options contracts is presented by the floor broker to the 
trading crowd, the customer on whose behalf the request is made 
typically wants to know promptly at what single price all of the 
options represented by the request may be bought or sold. However, such 
large trades typically require more liquidity than any single ROT or 
the specialist is able to provide. Coordinated efforts of the trading 
crowd are, thus, necessary to respond to such a request and to fill any 
resulting order to buy or sell the option at a single price. In this 
regard, borrowing a phrase from corporate principles, the Phlx believes 
that the trading crowd is properly viewed as a ``joint venture,'' in 
which the resources of the individual crowd members are combined to 
produce the necessary liquidity to respond to the needs of investors 
and to compete effectively with other options exchanges.
    When an options order exceeds the size that individual trading 
crowd members can execute, the Phlx believes that the trading crowd 
must act as a joint venture or single economic unit. In this situation, 
the trading crowd must reach agreement on the price they will offer 
because the customer desires a single price. Significantly, in the 
Exchange's view, the antitrust laws permit competitors to collaborate 
to produce and sell a product that they could not otherwise offer 
individually.\6\ In fact, such activity is pro-competitive because it 
increases output and increases the number of competitors.\7\
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    \6\ See, e.g., NCAA v. Board of Regents, 468 U.S. 85, 101 (1984) 
(recognizing that horizontal restraint on competition was essential 
to make the product available at all); Broadcast Music, Inc. v. CBS, 
441 U.S. 1, 23 (1979) (``Joint ventures and other cooperative 
arrangements are also not usually unlawful, at least not as price-
fixing schemes, where the agreement on price is necessary to market 
the product at all.''); and SCFC ILC, Inc. v. Visa USA, Inc., 36 
F.3d 958, 964 (10th Cir. 1994), cert. denied., 115 S. Ct. 2600 
(1995) (``horizontal restraint may be essential to create the 
product in the first instance'').
    \7\ The Phlx believes that the Antitrust Division of the 
Department of Justice and the Federal Trade Commission, agencies 
expert in competition analysis, also recognize this result. See FTC/
DOJ Antitrust Guidelines for Collaborations among Competitors (April 
2000) at 14, reprinted in Antitrust Rep., April 2000 (also available 
at www.ftc.gov.) (``Competitor collaborations may involve agreements 
jointly to sell, distribute, or promote goods and services that are 
either jointly or individually produced. Such agreements may be pro-
competitive, for example, where a combination of complementary 
assets enables products more quickly and efficiently to reach the 
marketplace.'').
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    Moreover, under the proposed rule change, Phlx Rule 1033(a)(ii) and 
OFPA F-32 would not force members of the trading crowd into the ``joint 
venture,'' and would not preclude price competition among members of 
the crowd or competition between a single crowd member and the rest of 
the crowd.\8\ If any one ROT is willing to execute a trade at a price 
better than the

[[Page 6572]]

prevailing market, the ROT could bid against the crowd and take the 
entire trade, as provided by Phlx Rule 1014(g)(i). If one or more ROTs 
have the necessary liquidity and believe that they can profit by taking 
order flow away from the crowd by independently offering a better price 
to the floor broker, they are free to do so.\9\ Thus, the Phlx believes 
that when read together with existing Phlx rules, Phlx Rule 1033(a)(ii) 
and OFPA F-32 are well designed to enable the Exchange to provide the 
required liquidity to execute large orders, while retaining the 
potential for price competition from ROTs in the crowd.
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    \8\ See note 4, supra. Amendment No. 2 amends the proposed rule 
language to clarify that individual trading crowd members can voice 
bids or offers that are independent of the trading crowds collective 
response and also indicates that other proposed rule changes have 
been submitted to the Commission to foster competitive pricing.
    \9\ In assessing the competitive effects of a joint venture, the 
antitrust agencies regard the continued ability for individual 
members of the joint venture to compete against the venture as an 
important factor weighing toward its lawfulness. FTC/DOJ Antitrust 
Guidelines for Collaborations among Competitors at 19 (``In general, 
competitive concern likely is reduced to the extent that 
participants have actually continued to compete, either through 
separate, independent business operations or through membership in 
other collaborations, or are permitted to do so.'').
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    Finally, the Phlx notes that unlike an exchange with a single 
specialist and no competing market makers, the Phlx's market structure 
requires that this activity be permitted so as to allow the Phlx to 
better compete with the other options exchanges and better serve the 
investing public
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\10\ in general, and furthers the 
objectives of Section 6(b)(5),\11\ 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 enhancing the 
Exchange's ability to make competitive, fair and orderly markets. 
Moreover, the Exchange believes that the proposal responds to the needs 
of investors by facilitating prompt and efficient order execution, 
while promoting fair competition, consistent with Section 11A(a)(i) and 
(ii).\12\
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78k-1(a)(i) and (ii).
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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 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-2001-33 and 
should be submitted by March 5, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3303 Filed 2-11-02; 8:45 am]
BILLING CODE 8010-01-P