[Federal Register Volume 67, Number 216 (Thursday, November 7, 2002)]
[Notices]
[Pages 67885-67887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28330]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46758; File No. SR-Phlx-2002-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. Proposing to Amend Phlx Rule 201A(b), Alternate Specialist 
Assignment

October 31, 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 February 11, 2002, 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 Exchange 
filed Amendment No. 1 with the Commission on September 10, 2002.\3\ 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\ On September 10, 2002, the Exchange filed a Form 19b-4, 
which replaced the original filing in its entirety (``Amendment No. 
1''). In Amendment No. 1, the Exchange enhanced the purpose of the 
proposed rule change.
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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 Phlx Rule 201A(b), Alternate Specialist 
Assignment, to delete restrictions on members, member organizations and 
persons affiliated with member organizations from acting as an 
alternate specialist while that member, member organization or person 
affiliated with member organization is either a specialist in the 
options overlying the equity issue or a Registered Options Trader 
(``ROT'') with an assignment in the overlying options. The text of the 
proposed rule change is set forth below. Deleted text is in brackets.
    Rule 201A (a) No change.
    (b) Assignment. The Allocation, Evaluation and Securities Committee 
may assign one or more alternate specialists in a particular equity 
issue and may assign an alternate specialist to one or more equity 
issues after consultation with the Floor Procedure Committee. [No 
alternate specialist shall be assigned in an equity issue in which the 
alternate specialist, or any person associated with the alternate 
specialist or the member organization with which the alternate 
specialist is affiliated, is either a specialist in the options 
overlying that equity issue, or a Registered Options Trader with an 
assignment in the overlying options].
    (c) No change.

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 Exchange 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 delete restrictions 
on assignment of members and member organizations as alternate 
specialists if the member, member organization or persons affiliated 
with the member is the options specialist or an assigned ROT in the 
options overlying the equity issue. The Phlx does not have any similar 
restrictions on registered equity specialists (i.e., primary 
specialists), their members or affiliated persons of such member 
organizations, nor is there a Commission rule on point. The Phlx 
believes that in an era of intense

[[Page 67886]]

competitive market making in multiple market centers, with continued 
consolidation of broker-dealer specialist units operating on multiple 
markets, the restriction on alternate specialist privileges because a 
member organization has a ROT assigned in the overlying options or is 
the options specialist on the Phlx is no longer relevant or 
appropriate.
    The instant restrictions were approved by the Commission in 
1987.\4\ According to the Phlx, the order makes only cursory reference 
to the restrictions and gives no rationale for them. Given the fact 
that there are no comparable restrictions on primary equity specialists 
at the Phlx, as well as the fact that appointments of alternate 
specialists and their association or affiliation with either a firm 
that is the specialist in the overlying option or with a ROT would be 
monitored by the Phlx's Market Surveillance Department to ensure 
compliance with Phlx and Commission rules, the Phlx does not believe 
the present restrictions are appropriate. The Phlx notes that its 
alternate specialist program allows existing registered Phlx equities 
specialists to provide liquidity on demand in the execution of customer 
orders in certain other securities traded on the Exchange and in other 
market centers.
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    \4\ See Securities Exchange Act Release No. 24820 (August 19, 
1987), 52 FR 32235 (August 26, 1987) (SR-Phlx-87-04).
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    The Phlx's Market Surveillance and Examinations Departments 
maintain and review any account activity of alternate specialists. 
Should the restrictions on appointment be deleted, the Phlx's Market 
Surveillance Department would coordinate their reviews of any 
corresponding options activity by an alternate specialist's member firm 
that may be a registered options specialist or have an affiliated ROT 
active in the related options to assure compliance with Phlx
    The Phlx believes that deleting the restriction on alternate 
specialist appointment on the Phlx, generally a non-primary market for 
equities and other securities, would be consistent with the 
Commission's previous approval of proposals by several of the regional 
stock exchanges to allow stock specialists on those exchanges to take 
positions (not limited to hedging positions) in listed options on their 
specialty stock.\5\ Specifically, the Phlx notes that the Commission 
staff Report of the Special Study of the Options Markets \6\ cited the 
fact that the Commission determined to permit specialists and odd-lot 
dealers on the floors of the regional stock exchanges (Chicago Stock 
Exchange, Inc., Pacific Exchange, Inc., and the Phlx) to trade options 
on their specialty stocks and to allow floor traders on those exchanges 
to trade listed options with respect to underlying securities in which 
such floor traders held a position.\7\ Further, in the Options Study, 
the staff noted that ``the Commission was of the view that the 
potential for manipulative activity that might result from such 
``concurrent trading'' was ``relatively insignificant'' on the 
secondary stock exchanges due to the small percentage of stock order 
flow directed to them.'' \8\
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    \5\ See, e.g., Securities Exchange Act Release Nos. 13269 
(February 16, 1977), 11 SEC Docket 1741 (March 1, 1977); 13270 
(February 16, 1977); 11 SEC Docket 1742 (March 1, 1977), 13271 
(February 16, 1977), 11 SEC Docket 1743 (March 1, 1977); and 13272 
(February 16, 1977), 11 SEC Docket 1744 (March 1, 1977).
    \6\ See Report of the Special Study of the Options Markets to 
the Securities and Exchange Commission, H.R. Rep. No. IFC 3, 96th 
Cong. 1st sess. (Comm. Print 1978) (``Options Study'').
    \7\ See supra note 5.
    \8\ See Options Study, supra note 6 at pp. 872-873.
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    Further, the Phlx notes that Phlx primary equity specialists may 
already take non-hedged positions in overlying options directly and are 
not restricted from being associated with the options specialist or 
having an associated ROT trade in the overlying options. In addition, 
the Commission recently approved an American Stock Exchange LLC 
(``Amex'') proposal that permitted limited side-by-side trading and 
integrated market making in certain securities (specified Exchange-
Traded Fund Shares (``ETFs'') or Trust Issued Receipts (``TIRs'')) and 
their related options under certain conditions, as well as allowed 
limited integrated market making by permitting specialists in 
securities admitted to dealings on an unlisted basis to act as 
specialists, or other registered market makers in the related options 
provided certain exchange-approved information barriers are established 
and enforced.\9\
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    \9\ See Securities Exchange Act Release No. 46213 (July 16, 
2002), 67 FR 48232 (July 23, 2002) (SR-AMEX-2002-21).
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    The Phlx believes that a Phlx alternate specialist will have little 
or no competitive or market informational advantages accruing to him or 
his firm in part due to the physical separation of the Phlx options and 
equity trading floors. The Phlx alternate equity specialist in an 
underlying security is physically separated from where an options 
specialist unit or an associated ROT would trade options and therefore, 
the Phlx believes that alternate specialists would have limited 
opportunities or abilities to engage in any potential manipulative or 
other improper trading practices.
    On the Phlx, an alternate specialist's primary function is to 
afford an opportunity to assist in providing liquidity on the Phlx 
market if requested by the Phlx registered equity specialist. The Phlx 
believes that it is, therefore, rather doubtful that any possible 
conflicts between stock and options market making obligations may 
arise.
    The Phlx believes it is inappropriate to restrict alternate 
specialist assignment due to the affiliation with an options specialist 
unit or an associated ROT in an environment of multiple market centers 
participating in trading of the equities and overlying options when the 
Phlx primary equities specialist is allowed to have such affiliations.
2. Basis
    The Phlx believes that proposed rule change is consistent with 
section 6 of the Act \10\ in general, and with section 6(b)(5) of the 
Act,\11\ in particular, in that it is designed to promote just and 
equitable principles of trade, prevent fraudulent and manipulative acts 
and practices and protect investors and the public interest by 
expanding the number of actively trading broker-dealers eligible to act 
as alternate specialists to increase liquidity and competitiveness of 
the Exchange's equities trading floor.
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    \10\ 15 U.S.C. 78f.
    \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 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:

[[Page 67887]]

    (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, as amended, 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-2002-11 and should be submitted by November 29, 2002.

    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-28330 Filed 11-6-02; 8:45 am]
BILLING CODE 8010-01-P