[Federal Register Volume 68, Number 57 (Tuesday, March 25, 2003)]
[Notices]
[Pages 14456-14459]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6988]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47500; File No. SR-Phlx-2001-28]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange Relating to Who Allocates 
Options Trades

March 13, 2003.
    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 9, 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 
January 31, May 17, July 8, 2002, and March 12, 2003, the Phlx filed 
Amendment Nos. 1, 2, 3, and 4 to the proposed rule change, 
respectively.\3\ 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.
    \3\ See letter from Edith Hallahan, First Vice President and 
Deputy General Counsel, Phlx, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
January 30, 2002 (Amendment No. 1); and letters from Richard S. 
Rudolph, Director and Counsel, to Nancy J. Sanow, Assistant 
Director, Division, Commission, dated May 16, 2002, July 5, 2002, 
and March 12, 2003 (Amendment Nos. 2, 3, and 4). The changes made by 
these amendments have been incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to proposes to amend Option Floor Procedure 
Advice F-2 (``Advice F-2''), ``Allocation, Time Stamping, Matching and 
Access to Matched Trades.'' The Phlx further proposes to codify 
paragraph (a) of Advice F-2, as amended--regarding who allocates 
options trades--in the Exchange's rules, as new paragraph (vi) of Phlx 
rule 1014(g).
    The Phlx also proposes to amend the fine schedule associated with 
Advice F-2, and thereby to amend its minor rule violation enforcement 
and reporting plan (``minor rule plan'') \4\ and the Exchange's 
sanctioning guidelines \5\ accordingly.
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    \4\ The Phlx's minor rule plan, codified in rule 970, consists 
of advices, such as Advice F-2, with accompanying fine schedules. 
Rule 19d-1 under the Act authorizes national securities exchanges to 
adopt minor rule plans for summary discipline and abbreviated 
reporting. Rule 19d-1 requires prompt filing with the Commission of 
any final disciplinary actions. However, minor rule plan violations 
not exceeding $2,500 are deemed not final, thereby permitting 
periodic, as opposed to immediate, reporting. See also Securities 
Exchange Act Release No. 44537 (July 11, 2001), 66 FR 37511 (July 
18, 2001) (SR-Phlx-2001-36).
    \5\ See Securities Exchange Act Release No. 45569 (March 15, 
2002), 67 FR 13397 (March 22, 2002) (SR-Phlx-2001-60).
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    Finally, the Exchange is proposing corresponding amendments to 
Option Floor Procedure Advice F-12 (``Advice F-12''), ``Responsibility 
for Assigning Participation,'' to replace the term ``largest 
participant'' with ``Allocating Participant'' and to cross-reference 
that new term to new rule 1014(g)(vi). The Exchange is also proposing 
to change Advice F-12 by correcting the fine schedule so that it does 
not apply a minor rule plan fine to paragraph (d), dealing with 
disputes, which is a process-oriented provision, and not one which 
could give rise to a violation.
    Below is the text of the proposed amendments to Advice F-2 and 
Advice F-12. Paragraph (a) of Advice F-2, as amended, would also be 
codified in the Phlx's rules as rule 1014(g)(vi). Deleted language is 
in brackets. Proposed new language is italicized.
* * * * *

[[Page 14457]]

Option Floor Procedure Advices

F-2 Allocation, Time Stamping, Matching and Access to Matched Trades

    (a) In order to facilitate timely tape reporting of executed 
trades, it is the duty of the persons identified below [largest 
participant in a trade] to allocate, match and time stamp manually 
executed trades as well as to submit the matched trade to the 
appropriate person at the respective specialist post immediately upon 
execution:
    (i) in a trade involving a floor broker, the floor broker shall do 
so, provided that a floor broker may delegate this responsibility to 
the specialist (or an assistant to the specialist under the 
specialist's direct supervision) if the specialist agrees to accept 
such responsibility, and, in the event of such delegation, the 
specialist (or an assistant to the specialist under the specialist's 
direct supervision) shall do so;
    (ii) in all other cases where the specialist is a participant 
(i.e., where there is no floor broker), the specialist (or an assistant 
to the specialist under the specialist's direct supervision) shall do 
so;
    (iii) in any other case (i.e., where there is no floor broker and 
no specialist is involved), the largest participant shall do so (for 
example, where several Registered Options Traders are involved); and
    (iv) if there is only one seller and one buyer (no floor broker and 
no specialist is involved), the seller shall do so (for example, where 
only two Registered Options Traders are involved).
    The person responsible for trade allocation (the ``Allocating 
Participant'') shall, for each trade allocated by such Allocating 
Participant, circle his or her badge identification number on the trade 
tickets, identifying himself/herself as the Allocating Participant in 
the particular trade. If the Allocating Participant is not a 
participant in the trade to be allocated, he/she shall identify 
himself/herself by initialing the trade tickets.
    (b) A member or member organization initiating an options 
transaction whether acting as principal or agent, must report or ensure 
that the transaction is reported within 90 seconds of the execution to 
the tape. Transactions not reported within 90 seconds after execution 
shall be designated as late. A pattern or practice of late reporting 
without exceptional circumstances may be considered conduct 
inconsistent with just and equitable principles of trade.

[If there is only one seller and one buyer, the seller is responsible.]

    (c) Execution times must be recorded on the reverse side of one or 
more of the tickets to a matched trade.
    ([b]d) Once a trade has been matched and submitted for reporting at 
the post, the respective Specialist Unit must preserve the matched 
tickets for a period of not less than three years.
    ([c]e) Member access to tickets comprising a matched trade is 
available to any participant of that trade, as well as the respective 
Specialist and any Floor Official acting in his capacity as a Floor 
Official. Requests to review trade matches must be made with the 
Specialist Unit.

                              Fine Schedule
        [Implemented on a three year running calendar basis] \6\
------------------------------------------------------------------------
 
------------------------------------------------------------------------
F-2 [(a-c)] (a, c-e):
    1st Occurrence....................  [$100] $500
    2nd Occurrence....................  [$250] $1,000
    3rd Occurrence....................  [$500] $2,000
    4th and Thereafter................  Sanction is discretionary with
                                         Business Conduct Committee.
F-2 (b):
    1st Occurrence....................  $500
    2nd Occurrence....................  $1,000
    3rd Occurrence....................  $2,500
    4th and Thereafter................  Sanction is discretionary with
                                         Business Conduct Committee.
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F-12 Responsibility for Assigning Participation

    (a) In each instance where a member/participant effects a 
transaction on the options or foreign currency options floor, he must 
make reasonable efforts to ensure that a meeting of the minds occurred 
with the contra-side as to confirming the contra-side's participation 
in the trade. In trades where more than one contra-side is involved, 
each contra-side must immediately make known to the [largest 
participant] Allocating Participant (See Advice F-2 and Rule 1014(g)) 
his understanding as to his respective level of participation in the 
trade.
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    \6\ See Securities Exchange Act Release No. 44537 (July 11, 
2001), 66 FR 37511 (July 18, 2001) (SR-Phlx-2001-36).
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    (b) No such contra-side who has participated in the trade shall 
leave the crowd until the level of his participation in the trade has 
been confirmed by the [largest participant] Allocating Participant (See 
Advice F-2 and Rule 1014(g)).
    (c) No person in the crowd shall submit a ticket for matching on a 
trade when that person is not due participation in the trade.
    (d) Disputes as to participation on a trade shall be resolved by a 
majority vote of those persons present in the crowd during the relevant 
time or, if not so settled, then by a Floor Official.

                              Fine Schedule
           [Implemented on a one year running calendar basis]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
F-12 (a-[d]c):
    1st Occurrence....................  $500
    2nd Occurrence....................  $1,000
    3rd Occurrence....................  $2,000
    4th and Thereafter................  Sanction is discretionary with
                                         Business Conduct Committee.
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Obligations and Restrictions Applicable to Specialists and Registered 
Options Traders

    Rule 1014. (a)-(e) No change.
    (g) (i)-(iv) No change.
    (v) RESERVED.
    (vi) In order to facilitate timely tape reporting of executed 
trades, it is the duty of the persons identified below to allocate, 
match and time stamp manually executed trades as well as to submit the 
matched trade to the appropriate person at the respective specialist 
post immediately upon execution:
    (i) in a trade involving a floor broker, the floor broker shall do 
so, provided that a floor broker may delegate this responsibility to 
the specialist (or an assistant to the specialist under the 
specialist's direct supervision) if the specialist agrees to accept 
such responsibility, and, in the event of such delegation, the 
specialist (or an assistant to the specialist under the specialist's 
direct supervision) shall do so;
    (ii) in all other cases where the specialist is a participant 
(i.e., where there is no floor broker), the specialist (or an assistant 
to the specialist under the specialist's direct supervision) shall do 
so;
    (iii) in any other case (i.e., where there is no floor broker and 
no specialist is involved), the largest participant shall do so (for 
example, where several Registered Options Traders are involved); and
    (iv) if there is only one seller and one buyer (no floor broker and 
no specialist is involved), the seller shall do so (for example, where 
only two Registered Options Traders are involved).
    The person responsible for trade allocation (the ``Allocating 
Participant'') shall, for each trade allocated by such Allocating 
Participant, circle his or her

[[Page 14458]]

badge identification number on the trade tickets, identifying himself/
herself as the Allocating participant in the particular trade. If the 
Allocating Participant is not a participant in the trade to be 
allocated, he/she shall identify himself/herself by initialing the 
trade tickets.

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 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. 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 change the 
responsibility for options trade allocation to permit floor brokers to 
delegate this responsibility to the specialist.\7\ The Exchange 
believes that this amendment should render the process of trade 
allocation more efficient, which in turn facilitates trade reporting. 
Trade allocation means, in this context, determining who is considered 
to be bidding or offering at a particular price, who participates in a 
trade, and for what size.\8\
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    \7\ On September 11, 2000, the Commission issued an Order 
Instituting Public Administrative Proceedings Pursuant to section 
19(h) of the Securities Exchange Act of 1934, Making Findings and 
Imposing Remedial Sanctions, which requires the Exchange (among 
other respondent options exchanges) to implement certain 
undertakings. See Securities Exchange Act Release No. 43268 
(September 11, 2000)(''Order''). One such undertaking, set forth in 
section IV.B.j. of the Order, requires each respondent exchange to 
adopt new, or amend existing, rules to include any practice or 
procedure, not currently authorized by rule, whereby market makers 
determine by agreement the spreads or option prices at which they 
will trade any option, or the allocation of orders in that option. 
Describing accurately who allocates trades is intended by the Phlx 
to capture in a rule activity that can be viewed as allocating 
trades.
    \8\ In a related proposal (File No. SR-Phlx-2001-39), the Phlx 
proposes to codify other practices relating to the allocation of 
trades that have developed on the Exchange's options floor, and 
relating to the Exchange's parity and priority rules. See Securities 
Exchange Act Release No. 47499 (March 13, 2003).
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    Currently, Advice F-2 provides that in order to facilitate timely 
tape reporting of executed trades, it is the duty of the largest 
participant in a trade to allocate, match, and time stamp manually 
executed trades,\9\ as well as to submit the matched trade to the 
appropriate person at the respective specialist post immediately upon 
execution. Further, under the current rule, if there is only one seller 
and one buyer, the seller is responsible.
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    \9\ Manually executed trades refers to trades other than AUTO-X 
trades (which are automatically executed by the AUTO-X feature of 
the AUTOM System, pursuant to Phlx rule 1080), which includes orders 
delivered by AUTOM, by the Floor Broker Order Entry System, as well 
as manually to the specialist. (AUTOM, an acronym for Automated 
Options Market, is the Exchange's electronic order delivery and 
reporting system, which provides for the automatic entry and routing 
of equity option and index option orders to the Exchange trading 
floor.)
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    Advice F-2 was amended in 1998 to add a trade allocation provision 
and to specifically place that responsibility upon the largest 
participant involved in the trade, who is normally the floor broker 
representing the original order in the trading crowd.\10\ At the time 
of this amendment, the Exchange noted that the practice in most options 
crowds was for the specialist to announce trade splits. The Exchange 
also noted that the practice differed throughout the floor, especially 
when the specialist was not involved in a trade, or where a great deal 
of trading and quoting activity rendered specialist allocation 
impractical. In these situations, floor brokers assisted in allocating 
trades, along with their other duties respecting trade tickets. Thus, 
the 1998 amendment was intended to both establish who is responsible 
for trade allocation as well as to select the largest participant 
(normally, the floor broker) as a logical extension of the then-
existing responsibilities for matching and time stamping.
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    \10\ See Securities Exchange Act Release No. 39889 (April 20, 
1998), 63 FR 23331 (August 28, 1998) (SR-Phlx-97-51).
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    The proposed amendment to Advice F-2 would facilitate a voluntary 
shift in the responsibility for allocating trades from the floor broker 
to, generally (subject to delegation), the specialist. The proposal 
would require the floor broker to allocate trades (where a floor broker 
is a participant to a trade), recognizing the floor broker's unique 
position in asking for the market and hearing the responses. At the 
same time, it would allow the floor broker to delegate such 
responsibility to the specialist (if the specialist agrees to do so), 
recognizing the floor broker's desire to proceed to the next trade.
    That delegation, which could also be made to someone assisting the 
specialist under the specialist's direct supervision,\11\ also 
acknowledges the specialist's general obligation to be present and 
aware of who is on what market. The Exchange anticipates that, 
generally, the delegation would be done across-the-board in a 
particular crowd, but understands that there are situations where the 
delegation may occur trade-by-trade, and even after a trade, in order 
to be responsive to the needs and relative activity level of particular 
specialists and floor brokers.
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    \11\ See Option Floor Procedure Advice F-23, which provides in 
pertinent part that a specialist clerk, under the supervision of a 
specialist, may request the crowd's market in order to update 
disseminated markets or ascertain parity/priority splits in relation 
to the execution of an order. See Securities Exchange Act Release 
No. 33125 (November 1, 1993), 58 FR 59286 (November 8, 1993), (SR-
Phlx-93-17). See also Phlx rule 748, which requires all employees to 
be supervised.
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    Since the 1998 amendment, for reasons relating to both business 
practices and technology, some floor brokers have found the 
responsibilities under the current version of Advice F-2 burdensome and 
impractical in many instances. Due to the changed role and reduced 
number of floor brokers, it may no longer make sense for floor brokers 
to have the sole responsibility to allocate trades on the Exchange 
floor. The number of orders received through the AUTOM System (not 
requiring a floor broker) has risen steadily, causing a declining role 
for floor brokers. The maximum size of orders eligible for AUTOM 
delivery has risen from 500 to 1,000 contracts, in response to 
competitive pressures.\12\ At the same time, the number of options 
listed on the Exchange and overall volume have skyrocketed. Overall 
technological enhancements and changes in the operation and economics 
of the trading floor seem to indicate it would be more realistic for 
specialists, who are always present in the trading crowd, to assume 
this responsibility.
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    \12\ See Securities Exchange Act Release No. 43115 (August 10, 
2000), 65 FR 50262 (August 17, 2000) (File No. SR-Phlx-00-35).
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    In trades not involving a floor broker or the specialist, the 
largest participant would continue to be responsible for trade 
allocation. For instance, where two Registered Options Traders sell to 
one Registered Options Trader, that one buyer would be the largest 
participant, and thus the allocating participant. Similarly, where 
there is one buyer and one seller (neither of whom is the specialist or 
floor broker), the seller would continue to be responsible for trade 
allocation. An example of this situation would be two Registered 
Options Traders trading with each other.

[[Page 14459]]

    The proposed rule change also would require the person responsible 
for trade allocation in each trade (the ``Allocating Participant'') to 
circle his or her badge identification number on the trade tickets, 
thereby identifying him or herself as the Allocating Participant in the 
particular trade.\13\ If the Allocating Participant is not a 
participant in the trade (such as where a Floor Broker delegated 
responsibility for allocation to the specialist), the Allocating 
Participant would be required to identify him or herself by initialing 
the trade tickets.\14\
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    \13\ See Amendment No. 2.
    \14\ See Amendment No. 3.
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    The purpose of adopting new sub-paragraph (vi) of rule 1014(g) is 
to codify Advice F-2 expressly into Exchange rules. Certain advices are 
merely restatements of Phlx rules, codified into Floor Procedure 
Advices, not just because they may have an associated fine schedule as 
part of the minor rule plan, but also for the convenience of members on 
the trading floor.\15\
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    \15\ The advices were historically printed in pocket-sized 
versions for trading floor use. See, e.g., Advice B-6 and Phlx rule 
1014(g)(ii) and Advice A-11 and Phlx rule 1015.
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    The Exchange believes that the proposed fine schedule is 
appropriate, in light of the low level of the existing fines (with a 
first violation resulting in a fine of merely $100), and the importance 
of the trade allocation function. The Exchange has recently increased 
most of its minor rule plan fine schedules.\16\ The Exchange is also 
proposing to adopt a separate fine schedule for paragraph (b) of Advice 
F-2, which deals with trade reporting, because the Exchange intends to 
administer its surveillance and enforcement of that provision 
separately.\17\
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    \16\ See Securities Exchange Act Release No. 44537 (July 11, 
2001), 66 FR 37511 (July 18, 2001) (SR-Phlx-2001-36).
    \17\ The Commission notes that the proposed fine for a third 
violation of paragraph (b) of Advice F-2 would be $2,500, in 
contrast to the proposed fine of $2,000 for a third violation of 
other provisions of Advice F-2.
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2. Statutory Basis
    For these reasons, the Exchange believes that its proposal is 
consistent with section 6(b) of the Act \18\ in general and section 
6(b)(5) \19\ 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 
establishing a structure for determining who allocates options trades 
that permits the floor broker, who would generally perform the 
allocation, to delegate this responsibility to the specialist. Thus, 
the provision should promote prompt and accurate trade allocations, 
which in turn facilitates prompt trade reporting.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 Exchange 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 Room. Copies of the filing will also be 
available for inspection and copying at the principal offices of the 
Phlx. All submissions should refer to File No. SR-Phlx-2001-28 and 
should be submitted by April 15, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6988 Filed 3-24-03; 8:45 am]
BILLING CODE 8010-01-P