[Federal Register Volume 68, Number 84 (Thursday, May 1, 2003)]
[Notices]
[Pages 23354-23355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10786]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47739; File No. SR-Phlx-2001-39]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to the 
Allocation of Trades

April 25, 2003.
    On March 12, 2001, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``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 relating to the allocation of trades on the 
Exchange's options floor.\3\ On May 11, 2001, February 19, 2002, May 
22, 2002, November 19, 2002, December 16, 2002, and February 25, 2003, 
Phlx submitted Amendment Nos. 1, 2, 3, 4, 5, and 6 to the proposed rule 
change, respectively.\4\ The proposed rule change, as amended, was 
published for comment in the Federal Register on March 25, 2003.\5\ The 
Commission received no comments on the proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change was submitted by Phlx pursuant to 
subparagraph IV.B.j. of the Commission's Order of September 11, 
2000, which requires the Exchange (among other respondent options 
exchanges) to adopt new, or amend existing, rules to make express 
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.'' Order Instituting Public 
Administrative Proceedings Pursuant to Section 19(h)(1) of the 
Securities Exchange Act of 1934, Making Findings and Imposing 
Remedial Sanctions, Securities Exchange Act Release No. 43268 
(September 11, 2000).
    The proposed rule change applies to trades that are not executed 
through the Exchange's automatic execution system. In addition, the 
Commission notes that the Exchange has adopted special allocation 
rules that pertain to its ``ROT Access'' system. See Securities 
Exchange Release Act No. 46763 (November 1, 2002), 67 68898 
(November 13, 2002).
    \4\ See letters from Richard S. Rudolph, Director and Counsel, 
Phlx, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated May 10, 2001 (Amendment No. 1), 
February 15, 2002 (Amendment No. 2), May 21, 2002 (Amendment No. 3), 
November 18, 2002 (Amendment No. 4), December 12, 2002 (Amendment 
No. 5), and February 24, 2003 (Amendment No. 6).
    \5\ See Securities Exchange Act Release No. 47499 (March 13, 
2003), 68 FR 14459 (``Notice''). The Notice contains a detailed 
description of the proposed rule change, the major aspects of which 
are summarized below.
---------------------------------------------------------------------------

    Specifically, the proposed rule change would revise Phlx Rule 
1014(g) and Option Floor Procedure Advice B-6 to: (1) Eliminate current 
exceptions to the Exchange's rule that an order of a ``controlled 
account'' (any account controlled by or under common control with a 
broker-dealer) must yield priority to a customer order; (2) establish 
that specialists and Registered Options Traders (``ROTs'') are entitled 
to participate only in the portion of an incoming order that remains 
(``Remainder of the Order'') following the allocation of contracts to 
customers that are on parity; (3) establish that each Enhanced 
Specialist Participation granted by the Exchange's rules is applied to 
the Remainder of the Order, and is a form of entitlement, rather than a 
mandatory participation;\6\ (4) set forth how the Remainder of the 
Order is to be allocated among all participants on parity, establishing 
a method that, after applying any Enhanced Specialist Participation, 
allocates contracts based on the ``stated size'' of each 
participant,\7\ and accommodates smaller stated sizes first when the 
stated sizes of participants are not equal;\8\ (5) set forth the 
procedures by which a specialist or ROT may waive some or all of the 
contracts to which he or she is entitled, and how such waived contracts 
would be allocated; (6) stipulate that a pattern or practice of waiving 
may be considered conduct inconsistent with just and equitable 
principles of trade; and (7) state that it would be considered conduct 
inconsistent with just and equitable principles of trade for a member 
to enter into any agreement with another member concerning allocation 
of trades, or to harass, intimidate, or coerce, any member to enter 
into any waiver or to make or refrain from making any complaint or 
appeal.
---------------------------------------------------------------------------

    \6\ The Enhanced Specialist Participation programs in the 
Exchange's rules for certain options classes allocate to the 
specialist a greater than equal share of the portion of the order 
that is divided among the specialist and any controlled accounts 
that are on parity. The percentage awarded to the specialist varies 
according to the number of controlled accounts on parity. Most of 
the relevant provisions in Phlx Rule 1014(g) currently state that 
the specialist is entitled to the applicable percentage, but other 
provisions do not. See Notice.
    \7\ The proposed rule change would also define how a 
participant's ``stated size'' is determined. See Notice.
    \8\ As discussed in greater detail in the Notice, the proposed 
rule change would provide that if all participants' stated sizes 
were equal, they would receive equal allocations. If all 
participants' stated sizes were not equal, they would be allocated 
contracts according to a process whereby, in an initial round of 
allocation, each participant would receive a number of contracts 
equal to the stated size of the participant(s) with the smallest 
stated size (provided that if the sum of such allocations would 
exceed the number of contracts available, the contracts would be 
divided equally among all participants). Each participant whose 
stated size was not filled in the initial round of the process would 
be allocated in the next round a number of contracts equal to the 
stated size of the participant(s) with the smallest stated size in 
that round. The process would continue as necessary until all the 
contracts are allocated. In any round where the number of contracts 
remaining does not suffice to allocate the smallest stated size to 
all participants, or when the stated sizes of all remaining 
participants are equal, the contracts would be divided equally.
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange \9\ and, in 
particular, the requirements of Section 6 of the Act \10\ and the rules 
and regulations thereunder. The Commission believes that the proposed 
rule change is

[[Page 23355]]

consistent with Section 6(b)(5) of the Act,\11\ because it codifies and 
clarifies the Exchange's procedures regarding how options trades are to 
be allocated among crowd participants.
---------------------------------------------------------------------------

    \9\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Commission believes that it is reasonable and 
appropriate to afford priority to customer orders over accounts of 
broker-dealers. The Commission further believes that it is reasonable 
and consistent for the Exhange to conform its rules to specify that 
Enhanced Specialist Participations are entitlements rather than 
mandatory participations, and to clarify that such entitlements apply 
only to the Remainder of the Order, after customers have received their 
allocations. The Commission believes that the proposed rule change sets 
forth a reasonable method of allocating the Remainder of an Order among 
the specialist and ROTs, taking into account the Enhanced Specialist 
Participation, where applicable, and the stated sizes of all 
participants on parity. Further, the Commission believes that it is 
reasonable for the Exchange to establish procedures for allocating 
contracts when a specialist or ROT waives all or part of a trade to 
which he or she is entitled. The Commission notes, at the same time, 
that the proposal provides a safeguard against abuse in the waiver 
process by specifying that a pattern or practice of waiving may be 
considered conduct inconsistent with just and equitable principles of 
trade. Finally, the Commission believes that the added prohibitions 
against agreements among members concerning the allocation of trades, 
and against members harassing, intimidating, or coercing other members 
to enter into any waiver, or to make or refrain from making any 
complaint or appeal, are reasonable and appropriate.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\12\, that the proposed rule change (File No. SR-Phlx-2001-39) be, and 
it hereby is, approved.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-10786 Filed 4-30-03; 8:45 am]
BILLING CODE 8010-01-P