[Federal Register Volume 68, Number 115 (Monday, June 16, 2003)]
[Notices]
[Pages 35746-35748]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15087]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48003; File No. SR-Phlx-2003-32]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Philadelphia Stock Exchange, Inc. Relating to Its Rule 452, 
Limitation on Members' Trading Because of Customers' Orders

June 9, 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 May 8, 2003, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') submitted to 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 
29, 2003, the Phlx filed Amendment No. 1 to the proposal.\3\ The 
proposed rule change, as amended, has been filed by Phlx under Rule 
19b-4(f)(6) under the Act.\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 Carla Behnfeldt, Director, Legal Department 
New Product Development Group, Phlx to Tim Fox, Attorney, Division 
of Market Regulation (``Division''), Commission, dated May 28, 2003 
(``Amendment No. 1''). In Amendment No. 1, the Exchange submitted 
technical corrections to the rule text and clarified that the 
applicability of Phlx Rule 452(a)(1) is limited to orders on the 
Exchange for securities listed or traded on the Exchange.
    \4\ 17 CFR 240.19b-4(f)(6). For purposes of determining the 
effective date and calculating the sixty-day period within which the 
Commission may summarily abrogate the proposed rule change under 
section 19(b)(3)(C) of the Act, the Commission considers that period 
to commence on May 29, 2003, the date Phlx filed Amendment No. 1. 
See 15 U.S.C. 78s(b)(3)(C).
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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 452, Limitations on Members' 
Trading Because of Customers' Orders, to permit members and member 
organizations to trade along with some of their customers in limited 
circumstances so long as the order is not for the account of an 
individual investor and the customer has given express permission for 
the transaction. The proposed rule change, as amended, also adds 
additional language regarding the applicability of Phlx Rule 452's 
limitation on trading, and adds a number of additional exceptions to 
that rule.
    The text of the proposed rule change, as amended, is below. 
Proposed additions are in italics and proposed deletions are in 
[brackets].
* * * * *

Rule 452. Limitations on Members' Trading Because of Customers' Orders

    (a) [No member shall (1) personally buy or initiate the purchase of 
any security on the Exchange for his own account or for any account in 
which he, or the firm of which he is a partner or any partner of such 
firm, is directly or indirectly interested, while such member 
personally holds or has knowledge that his firm or any partner thereof 
holds an unexecuted market order to buy such security in the unit of 
trading for a customer, or (2) personally sell or initiate the sale of 
any security on the Exchange for any such account, while he personally 
holds or has knowledge that his firm or any partner thereof holds an 
unexecuted market order to sell such security in the unit of trading 
for a customer.] Except as provided in this Rule, no member or member 
organization shall cause the entry of an order to buy (sell) on the 
Exchange any security listed or traded on the Exchange for any account 
in which such member or member organization or any associated person 
thereof is directly or indirectly interested (a ``proprietary order''), 
if the person responsible for the entry of such order has knowledge of 
any particular unexecuted customer order to buy (sell) such security 
which could be executed at the same price.
    (b) [No member shall (1) personally buy or initiate the purchase of 
any security on the Exchange for any such account, at or below the 
price at which he personally holds or has knowledge that his firm or 
any partner thereof holds an unexecuted limited price order to buy such 
security in the unit of trading for a customer, or (2) personally sell 
or initiate the sale of any security on the Exchange for any such 
account at or above the price at which he personally holds or has 
knowledge that his firm or any partner thereof holds an unexecuted 
limited price order to sell such security in the unit of trading for a 
customer.] A member or member organization may enter a proprietary 
order while representing a customer order which could be executed at 
the same price, provided the customer's order is not for the account of 
an individual investor, and the customer has given express permission, 
including an understanding of the relative price and size of allocated 
execution reports, under the following conditions:
    (1) the member or member organization is liquidating a position 
held in a proprietary facilitation account, and the customer order is 
for 10,000 shares or more;
    (2) the member or member organization is creating a bona fide hedge 
(``hedge'') and (i) the creation of the hedge, whether through one or 
more transactions, occurs so close in time to the completion of the 
transaction precipitating such hedge that the hedge is clearly related; 
(ii) the size of the hedge is commensurate with the risk it offsets; 
(iii) the risk to be offset is the result of a position acquired in the 
course of facilitating a customer order; and (iv) the customer order is 
for 10,000 shares or more;
    (3) the member or member organization is modifying an existing 
hedge and (i) the size of the hedge, as modified, remains commensurate 
with the risk it offsets; (ii) the hedge was created to offset a 
position acquired in the course of facilitating a customer order; and 
(iii) the customer order is for 10,000 shares or more; or
    (4) the member or member organization is engaging in bona fide 
arbitrage or risk arbitrage transaction, and recording such 
transactions in an account used solely to record arbitrage transactions 
(an ``arbitrage account'').
[Exceptions]
    (c) The provisions of this Rule 452 shall not apply to:
    (1) [to] any purchase or sale of any security in an amount of less 
than the unit of trading made by an odd-lot

[[Page 35747]]

dealer to offset odd-lot orders for customers[, or];
    (2) any purchase or sale of any security [, delivery of which is to 
be upon a day other than the day of delivery provided] upon terms for 
delivery other than those specified in such unexecuted market or 
limited price order;
    (3) transactions by a member or member organization acting in the 
capacity of a specialist or market maker in a security listed or traded 
on the Exchange otherwise than on the Exchange; and
    (4) transactions made to correct bona fide errors.

Supplementary Material:

    .01 [A member who issues a commitment to trade from the Exchange 
through ITS or any other Application of the System shall, as a 
consequence thereof, be deemed to be initiating a purchase or a sale of 
a security on the Exchange as referred to in this Rule.] A member or 
member organization or employee thereof responsible for entering 
proprietary orders shall be presumed to have knowledge of a particular 
customer order unless the member organization has implemented a 
reasonable system of internal policies and procedures to prevent the 
misuse of information about customer orders by those responsible for 
entering such proprietary orders.
    .02 This Rule 452 shall apply to any agency or proprietary 
transaction effected on the Exchange if such transaction (``Exchange 
transaction'') is part of a group of related transactions that together 
have the effects prohibited by this Rule, regardless whether (i) one or 
more of the other related transactions were effected on other market 
centers; or (ii) the Exchange transaction by itself had such effects.
    .03 This Rule 452 shall also apply to a member organization's 
member on the Floor, who may not execute a proprietary order at the 
same price, or at a better price, as an unexecuted customer order that 
he or she is representing, except to the extent the member organization 
itself could do so under this Rule.
    .04 For purposes of paragraph (b) above, the term ``account of an 
individual investor'' shall mean an account covered by section 
11(a)(1)(E) of the Securities Exchange Act of 1934. For purposes of 
paragraph (b)(1) above, the term ``proprietary facilitation account'' 
shall mean an account in which a member organization has a direct 
interest and which is used to record transactions whereby the member 
organization acquires positions in the course of facilitating customer 
orders. Only those positions which are recorded in a proprietary 
facilitation account may be liquidated as provided in paragraph (b)(1). 
For purposes of paragraph (b)(2) and (b)(4) above, the terms ``bona 
fide hedge'', ``bona fide arbitrage'' and ``risk arbitrage'' shall have 
the meaning ascribed to such terms in Securities Exchange Act Release 
No. 15533, January 29, 1979. All transactions effected pursuant to 
paragraph (b)(4) above must be recorded in an arbitrage account.
    .05 For purposes of paragraph (b)(2) above, a hedge will be deemed 
to be ``clearly related'' if either the first or last transaction 
comprising the hedge is executed on the same trade date as the 
transaction that precipitates such hedge. A member shall mark all 
memoranda of orders to identify each transaction creating or modifying 
a hedge as permitted under this Rule 452.
    .06 A member who issues a commitment or obligation to trade from 
the Exchange through ITS or any other Application of the System shall, 
as a consequence thereof, be deemed to be initiating a purchase or sale 
of a security on the Exchange as referred to in this Rule 452.
* * * * *

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 amend Phlx Rule 452, 
which provides limitations on members' trading because of customer 
orders. The proposed revision would bring the rule into conformity with 
New York Stock Exchange, Inc. (``NYSE'') Rule 92, which was recently 
approved by the Commission.\5\ The proposed revision to Phlx Rule 452 
would clarify the obligations of Exchange members regarding proprietary 
trading in instances where they or their member organization hold 
customer orders at the same or inferior prices.
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    \5\ See Securities Exchange Act Release No. 44139 (March 30, 
2001), 66 FR 18339 (April 6, 2001) (SR-NYSE-94-34).
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    In 1994, the NYSE proposed changes to NYSE Rule 92.\6\ According to 
the Phlx, these changes were meant to address various issues regarding 
an NYSE-member organization's trading when it was in possession of 
customer orders, including a member organization's regional specialist 
operations, block trading, arbitrage activity and hedge activity. The 
Commission approved the changes to NYSE Rule 92 in 2001.\7\ The 
revision would conform Phlx Rule 452 to NYSE Rule 92.\8\
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    \6\ See Securities Exchange Act Release No. 35139 (December 22, 
1994), 60 FR 156 (January 3, 1995) (SR-NYSE-94-34).
    \7\ See note 5 supra.
    \8\ The Phlx had previously filed a proposed rule change, 
including several amendments, to conform Phlx Rule 452 to NYSE Rule 
92, which was withdrawn in March, 2002. See Securities Exchange Act 
Release No. 37628 (September 3, 1996), 61 FR 47537 (September 9, 
1996) (SR-Phlx-96-37).
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    Currently, sections (a) and (b) of Phlx Rule 452 contain the 
general prohibitions against trading ahead of customer market orders 
and customer limit orders, respectively. As revised, section (a) 
contains the general prohibitions against trading ahead of both 
customer market and limit orders.
    The Exchange proposes to revise section (b) to create four 
exceptions to the general rule that may apply when the customer is not 
an individual investor and the customer knowingly consents: (1) 
Liquidation of a position held in a proprietary facilitation account so 
long as the customer's order is for 10,000 shares or more; (2) creation 
of a bona fide hedge under specified conditions; (3) modification of a 
bona fide hedge under certain conditions; and (4) engaging in bona fide 
arbitrage or risk arbitrage in an arbitrage account.
    Section (c) currently contains two exceptions to the general rule; 
it does not apply: (i) To orders under 100 shares and (ii) when a 
customer order settles under different delivery terms than the 
proprietary order. As proposed, revised section (c) retains these two 
exceptions and adds the following two more: (1) It does not apply to 
transactions of a member organization's specialist unit on another 
exchange; and (2) it does not apply when transactions are made to 
correct bona fide errors.
    Finally, the Supplementary Material currently contains a 
clarification that outbound Intermarket Trading System

[[Page 35748]]

(``ITS'') \9\ commitments are considered to be initiated from the Phlx 
floor. The Phlx retains the ITS clarification in Supplementary Material 
.06, and adds the following: (1) A Phlx member or member organization 
or employee thereof responsible for entering proprietary orders is 
presumed to have knowledge of any customer order held by the member 
organization unless the proper information barriers are in place; (2) 
this rule applies to series of transactions even if some of the 
transactions do not take place on the Phlx; (3) that a member on the 
Floor may only execute a proprietary order ahead in time of a customer 
order, to the extent that his member organization is permitted (i.e., 
if the member organization is prohibited, then so is the member on the 
floor); (4) definitions of certain terms in the rule; and (5) 
procedures for utilizing the hedge exemption to the rule.
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    \9\ See Phlx Rule 2001, Intermarket Trading System. The ITS Plan 
is a national market system plan approved by the Commission pursuant 
to Section 11A of the Act and Rule 11Aa3-2 thereunder. See 15 U.S.C. 
78k-1 and 17 CFR 240.11Aa3-2.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act \10\ in general, and furthers the objectives of section 
6(b)(5) of the Act \11\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade and, in general, to protect investors 
and the public interest. The Phlx represents that the proposed rule 
change, as amended, balances fundamental investor protections with the 
requirements of evolving trading practices involving institutional 
investors and member firm proprietary trading operations. The limited 
types of transactions it would permit should promote just and equitable 
principles of trade. Many of these proprietary transactions should add 
liquidity to the market and help investors receive efficient execution 
of their orders.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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, as 
amended, 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 solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change, as amended, has been filed by the 
Exchange pursuant to section 19(b)(3)(A) of the Act \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\ Consequently, because 
Phlx believes the foregoing rule change, as amended: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for thirty days from the date on 
which it was filed, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, and the Exchange has given the Commission written notice of 
its intention to file the proposed rule change at least five business 
days prior to the filing date, it has become effective pursuant to 
section 19(b)(3)(A) of the Act \14\ and Rule 19b-4 thereunder.\15\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4.
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    At any time within sixty days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change, as 
amended, if it appears to the Commission that such action is necessary 
or appropriate in the public interest, for the protection of investors, 
or otherwise in furtherance of the purposes of the Act.

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-2003-32 and should be submitted by July 7, 
2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-15087 Filed 6-13-03; 8:45 am]
BILLING CODE 8010-01-P