[Federal Register Volume 68, Number 137 (Thursday, July 17, 2003)]
[Notices]
[Pages 42452-42453]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18126]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48160; File No. SR-Phlx-2003-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. Relating to the Prohibition Against Specialists Accepting 
Discretionary Orders on the Limit Order Book

July 10, 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 13, 2003, 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 June 
5, 2003, the Phlx filed Amendment No. 1 to the proposed rule change. 
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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change has been submitted in response to the 
Order Instituting Public Administrative Proceedings Pursuant to section 
19(h)(1) of the Act, Making Findings and Imposing Remedial 
Sanctions.\3\ Specifically, the Phlx proposes to amend Option Floor 
Procedure Advice (``OFPA'') A-2, Types of Orders to be Accepted onto 
the Specialist's Book, to codify the prohibition against specialists 
accepting discretionary orders on the limit order book. The text of the 
proposed rule change is set forth below. Additions are italicized.
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    \3\ See Securities Exchange Act Release No. 43268 (September 11, 
2000) (File No. 3-10282).
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* * * * *
A-2 Types of Orders To Be Accepted onto the Specialist's Book
    (i)-(iii) No change.
    (iv) A Specialist shall not accept discretionary orders.
FINE SCHEDULE (Implemented on a Three-year Running Calendar Basis)
A-2
1st Occurrence--$250.00
2nd Occurrence--$500.00
3rd Occurrence--$1,000.00
4th Occurrence and Thereafter--Sanction is discretionary with Business 
Conduct Committee
* * * * *

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
    Currently, OFPA A-2 sets forth the types of orders that a 
specialist must accept, and the types of orders a specialist may not 
accept onto the limit order book.\4\ OFPA A-2 provides that a 
specialist may refuse to accept contingency orders,\5\ except that a

[[Page 42453]]

specialist may only refuse to accept customer contingency orders with 
the prior approval of two Floor Officials. Specialists must accept all 
non-contingent limit orders tendered for placement on the limit order 
book.\6\
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    \4\ The electronic ``limit order book'' is the Exchange's 
automated specialist limit order book, which automatically routes 
all unexecuted AUTOM orders to the book and displays orders real-
time in order of price-time priority. Orders not delivered through 
AUTOM may also be entered onto the limit order book. See Phlx Rule 
1080, Commentary .02.
    \5\ Phlx Rule 1066 (c) defines a contingency order as a limit or 
market order to buy or sell that is contingent upon a condition 
being satisfied while the order is at the post. The Rule lists the 
following types of contingency orders:
    (i) Stop-Limit Order. A stop-limit order is a contingency order 
to buy or sell at a limited price when the market for a particular 
option contract reaches a specified price. A stop-limit order to buy 
becomes a limit order executable at the limit price or better when 
the option contract trades or ibid at or above the stop-limit price, 
after the offer is represented in the trading crowd. A stop-limit 
order to sell becomes a limit order executable at the limit price or 
better when the option contract trades or is offered at or below the 
stop-limit price, after the order is represented in the trading 
crowd.
    (ii) Stop (stop-loss) Order. A stop order is a contingency order 
to buy or sell when the market for a particular option contract 
reaches a specified price. A stop order to buy becomes a market 
order when the option contract trades or is bid at or above the stop 
price, after the order is represented in the trading crowd. A stop 
order to sell becomes a market order when the option contract trades 
or is offered at or below the stop price, after the order is 
represented in the trading crowd.
    (iii) Multi-Part Order. A multi-part order is an order to buy 
and/or sell a stated number of foreign currency option contracts and 
a stated number of foreign currency future contracts. A multi-part 
order may be executed in accordance with the procedures outlined in 
Phlx Rule 1068.
    (iv) Delta Order. A ``delta order'' is a contingency order that 
is dependent upon the amount an option's price changes in relation 
to a corresponding change of price in the underlying security.
    (v) All-or-None Order. An all-or-none order is a market or limit 
order which is to be executed in its entirety or not at all.
    (vi) Opening-Only-Market Order. An opening-only-market order is 
a market order which is to be executed in whole or in part during 
the opening rotation of an options series or not at all.
    (vii) Market-on-Close Order. A market-on-close order is a market 
limit order to be executed as close as possible to the closing bell, 
or during the closing rotation and should be near to or at the 
closing price for the particular series.
    (viii) Cancel-Replacement Order. A cancel-replacement order is a 
contingency order consisting of two or more parts which require the 
immediate cancellation of a previously received order prior to the 
replacement of a new order with new terms and conditions. If the 
previously placed order is already filled partially or in its 
entirety the replacement order is automatically canceled or reduced 
by such member.
    \6\ See Securities Exchange Act Release No. 34721 (September 26, 
1994), 59 FR 50310 (October 23, 1994) (SR-Phlx-92-03) (Order 
approving amendments to OFPA A-2 permitting specialists to accept 
contingency orders and reflecting that Exchange specialists are not 
permitted to accept discretionary orders, including spread, 
straddle, and combination orders).
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    The purpose of the proposed rule change is to amend OFPA A-2 
specifically to prohibit a specialist from accepting discretionary 
orders \7\ on the limit order book. The Exchange believes that this 
clarifying provision is consistent with the Act, in that a specialist 
is responsible to effect transactions on behalf of the accounts of the 
persons that have placed limit orders on the limit order book when such 
limit orders become marketable.\8\ The Exchange believes that this 
proposed provision should provide Exchange specialists with more 
specific guidance as to the types of orders that they may, and may not, 
accept onto the limit order book by codifying a prohibition contained 
in the Act into Phlx rules.
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    \7\ Section 3(a)(35) of the Act provides that a person exercises 
``investment discretion'' with respect to an account if, directly or 
indirectly, such person (A) is authorized to determine what 
securities or other property shall be purchased or sold or for the 
account, (B) makes decisions as to what securities or other property 
shall be purchased or sold by or for the account even though some 
other person may have responsibility for such investment decisions, 
or (C) otherwise exercises such influence with respect to the 
purchase and sale of securities or other property by or for the 
account as the Commission, by rule, determines, in the public 
interest or for the protection of investors, should be subject to 
the operation of the provisions of this title and the rules and 
regulations thereunder. 15 U.S.C. 78c(35).
    \8\ Section 11(a)(1) of the Act prohibits any member of a 
national securities exchange from effecting any transaction on such 
exchange for its own account, the account of an associated person, 
or an account with respect to which it or an associated person 
thereof exercises investment discretion. 15 U.S.C. 78k(a)(1) 
(emphasis added). The Act provides an exception from this 
prohibition for any transaction by a dealer acting in the capacity 
of market maker. 15 U.S.C 78k(a)(1)(A). Furthermore, Section 11(b) 
of the Act provides that it shall be unlawful for a specialist 
permitted to act as a broker and dealer to effect on the exchange as 
broker any transaction except upon a market or limited price order. 
15 U.S.C. 78k(b). In this situation, once the limit order is placed 
on the limit order book, the specialist becomes a ``broker'' by 
definition, engaged in the business of effecting transactions in 
securities for the account of others, is not acting in the capacity 
of market maker, and therefore does not qualify for the market maker 
exception to the prohibition. 15 U.S.C. 78c(4)(A).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) \9\ of the Act in general, and section 6(b)(5) \10\ in particular 
in that it is designed to promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and protect investors and the public interest by amending 
its rules to more closely track the provisions of the Act.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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, 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 
number SR-Phlx-2003-15 and should be submitted by August 7, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-18126 Filed 7-16-03; 8:45 am]
BILLING CODE 8010-01-P