[Federal Register Volume 68, Number 229 (Friday, November 28, 2003)]
[Notices]
[Pages 66912-66913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29662]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48816; File No. SR-Phlx-2003-10]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating 
to Remote Primary Specialists

November 20, 2003.
    On February 26, 2003, the Philadelphia Stock Exchange, Inc. 
(``Phlx'') 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 to permit ``primary specialists'' to trade away 
from the Phlx floor in limited circumstances. The proposed rule change 
was published for comment in the Federal Register on September 29, 
2003.\3\ The Commission received no comments on the proposal. This 
order approves the Phlx's proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 48515 (September 22, 
2003), 68 FR 56031 (September 29, 2003).
---------------------------------------------------------------------------

    Under Phlx Rule 460, multiple specialists, one of which is 
identified as the ``primary specialist,'' \4\ currently may trade a 
particular security on the equity trading floor of the Phlx.\5\ Prior 
to the adoption of Phlx Rules 460 and 229A, each equity security traded 
on the floor of the Phlx was allocated to only one specialist unit. 
Phlx Rule 460 allows approved specialist units to trade one or more 
securities as ``competing specialists.'' \6\ There must be a primary 
specialist in a particular security in order for there to be competing 
specialists in that security.\7\ Competing specialists have the same 
affirmative and negative obligations under Phlx Rule 203 as primary 
specialists.
---------------------------------------------------------------------------

    \4\ Phlx Rule 229A(b)(5) defines ``primary specialist'' as 
follows:
    `Primary Specialist' shall mean the primary specialist 
identified as such by the Equity Allocation, Evaluation, and 
Securities Committee. The Primary Specialist may be either the 
Directed Specialist or the Non-Directed Specialist in the case of 
any particular Directed Order. The Primary Specialist shall be 
deemed to be the Directed Specialist with respect to any Non-
Directed Order.
    \5\ See Securities Exchange Act Release No. 45183 (December 21, 
2001), 67 FR 118 (January 2, 2002) (order approving establishment of 
a competing specialist program at the Phlx) (SR-Phlx-2001-97).
    \6\ Phlx Rule 229A(b)(6) defines ``competing specialist'' as 
follows:
    `Competing Specialist' shall mean any competing specialist 
identified as such by the Equity Allocation, Evaluation, and 
Securities Committee pursuant to [Phlx] Rule 460. A Competing 
Specialist may be either the Directed Specialist or the Non-Directed 
Specialist in the case of any particular Directed Order.
    \7\ A Phlx specialist may trade some securities on a primary 
basis and other securities on a competing basis, or made trade all 
its securities on either a primary or a competing basis.
---------------------------------------------------------------------------

    Pursuant to Phlx Rule 461, the Phlx also operates a program whereby 
competing Phlx specialist units conduct specialist trading activities 
off the Phlx trading floor using PACE \8\ terminals and related 
equipment. The Commission granted approval of the Phlx's remote 
competing specialist program subject to the condition that the Phlx 
``have in place specific information barrier policies and surveillance 
policies that are consistent with the Exchange's existing rules and 
that are acceptable be the Commission's Office of Compliance 
Inspections and Examinations (``OCIE'').'' \9\
---------------------------------------------------------------------------

    \8\ PACE is the electronic order routing, delivery execution, 
and reporting system used to access the Phlx Equity Floor. See Phlx 
Rules 229 and 229A.
    \9\ Securities Exchange Act Release No. 45184 (December 21, 
2001), 67 FR 622 (January 4, 2002) (order approving the 
establishment of the Phlx's remote specialist program) (SR-Phlx-
2001-98).
---------------------------------------------------------------------------

    The Phlx now proposes to establish a similar program whereby 
primary specialists would be permitted to conduct specialist trading 
activities off the Phlx trading floor.\10\ The Phlx has represented 
that its current rules, policies, and practices with respect to 
information barriers and surveillance are adequate to support remote 
trading by primary specialists at the Phlx.\11\ Moreover, the Phlx has 
represented that it will examine remote primary specialist locations to 
ensure adequate compliance with Phlx rules.\12\ Thus, the Commission 
believes that Phlx has addressed confidentiality issues associated with 
allowing remote primary specialists to trade from remote locations in 
proximity to a diversified broker-dealer's other off-floor operations. 
Member firms' traders should not get a market advantage because of 
their physical proximity to a specialist trading unit, and vice versa. 
Based, in part, on the Phlx's representation that it has in place 
adequate information barrier policies and surveillance procedures, the 
Commission is approving the Phlx's remote primary specialist proposal.
---------------------------------------------------------------------------

    \10\ The Commission reiterates that while the remote specialist 
program, which now includes primary specialists, may have the effect 
of attracting additional order flow to the Phlx, this must occur 
consistent with best execution principles. Accordingly, the broker-
dealer must rigorously and regularly examine the executions likely 
to be obtained for customer orders in the different markets trading 
the security, in addition to any other relevant considerations in 
routing customer orders.
    \11\ Telephone conversation between Carla Behnfeldt, Director, 
Legal Department New Product Development Group, Phlx, and Patrick M. 
Joyce, Special Counsel, Division of Market Regulation, Commission, 
on November 19, 2003.
    \12\ Telephone conversation between Edith Hallahan, Deputy 
General Counsel, Phlx, and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation, Commission, on November 20, 2003.
---------------------------------------------------------------------------

    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.\13\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\14\ which requires, among other things, 
that the Phlx's rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in, 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market

[[Page 66913]]

system, and, in general, to protect investors and the public interest. 
The Commission believes that the Phlx's proposal to permit primary 
specialists to trade on a remote basis in limited circumstances may 
reduce costs, add liquidity, and promote competition, and lead to a 
greater number of securities trading on PACE, thereby benefiting 
investors.
---------------------------------------------------------------------------

    \13\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\15\, that the proposed rule change (SR-Phlx-2003-10) be, and it hereby 
is, approved.
---------------------------------------------------------------------------

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

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-29662 Filed 11-26-03; 8:45 am]
BILLING CODE 8010-01-P