[Federal Register Volume 69, Number 32 (Wednesday, February 18, 2004)]
[Notices]
[Pages 7662-7663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3433]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49215; File No. SR-Phlx-2003-71]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to 
Participation Guarantees for Floor Brokers Representing Crossing and 
Facilitation Orders in Index Options

February 9, 2004.
    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 October 20, 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 Phlx. On January 9, 
2004, Phlx submitted Amendment No. 1 to the proposed rule change.\3\ 
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 Richard S. Rudolph, Director and Counsel, 
Phlx, to Ira Brandriss, Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated January 8, 2004 
(``Amendment No. 1''). The changes made by Amendment No. 1 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 amend Phlx Rule 1064, Crossing, Facilitation 
and Solicited Orders, which currently governs, among other things, the 
crossing of equity option orders by floor brokers. Specifically, the 
proposal would amend Commentary .02(i) and (iii) to Phlx Rule 1064 to 
provide a participation guarantee of 20% to floor brokers representing 
crossing and facilitation orders in index options.
    The text of the proposed rule change follows. Additions are 
italicized; deletions are in brackets.
* * * * *

Crossing, Facilitation and Solicited Orders

    Rule 1064. (a)-(d) No change.
    Commentary:
    .01. No change.
    .02. Firm Participation Guarantees. (i) Notwithstanding the 
provisions of paragraphs (a) and (b) of this Rule, when a Floor Broker 
holds an equity or index option order of the eligible order size or 
greater (``original order''), the Floor Broker is entitled to cross a 
certain percentage of the original order with other orders that he is 
holding or in the case of a public customer order, with a facilitation 
order of the originating firm (i.e., the firm from which the original 
customer order originated).
    (ii) No change.
    (iii) The percentage of the order which a Floor Broker is entitled 
to cross, after all public customer orders that were (1) On the limit 
order book and then (2) represented in the trading crowd at the time 
the market was established have been satisfied, is determined as 
follows:
    (A) With respect to orders for equity options: (i) 20% of the 
remaining contracts in the order if the order is traded at the best bid 
or offer given by the crowd in response to the Floor Broker's initial 
request for a market; or ([B]ii) 40% of the remaining contracts in the 
order if the order is traded between the best bid or offer given by the 
crowd in response to the Floor Broker's initial request for a market.
    (B) With respect to orders for index options, 20% of the remaining 
contracts in the order.
    (iv)-(x) No change.
    .03. No change.
* * * * *

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 Exchange 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 provide a 
participation guarantee of 20% to floor brokers representing crossing 
and facilitation orders in index options.
    Background. Currently, Phlx Rule 1064 sets forth, among other 
things, the procedures by which a floor broker holding a public 
customer order (``original order'') may cross it with either another 
customer order or orders from the same originating firm,\4\ or a contra 
side order provided by the original firm from its own proprietary 
account ``facilitation order'').\5\
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    \4\ See Phlx Rule 1064(a).
    \5\ See Phlx Rule 1064(b).
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    Under Exchange Rules 1064(a) and (b), a floor broker seeking to 
cross or facilitate buy and sell orders for the same options series 
must first bring the transaction to the trading floor and request 
markets from the trading crowd for all components of the order. After 
providing the crowd with the opportunity to make such markets, the 
floor broker must announce that he holds an order subject to crossing 
or facilitation, and then must propose a price at which to cross the 
original order that improves upon the price provided by the crowd. 
However, before the floor broker can effect the cross, the Registered 
Options Traders in the crowd are given the opportunity to take all or 
part of the transaction at the proposed price.
    Under these rules, if the crowd does not want to participate in the 
trade, the floor broker may proceed with the cross. If the crowd wants 
to participate in part of the order, however, the crowd has priority 
and the floor broker may cross only that amount remaining after the 
crowd has taken its portion. If the crowd wants to participate in the 
entire order, the floor broker will not be able to cross or facilitate 
any part of the order.
    In May 2003, the Commission approved amendments to Phlx Rule 1064 
that guarantee floor brokers representing crossing and facilitation 
orders in equity options with a size of at least 500 contracts the 
right to participate in a certain percentage of such orders.\6\
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    \6\ See Securities Exchange Act Release No. 47819 (May 8, 2003), 
68 FR 25924 (May 14, 2003) (File No. SR-Phlx-2002-17).
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    Currently, the participation guarantee applies to crossing and 
facilitation orders in equity options only. The percentage of the 
equity option order that a floor broker is entitled to cross after all 
public customer orders have been satisfied is determined as follows: 
(A) 20% of the remaining contracts in the order if the order is traded 
at the best bid or offer given by the crowd in response to the floor 
broker's initial request for a market; or (B) 40% of the remaining 
contracts in the order if the order is traded between the best bid or 
offer given by the crowd in response to the floor broker's initial 
request for a market.
    Crossing and Facilitation Orders in Index Options. The instant 
proposal would extend the participation

[[Page 7663]]

guarantee to floor brokers representing crossing and facilitation 
orders in index options. Floor brokers would be guaranteed a 
participation right of 20% for crossing and facilitation orders they 
represent in index options. All other current rules concerning 
participation guarantees in crossing and facilitation orders would 
apply to index options under the proposal.\7\ The Exchange believes 
that the proposed expansion of the participation guarantee to crossing 
and facilitation orders in index options would make the Exchange more 
competitive by providing an incentive to index options order flow 
providers to bring order flow to the Exchange.\8\ The Exchange also 
believes that the proposed rule change should make order flow 
providers, as customers of Exchange floor brokers, aware of the 
percentage of crossing and facilitation orders in index options to 
which they are entitled and also provide the Exchange's trading crowd 
participants with the same guidelines.
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    \7\ Id. See also Phlx Rule 1064, Commentary .02.
    \8\ The Exchange indicated this belief in the section of its 
filing that discusses the statutory basis for the proposed rule 
change.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\9\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\10\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect the 
investors and the public interest by providing floor brokers and 
Exchange crowd participants with rules setting forth guidelines 
regarding the percentage of crossing and facilitation orders in index 
options to which the floor brokers are entitled, and by making the 
Exchange more competitive by providing an incentive to index options 
order flow providers to bring order flow to the Exchange.
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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 solicited or received with respect to the 
proposed rule change.

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. 
Comments should be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-Phlx-2003-71. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in hard 
copy or by e-mail but not by both methods. 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 Exchange. All 
submissions should be submitted by March 10, 2004.

    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. 04-3433 Filed 2-17-04; 8:45 am]
BILLING CODE 8010-01-P