[Federal Register Volume 69, Number 71 (Tuesday, April 13, 2004)]
[Notices]
[Pages 19600-19601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8264]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49523; File No. SR-Phlx-2003-71]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to 
Participation Guarantees for Floor Brokers Representing Crossing and 
Facilitation Orders in Index Options

April 2, 2004.
    On October 20, 2003, 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 to amend Phlx Rule 1064, 
Crossing, Facilitation and Solicited Orders, with respect to index 
options. On January 9, 2004, Phlx filed Amendment No. 1 to the proposed 
rule change.\3\ The proposed rule change, as amended, was published for 
comment in the Federal Register on February 18, 2004.\4\ The Commission 
received no comments on the proposal.
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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, Commission, dated January 8, 2004.
    \4\ See Securities Exchange Act Release No. 49215 (February 9, 
2004), 69 FR 7662 (``Notice'').
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    Phlx Rule 1064 sets forth, among other things, the procedures by 
which a floor broker holding an option order (``original order'') may 
cross it with another order or orders he or she is holding, or, in the 
case of a public customer order, with a contra side order provided by 
the originating firm from its own proprietary account (``facilitation 
order''). Under certain conditions, Rule 1064 provides ``participation 
guarantees'' in such crossing or facilitation transactions, entitling 
the floor broker to cross a certain percentage of the original order 
with the other order or orders ahead of members of the trading 
crowd.\5\ These participation guarantees currently apply to 
transactions in equity options only. The Exchange proposes to amend 
Rule 1064 to provide a participation guarantee for trading in index 
options, and to set the guaranteed percentage in such options at 
20%.\6\
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    \5\ The percentage of the order that a floor broker is entitled 
to cross after all public customer orders have been satisfied is: 
(1) 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; and (2) 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. These guarantees apply when 
the original order is of an eligible size as determined by the Phlx 
Options Committee on an option-by-option basis, but in no case less 
than 500 contracts. See Phlx Rule 1064, Commentary .02(ii)-(iii).
    \6\ The 20% guarantee would apply whether the order is traded at 
or between the best bid or offer given by the crowd in response to 
the floor broker's initial request for a market. All other 
provisions in Rule 1064 concerning participation guarantees in 
equity options would apply to index options in the same manner as 
they apply to equity options. See Notice.
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    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,\7\ and, in 
particular, the requirements of section 6(b)(5) of the Act.\8\ The 
Exchange believes that establishing a participation guarantee of 20% 
for crossing and facilitation transactions 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. The 
Commission believes that participation guarantees are reasonable and 
within the business judgment of the Exchange, as long as they do not 
restrict competition and do not harm investors.\9\ The Commission has 
found, with respect to participation guarantees in other contexts, that 
guarantees of as much as 40% of an order in options trading are not 
inconsistent with statutory standards of

[[Page 19601]]

competition and free and open markets.\10\
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    \7\ 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).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ See, e.g., Securities Exchange Act Release No. 47729 (April 
24, 2003), 68 FR 23344 (May 1, 2003).
    \10\ See, e.g., Securities Exchange Act Release Nos. 42455 
(February 24, 2000), 65 FR 11388 (March 2, 2000) at 11398; and 43100 
(July 31, 2000), 65 FR 48778 (August 9, 2000) at notes 96-99 and 
accompanying text.
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    The Commission notes that, pursuant to Phlx Rule 1064, Commentary 
.02(vi), if a crossing or facilitation trade takes place in a situation 
in which the specialist is entitled to an Enhanced Specialist 
Participation (specialist guarantee), the percentage received by the 
specialist, combined with the percentage crossed by the floor broker, 
may be no more than 40% of the original order (after public customer 
orders have been satisfied).
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-Phlx-2003-71) be, 
and it hereby is, approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-8264 Filed 4-12-04; 8:45 am]
BILLING CODE 8010-01-P