24246 Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices

5 15 U.S.C. 78k–1(a)(1)(C).

6 15 U.S.C. 78f(b).

7 In approving this rule change, the Commission

has considered its impact on efficiency,

competition, and capital formation. 15 U.S.C. 78c(f).

8 15 U.S.C. 78k–1(a)(1)(C).

9 15 U.S.C. 78f(b)(5) and 78s(b)(2).

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 In Amendment No. 1, the Exchange made

technical changes to the proposal. See Letter from

Nandita Yagnik, Phlx, to Richard Strasser, Assistant

Director, Division of Market Regulation,

Commission, dated November 3, 1999

(‘‘Amendment No. 1’’).

4See Securities Exchange Act Release No. 42161

(November 19, 1999), 64 FR 66958.

5See Securities Exchange Act Release No. 34606

(August 26, 1994), 59 FR 45741 (September 2,

1994). Initially , the enhanced parity split was

approved as a one year pilot expiring August 26,

1995.

6See Securities Exchange Act Release No. 35028

(November 30, 1994), 59 FR 63151 (December 7,

1994).

the proposed rule change is the

requirement under Section

11A(a)(1)(C) 5 which states that it is in

the public interest and appropriate for

the protection of investors and the

maintenance of fair and orderly markets

to assure economically efficient

execution of securities transactions, fair

competition among brokers and dealers,

among exchange markets, and between

exchange markets and markets other

than exchange markets.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

These enhancements will provide the

Exchange the opportunity to compete

more effectively for order flow with

other marketplaces. Thus, the Exchange

does not believe that the proposed rule

change will impose any burden on

competition that is not necessary or

appropriate in furtherance of the

purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

The Exchange reviewed the proposed

rule change with members and

organizations representing various

constituencies of the Exchange and the

responses to the proposed rule changes

were positive. The Exchange has not

otherwise solicited, and does not intend

to solicit, comments on this proposed

rule change. The Exchange has not

received any written comments from

members or other interested parties.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

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, and, in particular, with the

requirements of Section 6(b) of the Act.6

Eliminating specialist commissions on

orders executed within five minutes

will improve the cost competitiveness of

Exchange executions, which the

Exchange believes will inure to the

benefit of investors. Additionally, this

may assist broker-dealers in fulfilling

their best execution duties for their

customers. The Commission notes that

the proposed rule change also extends

provisions of a previously approved

pilot program.7

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice thereof in the

Federal Register. Approval of the

proposal will allow the Exchange to

continue the pilot program. Therefore,

the Commission believes it is consistent

with Section 6(b)(5) and Section

11A(a)(1)(C) of the Act 8 to grant

accelerated approval to the proposed

rule change.9

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, N.W.,

Washington, D.C. 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 at

the Commission’s Public Reference

Room, located at the above address.

Copies of such filing will also be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to File No.

SR–NYSE–00–13 and should be

submitted by May 16, 2000.

V. Conclusion

It is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,10 that the

proposed rule change (SR–NYSE–00–

13) extending the pilot program for

amendments to Exchange Rule 123B

until April 26, 2000 is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10263 Filed 4–24–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42700; File No. SR–Phlx–

99–39]

Self-Regulatory Organizations;

Philadelphia Stock Exchange, Inc.;

Order Approving Proposed Rule

Change Regarding Specialist

Enhanced Participation

April 18, 2000.

I. Introduction

On October 4, 1999, the Philadelphia

Stock Exchange, Inc. (‘‘Exchange’’ or

‘‘Phlx’’) submitted to 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 seeking to amend

Exchange Rule 1014, ‘‘Obligations and

Restrictions Applicable to Specialists

and Registered Options Traders,’’ and

its corollary Option Floor Procedure

Advice B–6 to revise the enhanced

participation available to Exchange

specialists. The proposal was amended

on November 4, 1999.3 Notice of the

proposed rule change and Amendment

No. 1 appeared in the Federal Register

on November 30, 1999.4 The

Commission received no comments on

the proposal. This order approves the

proposed rule change, as amended.

II. Description of the Proposal

On August 26, 1994, the Commission

approved the Exchange’s proposal to

adopt an enhanced participation for

Exchange specialists in equity options.5

The enhancement, or ‘‘enhanced parity

split,’’ provides Exchange specialists

with a greater participation in parity

trades than the specialists would

otherwise be entitled to receive.

On November 30, 1994, the

Commission approved the Exchange’s

proposal to make the enhanced parity

split available to index option

specialists.6 The enhanced parity split

was later revised with respect to

Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices 24247

7See Securities Exchange Act Release No. 35429

(March 1, 1995), 60 FR 12802 (March 8, 1995). 8See Securities Exchange Act Release No. 36122

(August 18, 1995), 60 FR 44530 (August 28, 1995);

37254 (August 5, 1996), 61 FR 42080 (August 13,

1996); and 38924 (August 11, 1997), 62 FR 44160

(August 19, 1997). 9See Securities Exchange Act Release No. 39401

(December 4, 1997), 62 FR 65300 (December 11,

1997). 10See Securities Exchange Act Release No. 41588

(July 1, 1999), 64 FR 37185 (July 9, 1999. The

Exchange also received approval to give specialists

an enhanced parity split when they develop and

trade a new product (‘‘New Products Split’’). Under

the New Products Split, when the specialist is on

parity with three or more controlled accounts, the

specialist receives 40% of the contracts and the

controlled accounts receive the remaining 60%.

When the specialist is on parity with less than three

controlled accounts in the crowd, the specialist

receives 60% of the contracts and the controlled

accounts receive 40%. In either of these situations,

if a customer is on parity, the customer may not

receive a lesser allotment than any other crowd

participant including the specialist. Id.

11A controlled account is defined as ‘‘any

account controlled by or under common control

with a member broker-dealer.’’ Customer accounts,

which include discretionary accounts, are defined

as all accounts other than controlled accounts. See

Exchange Rule 1014(g)(i).

12The application of this enhanced parity split is

mandatory. Therefore, with respect to any equity or

index option transaction that implicates the

enhanced parity split, the specialist is required to

accept the preferential allocation and may not

decline the enhancement. If an equity or index

option trade is on parity, but not subject to the

enhanced parity split (i.e., the order is for five or

less contracts), the Exchange specialist is required

to allocate the contracts according to the Exchange’s

priority and parity rules. See Exchange Rule 119,

‘‘Precedence of Highest Bid,’’ and Exchange Rule

120, ‘‘Precedence of Offers at Same Price.’’

13 15 U.S.C. 78f(b)(5).

14 In approving this proposed rule change, the

Commission has considered the proposal’s impact

on efficiency, competition, and capital formation.

15 U.S.C. 78c(f).

15For example, under the current enhanced

participation if there is an initiating order of fifty

contracts, and three controlled accounts are on

parity, the Specialist will receive twenty contracts

and the controlled accounts will each receive ten

contracts. In contrast, under the proposal the

specialist will only receive fifteen contracts.

16See Amendment No. 1, supra note 3.

17 Id.

18See, e.g., Security Exchange Act Release No.

35177 (December 29, 1994), 60 FR 2419 (January 9,

1995).

19 15 U.S.C. 78S(B)(2).

situations where less than three

controlled accounts are on parity with a

specialist.7 The enhanced parity split

was renewed unaltered and on a

continuing pilot basis on three

subsequent occasions.8 Thereafter, the

enhanced parity split was extended

until December 31, 1998, and revised so

that it would apply to: (1) All index

options; (2) 50% of each specialist’s

equity options; and (3) all new options

allocated to a specialist during the year.

In addition, specialists were permitted

to revise the list of eligible equity

options on a quarterly basis, instead of

annually.9 Finally, in July 1999, the

enhanced parity split was permanently

approved.10

The enhanced parity split works as

follows: when an equity or index option

specialist is on parity with one

controlled account 11 and an order for

more than five contracts comes into the

crowd, the specialist will receive 60%

of the contracts and the controlled

account will receive 40%. When the

specialist is on parity with two

controlled accounts and the order is for

more than five contracts, the specialist

will receive 40% of the contracts and

each controlled account will receive

30%. When the specialist is on parity

with three or more controlled accounts

and the order is for more than five

contracts, the specialist will be counted

as two crowd participants when

allocating the contracts. In any of these

situations, if a customer order is on

parity, the customer will not be

disadvantaged by receiving a lesser

allotment than any other crowd

participant, including the specialist.

Thus, a customer on parity is assured a

minimum participation that is equal to

the participation of the specialist.12

The Exchange now proposes to revise

the manner in which the enhanced

parity split operates only in those cases

where the specialist is on parity with

three or more controlled accounts and

the order is for more than five contracts.

Under the proposal, the specialist will

receive 30% of the contracts instead of

being counted as two crowd participants

in determining the number of contracts

the specialist is entitled to receive.

III. Discussion

For the reasons discussed below, the

Commission finds that the proposed

rule change is consistent with the Act

and the rules and regulations under the

Act applicable to a national securities

exchange. In particular, the Commission

believes the proposed rule change is

consistent with the section 6(b)(5) 13

requirements that the rules of an

exchange be designed to promote just

and equitable principles of trade,

prevent fraudulent and manipulative

acts and practices, and protect investors

and the public interest.14 The

Commission also finds that the proposal

may serve to remove impediments to

and perfect the mechanism of a free and

open market by helping the Exchange to

attract and retain specialist units.

When an equity or index option

specialist is on parity with three or more

controlled accounts and the order is for

more than five contracts, the proposal

gives the specialist 30% of the contracts,

rather than counting the specialist as

two crowd participants. The proposal

will significantly increase the

specialist’s enhanced participation

when the specialist is on parity with

five or more controlled accounts. Under

the proposal, however, when the

specialist is on parity with three or four

controlled accounts, the specialist’s

enhanced participation will be

reduced.15 The Exchange recognizes

that the proposal will reduce the

number of contracts that a specialist

will receive when the specialist is on

parity with three or four controlled

accounts.16 The Exchange, however,

believes that the proposal will provide

a more equitable treatment to all

specialists such that specialists of both

small and large crowds will receive a

significant enhanced participation when

there are five of more controlled

accounts on parity.17

The Commission recognizes that the

purpose of the enhanced parity split is

to encourage specialists to make deep

and liquid markets to attract order flow

to the Exchange. The Commission has

previously noted that specialists have

responsibilities and costs that crowd

participants do not share, such as the

staff costs associated with the

requirement to continually update and

disseminate quotes.18 As a result, the

Commission believes it is reasonable for

the Exchange to grant certain advantages

to specialists, such as the enhanced

parity split, to attract and retain well

capitalized specialists at the Exchange.

As long as these advantages do not

unreasonably restrain competition and

do not harm investors, the Commission

believes that the granting of such

benefits to specialists, in general, is

within the business judgment of the

Exchange. In this regard, the

Commission believes that it is

reasonable for the Exchange to revise

the enhanced parity split as proposed.

The Commission believes that the

proposal should provide reasonable

benefits to specialists, given their

heightened responsibilities and costs.

The Commission believes that the

approval of the proposal is consistent

with the Act because the newly revised

enhanced parity split should not

unreasonably restrain competition and

should not result in harm to investors.

The Commission notes that customer

orders on parity will continue to be

assured a minimum participation equal

to any other crowd participant,

including the specialist.

IV. Conclusion

It Is Therefore Ordered, pursuant to

section 19(b)(2) of the Act,19 that the

24248 Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices

20 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 17 CFR 240.19b–4(f)(6).

4See Securities Exchange Act Release No. 37977

(November 26, 1996), 61 FR 63889 (December 2,

1996.)

5AUTOM is an electronic order routing and

delivery system for option orders.

6See Securities Exchange Act Release No. 35033

(November 30, 1994), 59 FR 63152 (December 7,

1994).

7The program was initially approved in 1994 as

a one year pilot. See Securities Exchange Act

Release No. 34606 (August 26, 1994), 59 FR 45741

(September 2, 1994). It has subsequently been

extended and revised. See Securities Exchange Act

Release Nos. 35028 (November 30, 1994), 59 FR

63151 (December 7, 1994); 35429 (March 1, 1995),

60 FR 12802 (March 8, 1995); 36122 (August 18,

1995), 60 FR 44530 (August 28, 1995); 37254

(August 5, 1996), 61 FR 42080 (August 13, 1996);

38924 (August 11, 1997), 62 FR 44160 (August 19,

1997); 39401 (December 4, 1997), 62 FR 65300

(December 11, 1997); and 40876 (December 31,

1998), 64 FR 1849 (January 12, 1999). The

Commission granted the pilot permanent approval

in July 1999. See Securities Exchange Act Release

No. 41588 (July 1, 1999), 64 FR 37185 (July 9, 1999).

8Pursuant to Rule 1014(g)(i), a controlled account

includes any account controlled by or under

common control with a member broker-dealer.

proposed rule change (SR–Phlx–99–39),

as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.20

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10258 Filed 4–24–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42699; File No. SR–Phlx–

99–04]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.

Relating to Enhanced Specialists

Participation in Wheel Trades

April 18, 2000.

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 June 14,

1999, the Philadelphia Stock Exchange,

Inc. (‘‘Phlx’’ or ‘‘Exchange’’), filed with

the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the Phlx. The

proposed rule change was filed by the

Exchange as a ‘‘non-controversial’’ rule

change under Rule 19b–4(f)(6) 3 under

the Act. The Commission is publishing

this notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Phlx proposal amends Options

Floor Procedure Advise F–24, AUTO–X

Contra-Party Participation (The Wheel)

(‘‘Advise F–24’’), as it relates to

Enhanced Specialist Participation in

Wheel trades. Specifically, the proposal

modifies paragraph (e) to state that

where the Enhanced Specialist

Participation of Rule 1014(g)(ii) applies,

the specialist shall receive an enhanced

participation ‘‘substantially equivalent

to twice the number of contracts as

other crowd participants,’’ rather than

‘‘twice the contracts,’’ as the text of

Advise F–24 previously stated.

The proposal retains the provision

that the Enhanced Specialist

Participation on the Wheel requires the

unanimous consent of Wheel

participants, but adds the requirement

that it be approved by the Options

Committee Chairman or his designee.

In addition, the proposal amends

paragraph (e) to clarify that the Wheel

will rotate in increments depending

upon the size of the AUTO–X guarantee,

not the size of each individual AUTO–

X order.4

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 includes statements concerning the

purpose of and basis for the proposed

rule change and discussed any comment

it received on the proposed rule change.

The text of these statements may be

examined at the places specified in Item

IV below. The Phlx has prepared

summaries, set forth in Section A, B,

and C below, of the most significant

aspects of such statement.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The Wheel is an automated

mechanism for assigning trade

participation among specialists and

Registered Options Traders (‘‘ROTs’’) on

a rotating basis, as contra-side

participants to AUTO–X orders. AUTO–

X is the automatic execution feature of

the Exchange’s Automated Options

Market (‘‘AUTOM’’) system,5 which

provides customers with automatic

execution of eligible option orders at

displayed markets.

The purpose of the Wheel is to

increase the efficiency of order

execution through AUTO–X by

including floor traders in the automated

assignment of contra-parties to

incoming AUTO–X orders. Thus, the

Wheel is intended to make AUTO–X

more efficient, as contra-side

participation is assigned automatically,

and no longer entered manually. The

Exchange’s detailed Wheel provisions

appear as Advise F–24.6

The Enhanced Specialist Participation

is a program whereby an equity or index

option specialist receives an

‘‘enhanced’’ or additional ‘‘split,’’

meaning a higher participation in the

execution of an order.7 The enhanced

parity split applies to: (i) All index

options; (ii) all new option classes

allocated to a specialist during the year;

and (iii) 50% of a specialist’s equity

option issues, which issues are

designated by the specialist and

approved by the Exchange’s Allocation,

Evaluation, and Securities Committee.

The program also permits specialists to

revise the list of eligible equity options

(i.e., the designated equity options for

which the specialist is entitled to

receive the enhanced parity split) on a

quarterly basis. Pursuant to Rule

1014(g)(ii), the enhanced split applies in

those situations where an equity or

index option specialist is on parity with

one or more controlled accounts 8 for

orders involving more than five

contracts.

As of the date this proposed change

to the Wheel allocation was filed, the

enhanced specialist split was defined by

Rule 1014(g)(ii) as follows: when the

specialist was on parity with one

controlled account, the specialist

received 60% of the contracts and the

controlled account received the

remaining 40%. When the specialist

was on parity with two controlled

accounts, the specialist received 40% of

the contracts and each controlled

account received 30%; and when the

specialist was on parity with three or

more controlled accounts, the specialist

was counted as two crowd participants

for purposes of allocating the contracts.

In all of these situations, if a customer

is on parity, the customer could not

receive a lesser allotment than any other

crowd participant, including the

specialist.

In August of 1998, the Phlx amended

Advice F–24 to allow specialists to

receive twice the number of contracts as

other Wheel participants to achieve an

enhanced participation consistent with

the provisions of Phlx Rule 1014(g)(ii).

The enhanced participation was

implemented in the form of an