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[Federal Register Volume 62, Number 160 (Tuesday, August 19, 1997)]
[Notices]
[Pages 44160-44162]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21848]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38924; File No. SR-Phlx-97-36]

Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Extending the Pilot Program for Equity and Index Option 
Specialist Enhanced Parity Split Participants

August 11, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 24, 1997, 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 self-regulatory organization. The Commission 
is publishing this notice to

[[Page 44161]]

solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PHLX proposes to extend until December 31, 1997, the Exchange's 
enhanced parity participation (``Enhanced Parity Split'') pilot program 
for equity and index option specialists (``Pilot Program''). Revisions 
to Exchange Rule 1014(g)(ii) and its corollary Option Floor Procedure 
Advice B-6 (``Advice B-6'') are proposed only to change the expiration 
date of the Pilot Program. The text of the proposed rule change is 
available at the Office of the Secretary, the PHLX, and at the 
Commission.

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 self-regulatory organization 
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 test of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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
    On August 26, 1994, the Commission approved, as a one-year pilot 
program, the Exchange's proposal to adopt an enhanced specialist 
participation in parity equity option trades.\2\ On November 30, 1994, 
the Commission approved the Exchange's request to expand the Enhanced 
Parity Split to include index option specialists as well as equity 
option specialists.\3\ The Enhanced Parity Split was again amended on 
March 1, 1995 to modify the Pilot Program with respect to situations 
where less than three controlled accounts \4\ are on parity with the 
specialist.\5\ At the termination of the first year of the pilot, the 
Exchange determined to renew the pilot for an additional year until 
August 26, 1996.\6\ The Exchange again determined to renew the pilot 
until August 26, 1997.\7\
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    \2\ Securities Exchange Act Release No. 34606 (Aug. 26, 1994), 
59 FR 45741 (Sept. 2, 1994) (order approving File No. SR-PHLX-94-
12).
    \3\ Securities Exchange Act Release No. 35028 (Nov. 30, 1994), 
59 FR 45741 (Dec. 7, 1994) (notice of filing and immediate 
effectiveness of File No. SR-PHLX-94-57).
    \4\ A 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 and specialist accounts. See 
Exchange Rule 1014(g).
    \5\ Securities Exchange Act Release No. 35429 (Mar. 1, 1995), 60 
FR 12802 (Mar. 8, 1995) (order approving File No. SR-PHLX-94-59).
    \6\ Securities Exchange Act Release No. 36122 (Aug. 18, 1995), 
60 FR 44530 (Aug. 28, 1995) (notice of filing and immediate 
effectiveness of File No. SR-PHLX-95-54).
    \7\ Securities Exchange Act Release No. 37524 (Aug. 5, 1996), 61 
FR 42080 (Aug. 13, 1996) (notice of filing and immediate 
effectiveness of File No. SR-PHLX-96-29).
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    The program works as follows: When an equity or index option 
specialist is on parity with one controlled account and the order is 
for more than five contracts, 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 dividing up the contracts. In any of 
these situations, if a customer is on parity, he will not be 
disadvantaged by receiving a lesser allotment than any other crowd 
participant, including the specialist.
    This enhanced split is not applicable to all equity and index 
options traded on the Exchange. It is only applicable to 50% of each 
specialist unit's issues listed as of the renewal date of the pilot 
each year and all option classes listed after that date. The Exchange 
also has a different enhanced split program in place for ``new'' option 
specialist units trading newly listed options classes where the 
specialist is on parity with two or more registered options traders 
(``ROTs'').\8\ That program was approved on a permanent basis and, 
therefore, is not included in the subject of this filing.
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    \8\ Securities Exchange Act Release No. 34109 (May 25, 1994), 59 
FR 28570 (June 2, 1994) (order approving File No. SR-PHLX-93-29).
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    Accordingly, the PHLX requests that the two-for-one specialist 
enhanced parity split pilot be extended until December 31, 1997.
    In the Commission's most recent Approval Order,\9\ it was noted 
that prior to granting another extension or permanent approval of the 
pilot program, the Commission would require the Exchange to submit a 
report (``Report'') discussing: (1) Whether the Pilot Program has 
generated any evidence of any adverse effect on competition or 
investors, in particular, or the market for equity or index options, in 
general; (2) whether the Exchange has received any complaints, either 
written or otherwise, concerning the operation of the Pilot Program; 
and (3) whether the Exchange has taken any disciplinary action against, 
or commenced any investigations, examinations, or inquiries concerning 
the operation of the Pilot Program, as well as the outcome of any such 
matter. On July 31, 1997, the Exchange submitted the report, which is 
summarized below.\10\
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    \9\ Release No. 34-37524, supra note 7, n.15.
    \10\ See letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, PHLX, to George Villasana, Office of 
Market Supervision, Division of Market Regulation, Commission, dated 
July 31, 1997.
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    As to the issue of competition, the Exchange found that the split 
as originally proposed was overly burdensome when only one or two 
controlled accounts were on parity with the specialist, so the rule was 
amended in March of 1995 in order to make the split more equitable in 
those situations.\11\ Subsequently, the Exchange established a 
subcommittee composed of four specialists, four ROTs, and one floor 
broker who represents customers. The subcommittee has met on numerous 
occasions since that time to analyze the program and its effect on 
competition, investors and the market in general. The members of the 
subcommittee which represent all of the different interests on the 
trading floor and in the market, discussed the operation of the program 
and concluded that there was no evidence of any adverse effects on 
competition or investors or the market for equity or index options.
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    \11\ Release No. 34-35429, supra note 5.
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    As to the second issue, the provision requiring the specialist to 
assure that the customer is not disadvantaged has been strictly 
enforced without incident and the Exchange has not received any 
complaints either orally or in writing from investors regarding 
inequitable splits or the program in general.\12\
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    \12\ According to the Exchange, its Matched Order Ticket System 
requires trade participants to submit matched tickets to the 
appropriate person at the specialist post immediately upon effecting 
a transaction in order to assure, among other things, that the party 
agrees with each contra-party's claim as to his or her level of 
participation. See Release No. 37524, supra note 7 (referencing 
telephone conversation on August 2, 1996 between Michelle R. 
Weisbaum, Vice President and Associate General Counsel, PHLX, and 
George A. Villasana, Attorney, Division of Market Regulation, SEC).

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[[Page 44162]]

    Finally, as to the third point, the Exchange took one disciplinary 
case against an equity option specialist for making an inequitable 
split among himself and the ROTs in the crowd in 1996.\13\ In that 
instance, the specialist was censured and suspended for one week as 
part of a settlement. The specialist has since left the Exchange. Since 
January 1, 1997, the Exchange has not commenced any investigations 
relating to the operation of the Pilot program.\14\
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    \13\ Enforcement No. 95-12, Business Conduct Committee, PHLX.
    \14\ The Commission again notes that in connection with any 
future request by the Exchange for the Commission to either further 
extend or permanently approve the Pilot Program, the Exchange will 
be required to submit a report discussing 1) whether the Pilot 
Program has generated any evidence of any adverse effect on 
competition or investors, in particular, or the market for equity or 
index options, in general, 2) whether the Exchange has received any 
complaints, either written or otherwise, concerning the operation of 
the Pilot Program, and 3) whether the Exchange has taken any 
disciplinary action against, or commenced any investigations, 
examinations, or inquiries concerning the operation of the Pilot 
Program, as well as the outcome of any such matter.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\15\ in general and in particular, with Section 6(b)(5),\16\ in that it 
is designed to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, 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 system, as 
well as to protect investors and the public interest. Specifically, the 
proposal balances the competing interests of specialists and market 
makers while assisting the specialist in making tight and liquid 
markets in its assigned issues and protects the public interest by 
requiring quarterly reviews and assuring that the customers' 
participation is never disadvantaged by the enhanced split.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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 has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
(3) does not become operative for 30 days from July 24, 1997, the date 
on which it was filed, and the Exchange provided the Commission with 
written notice of its intent to file the proposed rule change at least 
five business days prior to the filing date, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(e)(6) 
thereunder.\17\
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    \17\ 17 CFR 240.19b-4(e)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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 Station, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the Philadelphia 
Stock Exchange. All submissions should refer to File No. SR-PHLX-97-36 
and should be submitted by September 9, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-21848 Filed 8-18-97; 8:45 am]
BILLING CODE 8010-01-M
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