Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63593

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

6 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f). 7 15 U.S.C. 78s (b) (2).

8The Commission notes that this order only

approves a portion of the proposed rule change. See

supra note 3.

9 17 CFR 200.30–3(a) (12).

1The Exchange filed Amendment No. 1 to the

proposed rule filing on November 4, 1997, the

substance of which is incorporated into this notice.

See letter from Philip H. Becker, Senior Vice

President, General Counsel and Chief Regulatory

Officer, Phlx, to Michael Walinskas, Senior Special

Counsel, Market Regulation, Commission, dated

November 4, 1997.

‘‘adjusted stabilization’’ rates.

Specialists are expected to stabilize

stock price movements by buying and

selling from their own accounts against

the prevailing trend of the market. The

current definition of stabilization is

dealer purchases on minus and zero

minus ticks, and sales on plus and zero

plus ticks. The Exchange believes that

certain trades outside of the definition

of stabilization are not necessarily

destabilizing. These would consist of

proprietary zero plus tick purchases on

the current bid (provided the current

bid is below the offer at the time of the

immediately preceding trade) and

proprietary zero minus tick sales on the

current offer (provided the current offer

is above the bid at the time of the

immediately preceding trade). Hence,

the Exchange is grouping these trades

with the trades within the current

definition of stabilization to form an

‘‘adjusted stabilization’’ category for

review by the Allocation Committee.

Adjusted stabilization rate information

would be provided, on a one-year pilot

basis, solely to the Allocation

Committee to assist it in assessing the

value added by specialists to the depth

and liquidity of stocks they currently

trade.

III. Discussion

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).5

Specifically, the Commission believes

the proposal is consistent with the

Section 6(b) (5) requirements that the

rules of an exchange be designed to

promote just and equitable principles of

trade, to prevent fraudulent and

manipulative acts, and, in general, to

protect investors and the public.6

The Commission believes that the

proposed rule change is reasonable

under the Act in that continuing to

further develop objective measures of

specialist performance, by adopting the

‘‘adjusted stabilization’’ measure,

should help perfect the mechanism of a

free and open market and protect

investors and the public interest. The

Commission believes that ‘‘adjusted

stabilization’’ is a useful concept

because it could reflect liquidity added

to the market by specialists that is not

otherwise captured by the current

definition of stabilization, by reflecting

the fact that on certain zero plus tick

purchases or zero minus tick sales the

specialist is not initiating either a

transaction or a price change, but is

adding depth to the market at prices at

which transactions have already

occurred.

The Commission finds good cause to

approve Amendment No. 1 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Specifically,

Amendment No. 1 will ensure that the

new measure of specialist performance

is used solely by the Allocation

Committee to help evaluate specialist

performance and the depth and

liquidity specialists add to the stocks

they trade. Also, by providing for the

new measure on a one-year pilot basis,

the Exchange will be able to monitor the

success of the new performance

measure in helping to evaluate

specialist performance. In addition, the

substance of the proposed rule change

was noticed for the full statutory period

and no comments were received.

Accordingly, the Commission believes

that it is consistent with Section 6(b)(5)

of the Act to approve Amendment No.

1 to the proposal on an accelerated

basis.

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1 to the rule proposal. 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. 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 on 5 U.S.C. 552, will be

available for inspection and copying at

the Commission’s Public Reference

Room. Copies of such filing also will be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to File No.

SR–NYSE–96–34 and should be

submitted by December 22, 1997.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,7 that the

portion of the proposed rule change

(SR–NYSE–96–34) involving the

adoption of ‘‘adjusted stabilization’’ rate

information as a specialist performance

measure,8 as amended, is approved on

a one-year pilot basis through November

21, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31389 Filed 11–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39345; File No. SR–Phlx–

97–35]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Philadelphia Stock Exchange, Inc.

To Adopt a Contingency Market Maker

System for Foreign Currency Options

November 21, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on July 17, 1997,1 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 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

Phlx proposes to adopt a contingency

plan to trade foreign currency options

(‘‘FCOs’’) pursuant to a Market Maker

System. The contingency Market Maker

System would provide a modified

trading system to ensure the continuity

of FCO trading in the situation where a

specialist unit is not available. In

summary, the contingency Market

Maker System would be contained in a

new provision, Rule 1014(j), which

states that assigned ROTs will be

responsible for making markets and

honoring the minimum guarantee (ten-
63594 Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices

2See Securities Exchange Act Release No. 38764

(June 24, 1997), 62 FR 35535 (July 1, 1997) (SR–

Phlx–97–26). The proposal at hand is not intended

to replace SR–Phlx–97–26, such that FCOs on the

ECU would continue to be available only on a

customized basis, pursuant to Rule 1069. 3See e.g., CBOE Rule 7.1.

up) rule. Markets will be continuously

disseminated and the responsibility to

provide customers with minimum size

guarantee markets pursuant to Rule

1033(a) shall apply. Assigned ROT

participant organizations would be

required to be available from the

opening of trading on 50% of the

trading days. An Exchange employee,

assigned to be the Quote Monitor,

would handle certain specialist-type

functions. In addition, the proposed rule

change amends Rule 1047, Commentary

.01, to state that, in accordance with the

FCO market maker system, the Quote

Monitor is responsible for conducting

trading rotations in the FCOs utilizing

the market maker system. Further, the

proposed rule change amends Rules

1017 and 1019 to clarify that orders

would not be entrusted to a specialist

respecting the FCO market maker

system. Finally, the proposed rule

change incorporates a disclaimer of

liability into the proposal as proposed

paragraph (j)(ii) of Rule 1014.

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 text

of these statements may be examined at

the places specified in Item IV blow.

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

The Exchange has traded FCOs

pursuant to a specialist system since

1982. Earlier this year, due to the

resignation of a specialist unit in that

FCO, the Exchange determined to delist

options on the European Currency Unit

(‘‘EUC’’), only offering such options

pursuant to its customized facility

under Rule 1069.2 This situation

prompted a review of the specialist

system on the FCO trading floor and

recognition that ensuring the continuity

of FCO trading where a specialist cannot

be promptly replaced may require a

different system.

Thus, the purpose of this proposal is

to adopt rules and procedures to govern

situations where a specialist resigns

from that function and no replacement

specialist unit is immediately available

for a particular FCO. As such, the

proposal is a contingency plan, not

intended as a permanent method of

trading FCOs. As a contingency plan, it

would be implemented until a specialist

unit becomes available or the Exchange

determined to take other action, such as

request permanent approval of the

market maker system or delist that FCO.

Because the Phlx Board of Governors

has already approved this proposal, the

contingency plan would be

implemented upon approval by the FCO

Committee once the contingency occurs,

or, depending upon the immediacy and

circumstances, the chairperson of that

Committee or their designee. In crafting

this FCO contingency plan, the

Exchange considered various methods

of trading options, including the lead

and primary market maker systems of

other exchanges. The Exchange

determined that such systems were

intended for new products that required

incentives for long-term commitment of

time, personnel and capital, and are

thus not appropriate for FCOs. Instead,

the Exchange has determined to

implement a pure market maker system.

Thus, according to the Exchange, issues

of trade allocation, book allocation or

additional capital are not raised by the

proposal, because existing ROTs would

be acting as market makers under the

proposal.

Currently, all ROTs on the foreign

currency options floor are considered to

be assigned in all FCOs. As such, no

minimum number of ROTs is required

for the proposed market maker system.

Once the market maker system is

implemented in a given situation, all

assigned ROTs would be required to

participate. To further assure adequate

market maker participation, the

proposal requires that assigned ROTs’

participant organizations will be subject

to an additional requirement of

availability from the opening of trading

on 50% of trading days. The Exchange

intends to establish procedures

requiring at least one ROT from each

participant organization to be present

throughout the trading day for 50% of

the trading days during a specified

period, thereby ensuring a minimum

level of ROT presence on every trading

day. Surveillance of this requirement

would consist of a sign-in procedure in

the trading crowd, with the Quote

Monitor maintaining a log for

Surveillance Department review. Failure

to comply with this requirement would

be considered a violation of proposed

Rule 1014(j). In addition, floor brokers

will be required to ensure the presence

of an ROT in the trading crowd,

pursuant to Rule 1063. Further, ROTs

can be called into the crowd pursuant

to Rule 1014 (b) and (c), and failure to

honor such a request may result in

disciplinary action.

ROTs will have market making

responsibilities to replace certain

specialist functions, such as updating

markets and the components to pricing

models. As ten-up markets would

remain in effect, if the best bid/offer is

established by someone other than an

ROT and is not for at least ten contracts,

participation for the additional contracts

needed to meet the minimum ten

contract requirement would be supplied

at that same price by the assigned

ROT(s). Thus, the essence of the

proposed Market Maker System is ROT

responsibility.

Certain specialist-type functions

would be handled by the Quote

Monitor, who would be an Exchange

employee. Other options exchanges

utilize exchange employees for similar

functions.3 The Exchange believes that

the use of a Quote Monitor is

appropriate and should facilitate

disseminating firm markets in affected

FCOs. The Quote Monitor would be

responsible for establishing, monitoring,

and updating FCO markets under the

market maker system. The Quote

Monitor would maintain the AutoQuote System with input from the

assigned ROTs, which shall

automatically update these FCO

markets, based on the spot value of the

underlying foreign currency and the

pricing model selected by the assigned

ROTs in that FCO, pursuant to a

procedure established by the Exchange.

The Quote Monitor would be

responsible for regularly requesting

market quotations, as well as updated

components to the relevant pricing

model, such as interest rates and

volatility levels, from assigned ROTs.

Assigned ROTs would be required to

voice markets in these FCOs in a loud

and audible manner and update those

markets, as well as other components

relevant to the pricing model. The

Quote Monitor would staff this position

during all trading hours. The number of

Quote Monitors will vary depending on

the number of FCOs trading pursuant to

the proposed Market Maker System. The

Quote Monitor would also post bids and

offers as instructed loudly and audibly

by Floor Brokers. The Floor Broker

would be responsible for the posted bid/
Federal Register / Vol. 62, No. 230 / Monday, December 1, 1997 / Notices 63595

4This procedure is similar to the current

procedure used for equity index options when there

is a change in contract terms or a transfer of the

book. See Floor Procedure Advice A–6.

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

6 15 U.S.C. 78f(b)(5).

offer until he or she had properly

informed the Quote Monitor that it is

withdrawn. The Floor Broker

responsibilities applicable to markets

maintained by the Quote Monitor are

included in Rule 1063(e).

The implementation of the proposed

market maker system would result in

elimination of the specialist or limit

order book, as the Quote Monitor’s

responsibilities would be directed at

monitoring markets but not holding

orders. Currently, FCO specialists

maintain a specialist limit order book.

Generally, smaller customer orders are

placed on the book, but the book is not

limited to customer orders. Depending

upon the option and the market

conditions, an FCO book’s content

varies. Orders on the book at the time

of the implementation of the market

maker system would be canceled, and

could be re-entered for representation

by floor brokers. The Exchange would

announce the required cancellation of

such orders by memorandum to FCO

participants.4

The Exchange has been informed of a

decreased use in the book. The

Exchange believes this decreased use is

a result of decreased FCO volume,

increased costs and the more

institutional nature of FCO trading. All

of these factors were taken into account

when determining to eliminate the

book. The Exchange acknowledges that

eliminating the book is a departure from

the procedures of other exchanges

employing a market maker system, who

generally utilize an exchange employee

to operate the book. Although the

Exchange considered this approach, it

was determined that venturing into the

business of operating a limit order book

was not appropriate for the Exchange to

do on a sudden, contingency basis in

light of both the liability as well as

operational and staffing burdens. The

Exchange also cites to the institutional

nature FCO trading, including larger

sizes, which diminishes reliance on the

limit order book. Certain FLEX products

currently trading on other exchanges do

not offer a limit order book, in view of

the institutional nature of FLEX options.

In fact, FCO customized options,

pursuant to Phlx Rule 1069, trade

without a specialist or limit order book.

The Exchange believes that this

experience, coupled with the need for

quick implementation of the

contingency plan in order to provide a

continuous auction market for FCOs,

despite the absence of a specialist,

outweighs the benefits of providing a

limit order book.

Because the proposal replaces the

specialist system with a market maker

system, the Exchange proposes to

amend certain other rules to clarify that

a specialist’s traditional responsibilities

would not apply under the proposal.

For instance, for purposes of Rule 1047,

Trading Rotations, Halts and

Suspensions, Commentary .01, new

paragraph (e) would state that, in

accordance with the FCO Market Maker

System as defined in Rule 1014(j), the

Quote Monitor is responsible for

conducting trading rotations in those

foreign currency options utilizing the

Market Maker System. In addition,

Rules 1017 and 1019 would clarify that

orders would not be entrusted to a

specialist respecting the FCO Market

Maker System, as defined in Rule

1014(j).

Because the proposed Quote Monitor

functions would involve a new type of

activity by Exchange employees, a

disclaimer of liability is incorporated

into the provision as paragraph (j)(ii).

Specifically, in no event shall the

Exchange be liable to any person or

organization or to its members,

participants, member organizations or

participant organizations (hereinafter

referred to collectively as ‘‘members’’)

or persons associated therewith for any

loss, (including any indirect or

consequential loss), expense, damages

or claims arising out of any errors or

omissions in the collection and

dissemination of any foreign currency

options quotations by a Quote Monitor.

The Complete text of the proposed

rule change is available at the

Commission and at the office of the

Exchange.

2. Statutory Basis

The Exchange believes that the

proposal is consistent with Section 6(b)

of the Act 5 in general, and in particular,

with Section 6(b)(5),6 in that it is

designed to promote just and equitable

principles of trade, remove

impediments to and perfect the

mechanism of a free and open market,

as well as to protect investors and the

public interest, by providing a

contingency plan for the trading of

FCOs without an assigned specialist

unit.

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 either

solicited or received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the 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 self-regulatory organization

consents, the Commission will:

(A) By order approve the 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.

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. 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. 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–Phlx–97–35 and should be

submitted by December 22, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31390 Filed 11–28–97; 8:45 am]

BILLING CODE 8010–01–M