[Federal Register Volume 62, Number 239 (Friday, December 12, 1997)]
[Notices]
[Pages 65467-65469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32484]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39404; File No. SR-Phlx-97-42]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc., Relating to the 
Responsibility to Represent Orders to the Trading Crowd

December 4, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1034 
(``Act''),\1\ notice is hereby given that on August 25, 1997, the 
Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'')

[[Page 65468]]

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 self-regulatory 
organization. The Commission is publishing this notice to 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 Exchange, pursuant to Rule 19b-4 of the Act,\2\ proposes to 
amend Floor Procedure Advice (``Advice'') C-7, Responsibility to 
Represent Orders to the Trading Crowd, to adopt a new paragraph (b) in 
order to specify a Floor Broker's responsibility to be loud and audible 
and positioned to be heard by a majority of the trading crowd.
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    \2\ 17 CFR 240.19b-4.
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    Currently, Advice C-7 states that once an option order has been 
received on the floor, it must be represented to the trading crowd 
before it may be represented away from the crowd. This paragraph would 
be designated as paragraph (a). Proposed paragraph (b) would state that 
a Floor Broker must be loud and audible when requesting a market and/or 
representing an order in the trading crowd. Further, a Floor Broker 
must make reasonable efforts to position himself in the trading crowd 
to be heard by the majority of the trading crowd.
    A fine schedule, pursuant to the Exchange's minor rule violation 
enforcement and reporting plan (``minor rule plan''),\3\ is proposed to 
be levied for minor violations of proposed paragraph (b). Specifically, 
violations will be subject to the following fine schedule, which will 
be implemented on a one-year running calendar basis: 1st Occurrence--
$100; 2nd Occurrence--$250; 3rd Occurrence and Thereafter--Sanction is 
discretionary with Business Conduct Committee (``BCC''). This fine 
schedule is proposed to be adopted into, and thus amend, the Exchange's 
minor rule plan. Instances not deemed minor, as with all floor 
procedure advices subject to the minor rule plan, would be forwarded to 
the BCC. Violations of paragraph (a) would continue to be referred to 
the BCC, as no fine schedule applies. However, language indicating that 
such matters are subject to review by the BCC is proposed to be added. 
The proposal would take effect upon notice to the membership. The 
complete text of the proposed rule change is available at the Office of 
the Secretary, the Phlx, and at the Commission.
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    \3\ The Phlx's minor rule plan, codified in Phlx Rule 970, 
contains floor procedure advice, such as Advice C-7, with 
accompanying fine schedules. Rule 19d-1(c)(2) authorizes national 
securities exchanges to adopt minor rule violation plans for summary 
discipline and abbreviated reporting; Rule 19d-1(c)(1) requires 
prompt filing with the Commission of any final disciplinary actions. 
However, minor rule violations not exceeding $2,500 are deemed not 
final, thereby permitting periodic, as opposed to immediate, 
reporting.
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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 maybe 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

    The purpose of the amendment is to codify the long-standing 
practice of requiring, in order to promote just and equitable 
principles of trade, that Floor Brokers be heard by the trading crowd. 
Advice C-7 was adopted in 1987,\4\ and was designed to ensure that 
brokered orders receive the maximum interaction with orders competing 
for the other side of the trade, before they may be represented away 
from the crowd. This, in turn, improves the functioning of the auction 
market and the quality of customers executions. Similarly, the proposed 
loud and audible and crowd positioning requirements are intended to 
promote maximum interaction with other interest in the crowd, by 
improving the likelihood that Floor Brokers are heard and facilitating 
price discovery.
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    \4\ Securities Exchange Act Release No. 24309 (April 7, 1987), 
52 FR 11894 (April 13, 1987) (SR-Phlx-86-49).
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    Currently, the loud and audible requirement is rooted in Rule 110, 
which requires bids and offers to be made in an audible tone of voice, 
as well as Rule 707, Just and Equitable Principles of Trade, which 
prohibits members and member organizations from engaging in conduct 
inconsistent with just and equitable principles of trade. Floor Brokers 
are also required to utilize due diligence in representing orders, 
pursuant to Rules 155 and 1063. Specifically, Floor Brokers are 
responsible for using due diligence to execute an order at the best 
price available, which implies complete crowd interaction. Proposed 
paragraph (a) would apply to Floor Brokers requesting a market 
(quoting) as well as representing a market, including bidding, 
offering, canceling, executing and inquiring as to the status of orders 
or bids/offers.
    Similarly, the requirement that Floor Brokers position themselves 
so as to be heard by a majority of the trading crowd is also rooted in 
Rules 707, 155 and 1063, and is also intended to maximize order 
interaction. Crowd location, in busy situations, is especially 
important in fulfilling due diligence and best execution obligations. 
The Exchange notes that the proposal's intent is similar to that of 
Rule 1063(a) and Advice C-1, which require that a Floor Broker, prior 
to executing an order, ascertain that at least one Registered Options 
Principal (``ROT'') is present in the trading crowd.\5\ ROT presence is 
intended to confirm pricing, prevent errors, and witness specialist-
Floor Broker activity. The proposal should also promote an orderly 
environment, where Floor Brokers choose their crowd positioning 
centrally to comply with the requirement, and prevent unnecessary 
roughness and disorderly behavior by crowd participants attempting to 
hear a Floor Broker.
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    \5\ Prior to the adoption of a minor rule plan, this requirement 
appeared in Phlx Rule 1014.06. Securities Exchange Act Release No. 
23296 (June 4, 1986), 51 FR 21430 (June 12, 1987)(SR-Phlx-86-11).
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    The proposed rule change is designed to preserve and enhance 
auction market principles and the process of representing orders by 
open outcry, which is integral to exchange options trading.
    As stated previously, the proposal should ensure that Floor Brokers 
are heard. This, in turn, should help prevent errors by allowing 
verification of market quotes and orders by other crowd participants. 
As with paragraph (a), proposed paragraph (b) should prevent fraudulent 
and manipulative activity. The Exchange believes that expressly 
codifying these requirements into an Advice should help deter such 
activity, due to the potential imposition of fines for minor 
infractions, and should help encourage crowd vigilance for proper 
vocalization and wrongful activity.
    The Exchange believes that the proposal is appropriately codified 
into Advice C-7, which deals with Floor Broker responsibilities, and, 
more specifically, with representing orders in the trading crowd. 
Furthermore, the Exchange believes that the new

[[Page 65469]]

requirement is appropriate for the minor rule plan, because it involves 
actions that are objective and easily verifiable. The reference in the 
fine schedule to infractions of paragraph (a) being referred to the BCC 
is intended to bolster the distinction between provisions subject to 
fines and those referred directly to BCC; it does not imply that 
violations of paragraph (a) cannot result in fines or disciplinary 
action.
    For these reasons, the proposed rule change is consistent with 
Section 6 of the Act in general, and in particular, with Section 
6(b)(5), in that it is designed to promote just and equitable 
principles of trade, prevent fraudulent and manipulative acts and 
practices, as well as to protect investors and the public interest, by 
maximizing order interaction and thus improving the functioning of the 
auction market, including price discovery and liquidity, and the 
quality of customer executions. The proposal is also consistent with 
Sections 6(b)(1) and (6), which require, respectively, that the 
Exchange have the capacity to enforce compliance with its rules and 
that members be appropriately disciplined.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx 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 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 or such date if it finds such longer period to 
be appropriate and publishes it reasons for so finding or (ii) as to 
which the Phlx 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. 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. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Phlx. All 
submissions should refer to File No. SR-Phlx-97-42 and should be 
submitted within January 2, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-32484 Filed 12-11-97; 8:45 am]
BILLING CODE 8010-01-M