[Federal Register Volume 66, Number 122 (Monday, June 25, 2001)]
[Notices]
[Pages 33734-33735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15798]



[[Page 33734]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44436; File No. SR-Phlx-2001-50]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to the 
Specific Inclusion of Trade Correction Data and Exemptive Relief 
Information in the Specialist Evaluations Conducted by the Options 
Allocation, Evaluation and Securities Committee

June 15, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 1, 2001, 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 Exchange. 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 Phlx proposes to amend Phlx Rule 515, Specialist Evaluations, 
Supplementary Material .02, Option Specialist Evaluation (``Rule 
515(.02)'') to specifically include trade correction data and exemptive 
relief information in the specialist evaluations conducted by the 
Options Allocation, Evaluation and Securities Committee (the 
``Committee'').
    The following is the text of the proposed rule change. New language 
is italicized.

515 Specialist Evaluations

* * * * *

Supplementary Material

    .02  Options Specialist Evaluation
    The Committee shall conduct specialist performance evaluations 
to determine whether a specialist unit has fulfilled performance 
standards relating to among other things; quality of markets, 
observance of ethical standards and administrative responsibilities. 
As part of the specialist evaluation process, the Committee will 
consider trade correction data and information concerning exemptive 
relief of each specialist unit. Options specialist units are 
evaluated on the basis of questionnaires completed by floor brokers. 
Floor brokers shall be invited but are not required to meet with any 
specialist about which they have submitted negative comments and the 
Committee may mediate such a meeting. To the extent possible, 
evaluations of specialist units shall also include an objective 
performance evaluation survey. The Committee may consider any 
relevant information in addition to the questionnaire including but 
not limited to the unit's and its members' regulatory history (both 
final disciplinary actions and minor rule plan infractions), trading 
data, timeliness of openings, written complaints and such other 
factors and data as may be pertinent. A registered specialist unit 
will be presumed to have performed below minimum standards if the 
specialist unit is rated in the bottom 10% of all specialist units 
in the aggregate results for the specialist evaluation 
questionnaire. The Committee may also presume that a specialist unit 
failed to meet minimum performance standards if the questionnaire or 
information aside from said questionnaire supports findings of a 
failure of the specialist unit to fulfill any of the above 
standards. Separate evaluations will be conducted for each quarter 
or contiguous half turret in which a specialist unit conducts an 
operation on the trading floor, thus any reference to ``specialist 
unit'' within this rule or Rule 511(c)(2) will mean the unit as a 
whole or any subpart of its operation subject to evaluation. For 
instance, a unit which conducts a specialist operation at two 
separate turrets will be evaluated as XYZ specialist unit-A and XYZ 
specialist unit-B and a presumption of failure to meet minimum 
performance standards at unit A will not be determinative of whether 
unit B has failed to meet minimum performance standards but may be 
considered by the Committee.

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 Exchange 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 below. The Exchange 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 purpose of the proposed rule change is to amend Rule 515(.02) 
to specifically include trade correction data and exemptive relief 
information in the specialist evaluations conducted by the 
Committee.\2\ Under Rule 515 the Committee is responsible for 
conducting both routine and special evaluations of options specialist 
units.\3\ Currently, Rule 515(.02) provides, in relevant part, that the 
Committee may consider any relevant information including, but not 
limited to the unit's and its members' regulatory history (both final 
disciplinary action and minor rule plan infractions), trading data, 
timeliness of openings, written complaints, and such other factors and 
data as may be pertinent. Although the current rule provides the 
Committee with discretion to consider trade data and regulatory history 
in the specialist review process, the proposed rule change specifically 
requires including trade correction data and information concerning 
exemptive relief in the specialist evaluation process. The current rule 
also provides the Committee with the discretion to consider ``such 
other factors and data as may be pertinent.''
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    \2\ Pursuant to Phlx Rule 511(b), specialist evaluations are 
employed by the Committee when allocating new options classes 
approving transfers and reallocating existing option classes.
    \3\ Under Phlx Rule 515(b), routine reviews are conducted every 
six months for option specialist units. Special reviews are 
commenced: (i) Where a specialist unit's performance in a particular 
market situation was so egregiously deficient as to call into 
question the Exchange's integrity or impair the Exchange's 
reputation for maintaining efficient, fair and orderly markets; (ii) 
where a material change in the specialist unit has occurred; (iii) 
within 60 days after a transfer of one or more equity books or 
option classes has become effective pursuant to Phlx Rule 511(d)(2); 
or (iv) within 90 days after a new allocation.
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    Specialist evaluations are a factor used in the allocation of 
option classes to specialist units. By specifically including trade 
correction data and exemptive relief information in the specialist 
evaluations, the Committee will be better able to consider effectively 
specialist floor trade practices in their evaluation process. 
Currently, the following types of exemptive relief \4\ are granted by 
the Phlx: (1) Auto-X disengagement,\5\ (2) NBBO Feature relief,\6\ (3) 
parameter relief; \7\ (4) stop and stop limit order relief,\8\ and (5) 
firm quote relief.\9\
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    \4\ The relief, when granted, permits specialists to disengage 
Auto-X and orders are then handled manually. Phone call between 
Linda Christie, Counsel Phlx, and Terri Evans, Attorney, and John 
Riedel, Attorney, Division of Market Regulation (``Division''), 
Commission (June 12, 2001).
    \5\ See Phlx Rule 1080(e) Advice A-13. The Exchange will grant 
only the relief provided for by the rules cited. Phone call between 
Linda Christie, Counsel, Phlx, and Terri Evans, Attorney, and John 
Riedel, Attorney, Division, Commission (June 12, 2001).
    \6\ See Phlx Rule 1080(e).
    \7\ See Phlx Rule 1014(f)(ii), Advice F-6.
    \8\ See Advice A-5.
    \9\ See Phlx Rule 1082(c).
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    The Exchange proposes to provide such exemptive relief information 
to the Committee. The Exchange believes that

[[Page 33735]]

excessive or inappropriate use of exemptive relief may indicate that a 
specialist is not fulfilling adequately the obligations of a 
specialist. As a result, the Exchange's Surveillance Department 
monitors and documents requests for such relief. Thus, the Exchange 
believes that exemptive relief information is relevant to the regular 
option specialist performance evaluations made by the Committee.
    Trade corrections occur if a specialist believes that an execution 
was either improperly priced or executed.\10\ In such cases, the 
specialist may, with floor official approval, notify the AUTOM Desk or 
the AUTOM trade correction.\11\ Excessive utilization of trade 
corrections by a specialist may reveal a pattern of the specialist not 
executing at the national best bid or offer,\12\ may demonstrate a 
pattern of customers obtaining inferior price than first reported, or 
result in trades not properly reported to the tape. Therefore, the 
Exchange believes that trade correction data should be considered as 
part of the overall mix of information considered by the Committee in 
its specialist evaluation.
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    \10\ See Phlx Rule 1054, Advice F-5.
    \11\ The AUTOM Desk is a help desk designed to service firms 
connected the Phlx through the AUTOM system.
    \12\ Phlx clarified that excessive utilization of trade 
corrections by a specialist, in all cases, not just in extreme 
cases, may reveal a pattern of the specialist not executing at the 
national best bid or offer. Phone call between Linda Christie, 
Counsel, Phlx, Terri Evans, Attorney, and John Riedel, Attorney, 
Division, Commission (June 14, 2001).
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    In summary, the Exchange believes that exemptive relief and trade 
correction information should enable the Committee to allocated books 
with a more thorough understanding of each specialist unit's activities 
and performance on the trading floor.\13\
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    \13\ It should be noted that requests for exemptive relief and 
trade corrections are a normal part of everyday business at the 
Exchange and all other exchanges, and that in the ordinary case, 
such requests are entirely appropriate. The Exchange believes, 
however, that unusual levels of activity in these two areas by a 
specialist, relative to other specialists, after taking into account 
the market conditions for the relevant options and underlying 
securities, as well as market conditions at the time that such 
requests or corrections are made, may be an indicator of the quality 
of the specialist's overall performance.
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2. Statuory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act \14\ in general, and furthers the objectives of 
section 6(b)(5)\15\ in particular, in that it is designed to perfect 
the mechanisms of a free and open market and a national market system, 
to promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Phlx 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 Phlx has neither solicited nor received written comments with 
respect to the proposed rule change.

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 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 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, 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, NW., Washington, DC 20549-0609.
    Copies of the submissions, 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 in the 
Commission's Public Reference Section. 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-2001-50 and 
should be submitted by July 16, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-15798 Filed 6-22-01; 8:45 am]
BILLING CODE 8010-01-M