Federal Register / Vol. 61, No. 16 / Wednesday, January 24, 1996 / Notices 1961

10 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b-4.

3See letter from Gerald D. O’Connell, First Vice

President, Phlx, to Glen Barrentine, Team Leader,

Division of Market Regulation, SEC, dated October

30, 1995. In Amendment No. 1, the Exchange

clarified that the ‘‘50% of quarterly opening share

volume’’ requirement has been replaced with ‘‘50%

of quarterly trade volume.’’

4See letter from Gerald O’Connell, First Vice

President, Phlx, to Glen Barrentine, Team Leader,

Division of Market Regulation, SEC, dated

December 20, 1995. In Amendment No. 2, the

Exchange clarified that the Alternate Specialist

must clear the post before sending an order via ITS

to obtain credit for the 50% on-floor requirement.

Amendment No. 2 also withdrew the proposal to

permit Alternate Specialists to count towards the

50% on-floor requirement unexecuted orders of 500

or more shares placed with the specialist on the

Exchange at a price on or in-between the

consolidated market and maintained on the book

for an extended period of time.

5Phlx specialists and Alternate Specialists

qualify for favorable margin treatment under

Regulation T. Under Rule 12 of Regulation T, a

creditor may extend good faith margin for any long

or short position in a security in which a specialist

makes a market. See 12 CFR 220.12(b)(3).

Regulation T defines ‘‘good faith margin’’ as the

amount of margin which a creditor, exercising

sound credit judgment, would customarily require

for a specified security position and which is

established without regard to the customer’s other

assets or securities positions held in connection

with unrelated transactions. See 12 CFR 220.2(k).

6 15 U.S.C. 78k. Generally, section 11(b) of the

Act governs specialist rights and obligations. In

particular, Rule 11b–1(a)(2) under the Act provides

that the rules of an exchange concerning specialist

registration must include provisions on the

following: (1) Minimum capital requirements; (2)

requirements that the specialist engage in a course

of dealing for his own account that will assist in

the maintenance of a fair and orderly market and

that substantial, continued failure to meet these

requirements will result in suspension or

cancellation of the specialist’s registration in his

specialty stock(s); (3) provisions restricting the

specialist’s dealings to those necessary to maintain

a fair and orderly market or to act as an odd-lot

dealer; (4) provisions stating the responsibilities of

the specialist as broker; and (5) procedures for the

effective and systematic surveillance of specialist

activities. Phlx Alternate Specialists are considered

specialists as envisioned by Section 11 of the Act.

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

Section, 450 Fifth Street, NW.,

Washington, DC. 20549. Also, copies of

such filing will be available for

inspection and copying at the principal

office of the NYSE. All submissions

should refer to File No. SR–NYSE–95–

41 and should be submitted by February

14, 1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.10

Margaret H. McFarland,

Deputy Secretary

[FR Doc. 96–10333 Filed 1–23–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36728; File No. SR-Phlx95-60]

Self-Regulatory Organizations;

Philadelphia Stock Exchange, Inc;

Order Granting Approval to Proposed

Rule Change and Notice of Filing and

Order Granting Accelerated Approval

to Amendment No. 2 to Proposed Rule

Change Relating to Alternate

Specialists

January 17, 1996.

I. Introduction

On September 15, 1995, the

Philadelphia Stock Exchange, Inc.

(‘‘Phlx’’ or ‘‘Exchange’’) submitted to the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘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 to amend Phlx Rule 202A,

which addresses the responsibilities of

Alternate Specialists. On November 1,

1995, the Exchange submitted to the

Commission Amendment No. 1 to the

proposed rule change.3

The proposed rule change and

Amendment No. 1 were published for

comment in Securities Exchange Act

Release No. 36457 (Nov. 3, 1995), 60 FR

57028 (Nov. 13, 1995). No comments

were received on the proposal. On

December 27, 1995, the Exchange

submitted to the Commission

Amendment No. 2 to the proposed rule

change.4

This order approves the proposed rule

change, including Amendment No. 2 on

an accelerated basis.

II. Description of Proposal

An Alternate Specialist is a registered

Phlx specialist, who with regard to

certain assigned issues has agreed

generally to supplement the market

making activities of Exchange primary

specialists. When called in to

participate by the specialist or a Floor

Official, Alternate Specialists assist the

primary specialists in executing public

orders during periods of unusual or

heavy trading in a particular issue.5

Phlx Rule 202A sets forth the

requirements and responsibilities of

Alternate Specialists. Currently, equity

specialists are permitted to trade in an

Alternate Specialist capacity all

securities traded on the equity floor.

Phlx rule 202A imposes certain

trading obligations upon Alternate

Specialists pursuant to section 11 of the

Act and the rule thereunder 6 as well as

financial responsibility and reporting

requirements. An Alternate Specialist is

obligated under Rule 202A to effect all

of his transactions in securities on the

Exchange so that they constitute a

course of dealings reasonably calculated

to contribute to the maintenance of a

fair and orderly market. Moreover, an

Alternate Specialist at the request of a

floor broker must make a bid or offer in

any security to which he is assigned or

in which he is then trading such that a

transaction effected thereon will

contribute to the maintenance of a fair

and orderly market.

The current rule also provides the

criteria for qualifying and maintaining

the status of an Alternate Specialist.

Under the rule, 50% of an alternate

Specialist’s quarterly share volume

(excluding share volume in securities in

which he is registered as specialist)

must be in issues to which he is

assigned. Moreover, 50% of the

quarterly share volume that creates or

increases a position (‘‘opening’’) in an

Alternate Specialist account must result

from transactions consummated on the

Exchange.

Finally, the current rule contains

several provisions that focus on the

Alternate Specialist’s participation on

openings and after the opening and the

handling of orders. Supplementary

Material .06 to Phlx Rule 202A provides

that alternate Specialists as a group are

entitled to participate in opening a

security on the Exchange with equal

standing with respect to any net

imbalance (after specialist participation)

of purchase and sale orders on the

exchange. Moreover, pursuant to

Supplementary Material .07 to Phlx

Rule 202A, following the opening, when

the bids or offers of one or more

Alternate Specialists are equal in price

to those of the specialist, the Alternate

Specialists as a group are entitled to

participate in the transactions effected

thereon to the extent of one-third of the

total shares involved (excluding those

needed to satisfy public orders).

Pursuant to Supplementary Material .09

to Rule 202A, an Alternate Specialist

must also accept and guarantee

execution of all 100 share agency orders

to which his assignment extends that
1962 Federal Register / Vol. 61, No. 16 / Wednesday, January 24, 1996 / Notices

7Terminations will become effective as of the

opening of trading on the equity floor on the

business day following the submission.

8For example, if an Alternate Specialist needs to

employ ITS trades to meet his on-floor requirement,

and has executed a total of 2,000 trades in that

quarter, the requirement could be met by effecting

250 off-floor ITS trades and 750 on-floor trades.

9Specifically, before sending an order initiated

on the Exchange floor to another market, the

Alternate Specialist must (1) request the specialist’s

quote and (2) make a bid or offer at the post for the

price and size of his intended interest. See

Securities Exchange Act Release No. 20331 (Oct. 27,

1983), 48 FR 50649 (Nov. 2, 1983) (approving a

proposed rule change to require all Phlx floor

members to clear the post for a security on the Phlx

floor before directly inputting the order into the

Intermarket Trading System; alternate specialists

are also required to bid or offer at the post for the

price and size of their intended interest prior to

transmitting a commitment to another market via

the ITS).

10See Phlx Rule 119 (Precedence of Highest Bid)

and Phlx Rule 120 (Precedence of Offers at Same

Price).

11 15 u.S.C. 78f(b) and 78k(b).

12 17 CFR 240.11b–1.

are not accepted by the specialist when

requested by a floor broker.

The Exchange proposes to amend

certain obligations and responsibilities

of Alternate Specialists set forth in Phlx

Rule 202A. Specifically, the Exchange

proposes to consolidate into new Rule

202A(a) the provisions relating to an

Alternate Specialist’s affirmative and

negative market making obligations. The

Exchange believes that this change will

avoid repetition and improve the clarity

of the rule.

In new Rule 202A(b), Phlx proposes

to limit the number of equity issues in

which an individual may serve as

Alternate Specialist to 60 securities.

Moreover, the Exchange proposes that

once a member has been assigned as an

Alternate Specialist, the member must

maintain such assignment for at least 30

business days, after which the member

may terminate the assignment by

providing written notification to the

Phlx on a form prescribed by the

Exchange.7 The Exchange states that the

primary purpose of the proposed rule

change is to bolster liquidity provided

by the Phlx’s Alternate Specialist

program by concentrating Alternate

Specialist activities in a smaller number

of securities.

Finally, the Exchange proposes new

Rule 202A(c), which will list the criteria

for qualifying and maintaining the

status of an Alternate Specialist. This

provision incorporates and amends

certain previous requirements and

eliminates others that the Exchange

finds to be unnecessary in light of other

Exchange rules. In particular, the

Exchange proposes to delete the

requirement that 50% of the Alternate

Specialist’s share volume must be in

assigned issues. The Exchange believes

that this requirement is no longer

necessary in light of its proposal to limit

the maximum number of securities in

which a specialist can act as an

Alternate Specialist to 60. Moreover, the

Exchange proposes to amend the

requirement that 50% of the quarterly

opening share volume in an Alternate

Specialist account result from

transactions consummated on the

Exchange (‘‘50% on-floor requirement’’)

by replacing the ‘‘50% of quarterly

opening share volume’’ with ‘‘50% of

quarterly trade volume.’’ The Exchange

states that it has determined that the

requirement should no longer be limited

to ‘‘opening’’ positions because

measuring all trade volume each quarter

to ensure that 50% is executed on the

Exchange should fulfill the Phlx’s intent

to monitor for true Alternate Specialist

activity and obligations. The Exchange

also notes that opening transactions are

difficult to monitor because floor tickets

are not marked with an opening or

closing distinction on the equity floor.

The Exchange also proposes to amend

the 50% on-floor requirement to permit

Alternate Specialist to include in the

calculation trades effected on another

national securities exchange through the

Intermarket Trading System (‘‘ITS’’) that

do not exceed a ratio of three Phlx

trades to one ITS trade.8 For an ITS

trade to count toward such a

requirement, however, the Alternate

Specialist must first ‘‘clear the post’’

before routing an ITS commitment to

another market.9 The Exchange believes

that it is appropriate to allow onequarter of the 50% on-floor requirement

to be met by ITS trades effected away

from the Exchange because ITS

enhances liquidity and provides a

linkage that is vital to a true National

Market System.

The Phlx also proposes to delete

Supplementary Material .06, .07, and

.09. The Exchange proposes to delete

Supplementary Material .06 and .07,

which pertain to Alternate Specialist’s

participation, because it believes that

the priority of orders is already

adequately addressed in Rules 119 and

120.10 The Phlx also proposes to delete

Supplementary Material .09, which

relates to Alternate Specialist’s handling

of orders, because it believes that the

obligation on the Alternate Specialist to

accept and guarantee executions only

pertains to 100 share orders and will be

largely superseded by new Rule

202A(c)(iv), where the Alternate

Specialist’s affirmative obligation to

maintain an adequate presence in his

assigned issues is more pronounced.

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 sections 6(b) and

11(b).11 In particular, 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 interest.

The Commission also believes that the

proposed rule change is consistent with

the requirement of section 11(b) and

Rule 11b–1 thereunder 12 that specialist

transactions must contribute to the

maintenance of fair and orderly markets.

The Commission believes that

limiting the number of issues in which

an equity specialist may serve as an

Alternate Specialist to 60 would assist

in adding depth and liquidity to the

market. By placing a limit on the

number of Alternate Specialist issues,

the Alternate Specialist can more

effectively utilize his capital and focus

his liquidity providing activities on 60

issues rather than on potentially over

2,300 issues.

The Commission also believes that the

consolidation into new Rule 202A(a) of

the Alternate Specialist’s affirmative

and negative market making obligations

is consistent with the purposes of the

Act in that the requirements of section

11(b) of the Act and Rule 11b–1(a)(2)

thereunder remain intact: Alternate

Specialists must continue to adhere to

minimum capital requirements as well

as the requirement that the Alternate

Specialist trading contribute to the

maintenance of a fair and orderly

market. Moreover, the proposed rule

change does not affect the Alternate

Specialist’s obligations as an equity

specialist when he is not otherwise

acting in his capacity as an Alternate

Specialist. Finally, Phlx’s specialist

compliance and surveillance rules

continue to apply to the Exchange’s

Alternate Specialist program. Therefore,

the Commission believes that these

rules will ensure that Alternate

Specialist trading will be beneficial to

investors and the market in general.

The Commission also believes that the

amendments to the two quarterly

trading requirements are not

inconsistent with the Act. The

requirement that 50% of the Alternate
Federal Register / Vol. 61, No. 16 / Wednesday, January 24, 1996 / Notices 1963

13 Indeed, the Commission would question

whether regular or alternate specialists were

fulfilling their Section 11(b) obligations if they

refused to accept for execution certain orders (e.g.,

100 share agency orders).

14See supra note 9.

15See Securities Exchange Act Release No. 36457

(Nov. 3, 1995), 60 FR 57028 (Nov. 13, 1995).

16 15 U.S.C. 78s(b)(2).

17 17 CFR 200.30–3(a)(12).

Specialist’s share volume be in assigned

issues may be deleted because with only

60 securities in which a specialist may

serve as an Alternate Specialist and the

adoption of the new standards in the

rule, it is permissible for Phlx to decide

that an aggregate minimum level of

Alternate Specialist activity is no longer

necessary to ensure that Alternate

Specialists are acting as section 11(b)

specialists. Moreover, the 50%

requirement spread over potentially

2,300 securities did not guarantee

significant depth or liquidity in

individual stocks. The Commission

believes that new Rule 202A(c)(iv),

which places affirmative obligations on

the Alternate Specialist to maintain an

adequate presence in the Exchange’s

market with respect to assigned issues

and to execute at least 50% of the trades

placed in the Alternate Specialist

account each quarter on the Exchange,

in addition to the limitation in the

number of securities for which a

specialist may act as an Alternate

Specialist should ensure sufficient

Alternate Specialist participation on the

Exchange and liquidity in individual

stocks.

With respect to the 50% on-floor

requirement, the Exchange proposes to

calculate the percentage of quarterly

trade volume rather than ‘‘opening’’

share volume. The Commission believes

that with this amendment the Exchange

can monitor the frequency of Alternate

Specialist participation on the

Exchange, which would be as helpful as

the prior requirement in measuring

whether Alternate Specialists are

fulfilling their obligations to provide

liquidity on the Exchange. Moreover,

eliminating the ‘‘opening’’ distinction

will make it easier for the Exchange to

monitor compliance with the

requirement.

Moreover, the Commission believes

that amending the 50% on-floor

requirement to permit Alternate

Specialist to include in the calculation

ITS trades will not be inconsistent with

the purposes of the Act. The Exchange

specifically requires that the Alternate

Specialist clear the post before routing

an ITS commitment to another market.

Where one of the primary obligations of

Alternate Specialists is to provide

liquidity on demand, permitting

Alternate Specialists to count ITS trades

towards their 50% on-floor requirement

would encourage and recognize

Alternate Specialists activities that

contribute to the liquidity of the

National Markets. Moreover, the

Commission recognizes that an

Alternate Specialist who initiates an

order on the floor and clears the post

should not be penalized if there is no

interest in the crowd or on the limit

order book against which the Alternate

Specialist’s order can be executed and if

the specialist does not accept that order

for placement in the book. The

Commission finds that it is reasonable

for the Exchange to assume that an

Alternate Specialist who makes a good

faith effort to participate as dealer on

the Exchange floor is engaged in bona

fide specialist activity even though the

transaction ultimately can be

consummated only by exposing the

Alternate Specialist’s order to all

interest in the National Market System.

Moreover, the Commission finds that

the limit on the amount of ITS trades

that may be counted towards the 50%

on-floor requirement should ensure that

the Alternate Specialists are actually

engaging in bona fide equity specialist

activity on the Phlx floor entitled to

exempt credit.

Finally, the Commission finds that the

Exchange’s rules of priority and

precedence of orders adequately address

the concerns in Supplementary Material

.06 and .07. Moreover, the Commission

believes that the Exchange’s proposal to

delete Supplementary Material .09 is

not inconsistent with the purposes of

the Act. Although the affirmative

obligations upon Alternate Specialist in

the proposed rule change do not require

the Alternate Specialist to guarantee

execution of any specific number of

shares, Phlx rules require Alternate

Specialists to maintain an adequate

presence on the Exchange with respect

to assigned alternate issues and related

trade activities for the alternate account.

This standard will ensure that, when

needed, the Alternate Specialist will be

available to assist in executions as

required of all specialists under section

11(b) of the Act.13

Moreover, the Commission finds good

cause for approving Amendment No. 2

to the proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof.

Amendment No. 2 merely clarified a

requirement on the Alternate Specialist

to clear the post before routing an order

to another market through ITS 14 and

withdrew from consideration of the

proposed rule change an amendment to

permit Alternate Specialists to count

towards the 50% on-floor requirement

unexecuted orders of 500 or more shares

placed with the Specialist on the

Exchange. Both these changes to the

proposal strengthen the Phlx’s Alternate

Specialist rules. In addition, the

Exchange’s original proposal was

published in the Federal Register for

the full statutory period and no

comments were received.15 Based on the

above, the Commission finds that there

is good cause, consistent with Section

6(b)(5) of the Act, to accelerate approval

of Amendment No. 2.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

2. 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 statement 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

Section, 450 Fifth Street, NW.,

Washington, DC 20549. 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–95–60

and should be submitted by February

14, 1996.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,16 that the

proposed rule change (SR–Phlx–95–60),

as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.17

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–1034 Filed 1–23–96; 8:45 am]

BILLING CODE 8010–01–M