[Federal Register: May 14, 2003 (Volume 68, Number 93)]
[Notices]
[Page 25924-25927]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14my03-93]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47819; File No. SR-Phlx-2002-17]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval of Proposed Rule Change and Amendment Nos. 1,
2, and 3 Thereto and Notice of Filing of and Order Granting Accelerated
Approval to Amendment Nos. 4, 5, 6, and 7 Thereto Relating to Crossing,
Facilitation, and Solicited Orders
May 8, 2003.
I. Introduction
On March 18, 2002, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act
[[Page 25925]]
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change relating to crossing, facilitation, and solicited orders. On May
2, 2002, July 24, 2002, and August 20, 2002, Phlx submitted Amendment
Nos. 1, 2, and 3 to the proposed rule change, respectively.\3\ On May
2, 2002, notice of the proposed rule change, as amended by Amendment
Nos. 1, 2, and 3, was published in the Federal Register.\4\ The
Commission received no comments on the proposed rule change. On
November 6, 2002, February 25, 2003, March 19, 2003, and April 23,
2003, Phlx submitted Amendment Nos. 4, 5, 6, and 7 to the proposed rule
change, respectively.\5\ This notice and order solicits comment on
Amendment Nos. 4, 5, 6, and 7 and approves the proposed rule change, as
amended, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letters from Richard S. Rudolph, Director and Counsel,
Phlx, to Nancy J. Sanow, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated May 1, 2002
(``Amendment No. 1''); and to Ira Brandriss, Special Counsel,
Division, Commission, dated July 23, 2002 (``Amendment No. 2''), and
August 19, 2002 (``Amendment No. 3'').
\4\ See Securities Exchange Act Release No. 45824 (April 25,
2002), 67 FR 22144 (``Notice'').
\5\ See letters from Richard S. Rudolph, Director and Counsel,
Phlx, to Ira Brandriss, Special Counsel, Division, Commission, dated
November 5, 2002 (``Amendment No. 4''), February 24, 2003
(``Amendment No. 5''), March 18, 2003 (``Amendment No. 6''), and
April 22, 2003 (``Amendment No. 7'').
Amendment No. 4 replaced the text of the proposed rule change
with new text that made revisions to proposed Commentary .03. The
text of proposed Commentary .03 was further amended by Amendment
Nos. 5, 6, and 7. As discussed infra, the final text of proposed
Commentary .03 as set forth in Amendment No. 7 is intended to
clarify that the provision would apply to any transaction in which a
floor broker is crossing a public customer order with an order that
is not a public customer order.
In Amendment No. 6, Phlx also amended proposed Commentary .02(i)
to Phlx Rule 1064, as discussed infra, to reflect that the proposed
provision to entitle a floor broker to cross a certain percentage of
a customer order with a facilitation order from the originating firm
would apply only to public customer orders, not all customer orders.
---------------------------------------------------------------------------
II. Description of Proposal
The proposed rule change would amend Phlx Rule 1064, ``Crossing,
Facilitation and Solicited Orders,'' which governs the crossing of
equity option orders by floor brokers. Rule 1064, among other things,
sets forth the procedures by which a floor broker who holds a customer
order (``original order'') may cross such order with either another
customer order or orders from the same originating firm, or with a
contra side order provided by the originating firm from its own
proprietary account.\6\
---------------------------------------------------------------------------
\6\ When the contra side is provided by the originating firm
from its own proprietary account, the transaction is known as a
``facilitation.''
---------------------------------------------------------------------------
As explained by the Phlx, under the current rule, a floor broker
seeking to cross buy and sell orders for the same options series must
first bring the transaction to the trading floor and request markets
from the trading crowd for all components of the order. After providing
the crowd with the opportunity to make such markets, the floor broker
must announce that he or she holds an order subject to crossing or
facilitation, and then must propose a price at which to cross the
original order that improves upon the price provided by the crowd.
However, before the floor broker can effect the cross, the registered
options traders (``ROTs'') in the crowd are given the opportunity to
take all or part of the transaction at the proposed price.
Under these rules, if the crowd does not want to participate in the
trade, the floor broker may proceed with the cross. If the crowd wants
to participate in part of the order, however, the crowd has priority
and the floor broker may cross only that amount remaining after the
crowd has taken its portion. If the crowd wants to participate in the
entire order, the floor broker will not be able to cross or facilitate
any part of the order.
The Phlx proposes to adopt new Commentary .02 to Rule 1064 to
entitle the floor broker, under certain conditions, to cross a
specified percentage of an original order with another customer order
or orders, or with an order of the originating firm, before ROTs in the
crowd can participate in the transaction. The percentage of the floor
broker's guarantee would depend upon whether the price at which the
order is ultimately traded is at the crowd's best bid or offer in
response to the floor broker's initial request, or at an improved
price.
Where the floor broker proposes the cross at a price that improves
the crowd's market, and the crowd then wants to take part in some or
all of the order at the improved price, the floor broker would be
entitled to cross 40% of the contracts.\7\ Where the trade takes place
at the market provided by the crowd, the floor broker would be entitled
to cross 20% of the contracts. These entitlements would apply only with
respect to any portion of the original order that remained after all
public customer orders in the limit order book and represented in the
trading crowd at the time the market was established were satisfied.
---------------------------------------------------------------------------
\7\ After the floor broker proposed to cross the order, he or
she would be required again to give the crowd a reasonable
opportunity to bid or offer for the order. Telephone conversation
between Richard S. Rudolph, Director and Counsel, and Dawn Kelly
Reim, Market Surveillance Investigator, Phlx, and Ira Brandriss,
Special Counsel, and Frank N. Genco, Attorney, Division, Commission,
on October 21, 2002. If the crowd improved upon the floor broker's
price, and the floor broker then proposed to match the crowd's
price, the floor broker would be entitled to cross 20% of the
contracts. Telephone conversation between Richard S. Rudolph,
Director and Counsel, Phlx, and Ira Brandriss, Special Counsel, and
Frank N. Genco, Attorney, Division, Commission, on November 21,
2002.
---------------------------------------------------------------------------
The proposed rule change would apply to transactions in equity
options and would initially apply to customer orders of a minimum size
of 500 contracts. The Exchange's Options Committee would be authorized
to determine, on an option by option basis, the eligible size for an
order that could be transacted pursuant to the proposal. However, the
eligible order size could not be less than 500 contracts. In the case
of a complex order, such as a spread or a straddle, the proposed rule
change would require that at least one leg of such an order, standing
alone, would need to meet the eligible size requirement.
The proposed rule change also provides that if the same member
organization of the Exchange is both the originating firm and the
specialist for the option in which the transaction takes place, and the
floor broker acting on behalf of the originating firm crosses or
facilitates under the proposed rule, the specialist would not be
entitled to any Enhanced Specialist Participation pursuant to Phlx Rule
1014(g) \8\ with respect to the particular cross transaction.
---------------------------------------------------------------------------
\8\ The Enhanced Specialist Participation programs in Phlx Rule
1014(g) allocate to the specialist, in certain options classes, a
greater than equal share of the portion of the order that is divided
among the specialist and any ``controlled accounts'' that are on
parity. A ``controlled account'' is an account controlled by or
under common control with a broker-dealer.
---------------------------------------------------------------------------
If the specialist is not the same member organization as the
originating firm, and the trade takes at the specialist's disseminated
bid or offer when the specialist is on parity with one or more
controlled accounts, the specialist may be entitled to an Enhanced
Specialist Participation, but in no case would the specialist be
guaranteed a percentage that, when combined with the percentage crossed
by the floor broker, exceeds 40% of the original order after relevant
public customer orders have been satisfied.
[[Page 25926]]
Other provisions of the proposed rule change are patterned after
similar rules on other exchanges.\9\
---------------------------------------------------------------------------
\9\ See Notice.
---------------------------------------------------------------------------
Amendment No. 6 to the proposed rule change specifies that the
provisions of Commentary .02 to permit the floor broker to cross a
specified percentage of an original order with a facilitation order of
the originating firm would apply where the original order is a public
customer order.
The Exchange further proposes to adopt Commentary .03 to Phlx Rule
1064. As set forth in Amendment No. 7 to the proposed rule change,
Commentary .03 would state that a floor broker crossing a public
customer order with an order that is not a public customer order, when
providing a reasonable opportunity for the trading crowd to participate
in the transaction, must disclose the public customer order that is
subject to crossing prior to the execution of the order.
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. Specifically,
the Commission finds that the proposal is consistent with the
requirements of sections 6(b)(5) of the Act \10\ that the rules of an
exchange, among other things, be designed to promote just and equitable
principles of trade, to remove impediments to and perfect the
mechanisms of a free and open market and a national market system, and,
in general, to protect investors and the public interest.\11\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b)(5).
\11\ In approving the proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
---------------------------------------------------------------------------
The Commission believes that Phlx's proposal to grant crossing
guarantees and participation rights to member firms seeking to execute
crosses on the Exchange, under the proposed conditions, is reasonable.
As noted above, other options exchanges have similar rules, and the
proposed rule change should enable Phlx to compete with these exchanges
in attracting order flow of broker-dealer firms seeking to cross or
facilitate customer orders.
The Commission notes that, in approving member firm participation
rights and other guaranteed participations in the past, it has found
that rules entitling a market participant or participants to up to 40%
of an order are not inconsistent with the statutory standards of
competition and free and open markets.\12\ The Commission has raised
concerns, on the other hand, about participation guarantees that ``lock
up'' a larger percentage of an order, and thereby reduce the number of
contracts for which the trading crowd can compete.\13\ The proposed
rule change guarantees an allocation of no more than 40% of an order to
a member firm seeking to facilitate an order. Moreover, the proposal
includes a provision that limits the number of contracts to be
allocated to the facilitating firm and the specialist in the aggregate
to no more than 40% of the order. The rule for which the Phlx seeks
approval is consistent with the Commission's position with respect to
participation guarantees.
---------------------------------------------------------------------------
\12\ See, e.g., Securities Exchange Act Release Nos. 42455
(February 24, 2000), 65 FR 11388 (March 2, 2000); 42894 (June 2,
2000), 65 FR 36850 (June 12, 2000); 42835 (May 26, 2000), 65 FR
35683 (June 5, 2000); 42848 (May 26, 2000), 65 FR 36206 (June 7,
2000).
\13\ See, e.g., Securities Exchange Act Release No. 43100 (July
31, 2000), 65 FR 48778 (August 9, 2000).
---------------------------------------------------------------------------
The Commission finds good cause for granting accelerated approval
of Amendment Nos. 4, 5, 6, and 7 to the proposed rule change. Amendment
No. 4 restated the text of the proposed rule change as set forth in the
Notice, and made revisions only to Commentary .03. Amendment Nos. 5 and
6 also revised proposed Commentary .03. To the extent that the
revisions made by these amendments were retained in the final version
of proposed Commentary .03 set forth in Amendment No. 7, they are
discussed below.
Amendment No. 6 also amended proposed Commentary .02 to establish
that the member firm participation guarantee would apply only when the
floor broker is seeking to cross a facilitation order from the member
firm with a public customer order. The Commission notes that Phlx Rule
1064(b), governing facilitation crosses, refers specifically to
transactions in which a floor broker is holding an options order for a
public customer that he or she is seeking to cross with a contra side
order. The text of proposed new Commentary .02 as originally submitted
also referred to the facilitation of a public customer order. Although
in an earlier amendment the Exchange deleted the word ``public'' from
proposed Commentary .02,\14\ the Exchange has now determined to restore
the term. The Commission believes that this change is reasonable and
also eliminates a possible inconsistency between Phlx Rule 1064(b) and
proposed Commentary .02.
---------------------------------------------------------------------------
\14\ See Amendment No. 2.
---------------------------------------------------------------------------
The Commission also finds good cause for accelerating approval of
Amendment No. 7 to the proposed rule change. Amendment No. 7 would
amend the text of proposed Commentary .03 to state that a floor broker
crossing a public customer order with an order that is not a public
customer order, when providing for a reasonable opportunity for the
trading crowd to participate in the transaction, shall disclose the
public customer order that is subject to crossing prior to the
execution of the order. As discussed in the Notice, the Phlx believes
that ``[i]f the customer order is disclosed first, the trading crowd
may be more likely to bid or offer competitively as contra side to that
customer's order, thus benefiting the customer.'' As originally
proposed, Commentary .03, referred only to facilitation orders.
Amendment No. 7 establishes that the provision would apply to all
crossing transactions in which the floor broker is crossing a public
customer order with an order that is not a public customer order.\15\
The Commission believes that it is appropriate to accelerate approval
of Amendment No. 7.
---------------------------------------------------------------------------
\15\ Commentary .03 also was amended by the Phlx to distinguish
the disclosure requirement of proposed Commentary .03 from the
provision of proposed Commentary .02(iv) requiring the floor broker
to disclose all components of the customer order initially, before
requesting that the trading crowd provide its market.
---------------------------------------------------------------------------
Accordingly, the Commission finds that good cause exists,
consistent with sections 6(b)(5) and 19(b)(2) of the Act,\16\ to grant
accelerated approval of Amendment Nos. 4, 5, 6, and 7 to the proposed
rule change prior to the thirtieth day after publication in the Federal
Register.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 4, 5, 6 and 7, including whether
Amendment Nos. 4, 5, 6 and 7 are 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 submission, all subsequent
amendments, all written statements with respect to Amendment Nos. 4, 5,
6, and 7 that are filed with the Commission, and all written
communications relating to these amendments between the Commission and
any person, other than those that may be withheld from the public in
[[Page 25927]]
accordance with the provisions of 5 U.S.C. 552, will be available for
inspection and copying in 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-2002-17 and should be submitted by June 4, 2003.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\17\ that the proposed rule change (File No. SR-Phlx-2002-17), as
amended, is hereby approved.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
---------------------------------------------------------------------------
\18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11996 Filed 5-13-03; 8:45 am]
BILLING CODE 8010-01-P