Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on January 17, 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 Exchange has designated the proposed rule change as constituting a “non-controversial” rule change under paragraph (f)(6) of Rule 19b-4 under the Act, which renders the proposal effective upon receipt of this filing by the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
17 CFR 240.19b-4.
17 CFR 240.19b(f)(6).
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend Phlx Rule 1080 relating to the Exchange's Automated Options Market (AUTOM) and Automatic Execution system (AUTO-X), by adopting Rule 1080(j). This proposed rule would prohibit members from entering, or facilitating the entry of, limit orders in the same options series, for the account or accounts of the same or related beneficial owners, in such a manner that the member or the beneficial owner(s) effectively is operating as a market maker by holding itself out as willing to buy and sell such options contract on a regular or continuous basis.
AUTOM is the Exchange's electronic order delivery and reporting system, which provides for the automatic entry and routing of equity option and index option orders to the Exchange trading floor. Orders delivered through AUTOM may be executed manually, or automatically if they are eligible for AUTOM's automatic execution feature, AUTO-X. Equity option and index option specialists are required by the Exchange to participate in AUTOM and its features and enhancements. Option orders entered by Exchange members into AUTOM are routed to the appropriate specialist unit on the Exchange trading floor.
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. 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 prevent persons from functioning as market makers through Phlx member firms without those persons being held to the affirmative obligations and restrictions imposed on on-floor market makers (Registered Options Traders, or “ROTs”). Phlx Rule 1014(b) defines a ROT as a regular member or a foreign currency options participant of the Exchange located on the trading floor who has received permission from the Exchange to trade in options for his own account. ROTs are subject to numerous affirmative trading, margin and capitalization requirements and prohibitions pursuant to the Act and the regulations thereunder, and to Exchange rules.
Telephone call between Rick Rudolph, Counsel, Phlx, and Jennifer Colihan, Special Counsel, Division of Market Regulation, Commission, on January 24, 2001.
For example, Exchange Rule 1014, Obligations And Restrictions Applicable To Specialists and Registered Options Traders, sets forth numerous obligations and restrictions applicable to ROTs on the floor on the Exchange, including the obligation of a ROT to engage in dealings reasonably calculated to contribute to the maintenance of a fair and orderly market; limitations on quote spread parameters; limitations on price change parameters; the requirement to yield priority to customer orders; and in-person, on-floor quarterly trading requirements. Off-floor traders that enter orders through AUTOM and effectively function as market makers are not currently subject to such affirmative requirements and limitations.
Phlx states that recently certain off-floor traders have demonstrated their ability to engage in simultaneous or near-simultaneous entry of limit orders, to buy and sell the same options contract. In Phlx's view, persons engaged in such practices are effectively functioning as market makers from off the floor of the Exchange.
The proposed rule would prohibit members from entering, or facilitating the entry of, limit orders in the same options series from off the floor of the Exchange, for the account or accounts of the same or related beneficial owners, in such a manner that the off floor member or the beneficial owner(s) effectively is operating as a market maker by holding itself out as willing to buy and sell such options contract on a regular or continuous basis. The Exchange proposes this change to prohibit users from acting as market makers through AUTOM and AUTO-X.
In determining whether an off-floor member or beneficial owner effectively is operating as a market maker, the Exchange will consider, among other things: the simultaneous or near-simultaneous entry of limit orders to buy and sell the same options contract; the multiple acquisition and liquidation of positions in the same options series during the same day; and the entry of multiple limit orders at different prices in the same options series.
2. Statutory Basis
The Exchange represents that the proposed rule change is consistent with Section 6(b) of the Act in general, and with Section 6(b)(5) of the Act in particular, in that it is designed to perfect the mechanisms of a free and open market and the national market system, protect investors and the public interest and promote just and equitable principles of trade by prohibiting AUTOM users from functioning as market makers from off the floor of the Exchange.
15 U.S.C. 78f(b)(5).
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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 Exchange has neither solicited nor received written comments on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The proposed rule change has been filed by the Exchange as a “non-controversial” rule change pursuant to Section 19(b)(3)(A) of the Act and subparagraph (f)(6) of Rule 19b-4 thereunder. Consequently, because the foregoing proposed rule change: (1) does not significantly affect the protection of investors or the public interest; (2) does not impose any significant burden on competition; and (3) does not become operative for 30 days from the date on which it was filed, and the Exchange provided the Commission with written notice of its intent to file the proposed rule change at least five days prior to the filing date, it has become effective pursuant to section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.
17 CFR 240.19b-4(f)(6).
At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest for the protection of investors, or otherwise in furtherance of the proposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule 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 submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and 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-01-05 and should be submitted by March 8, 2001.
For the Commission, by the Division of Market Regulations, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3801 Filed 2-14-01; 8:45 am]
BILLING CODE 8010-01-M