I. Introduction
On June 16, 2000, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) submitted to the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, a proposed rule change establishing rules on telephone use on the options floor. The Exchange filed Amendment No. 1 to the proposed rule change on December 1, 2000. The Federal Register published the proposed rule change, as amended, for comment on December 28, 2000. The Commission received no comments on the proposal. This order approves the proposal, as amended.
17 CFR 240.19b-4.
The Exchange submitted a new Form 19b-4, which replaced and superseded the original filing (“Amendment No. 1”). Amendment No. 1 amended the purpose section of the proposed rule change to provide a description of provisions governing floor brokers, registered options traders, general access phones, and exchange liability. Amendment No. 1 also clarified that registration and maintenance of registration records is handled through the Exchange's Membership Services Department. Finally, Amendment No. 1 amended proposed Phlx Rule 606(e)(3) to include specialists.
Securities Exchange Act Release No. 43740 (December 19, 2000), 65 FR 82437.
II. Description of Proposal
The Phlx proposes to amend Exchange Rule 606 to establish rules and procedures for telephone use on the Phlx's options floor. The proposed rule contemplates that certain types of telephones (i.e., cellular phones) may be used for personal purposes. The proposed rule would limit the use of telephones on the options floor for business purposes, depending on the category of user (specialist, registered options trader (“ROT”), floor broker, or clerk).
The proposal will also be set forth in new Options Floor Procedure Advice (“OFPA”) F-31.
All categories of users are permitted to make and receive personal phone calls, subject to existing prohibitions when necessary because of electronic interference. Telephone calls between Rick Rudolf, Counsel, Phlx, and Sonia Patton, Staff Attorney, Commission (December 18, 2000).
The proposed rule change would require members and member organizations to register by category of user any new telephone to be used on the options floor prior to use. Registration and maintenance of registration records would be handled through the Exchange's Membership Services Department. If there is a change in the category of user, the telephone must be re-registered with the Exchange. At the time of registration, the user must sign a statement that the user is aware of and understands the rules governing the use of telephones on the options floor. The Exchange believes that this should facilitate record keeping and also should enhance the ability of the Exchange's Market Surveillance Department to investigate potential violations of the rule.
The proposed rule also would provide that no person on the options floor may use any device, including, but not limited to, intercoms, walkie-talkies, and similar devices, for the purpose of maintaining an open line of communication whereby a person not located in a trading crown may continuously monitor the activities of that crowd.
The proposed rule specifies the capacity and functionality permitted for use of telephones on the options floor. Specifically, proposed Phlx 606(e)(2) provides that no wireless telephone on the options floor may have an output of more than one watt.
The purpose of this provision is to minimize the possibility of radio frequency or other interference with the systems of the Exchange of those of other members.
Currently, Exchange Rule 606(b)(2) prohibits members, member organizations and any person associated with a member organization from establishing or maintaining any telephonic, electronic or wireless transmitting system or device, and from operating any other equipment on the Options Floor, that creates radio frequency or other interference with the systems of the Exchange or other members.
The proposed rule sets forth specific guidelines for each category of user on the options floor. Proposed Phlx Rule 606(e)(3) would provide that specialists and ROTs on the trading floor may use their own cellular and cordless phones to place calls to any person at any location (whether on or off the options floor). Any telephonic order entered from off the options floor must be placed with a person located in a floor broker booth.
Specialists are also permitted to receive incoming calls, but cannot receive orders from the trading crowd. The Phlx has also noted that there is nothing in their rules that would prohibit specialists from using their phones to solicit orders, as long as the solicitations are consistent with Phlx Rule 1064(c). Telephone call between Rick Rudolf, Counsel, Phlx, and Sonia Patton, Staff Attorney, Commission (December 18, 2000).
Proposed Phlx Rule 606(e)(4) would allow floor brokers to use cellular and cordless phones, but only to communicate with persons located on the options floor. The proposed rule would prohibit floor brokers from receiving telephonic orders while in the trading crowd. Orders phoned to floor brokers must be received at the floor broker's booth.
Someone from the floor broker's booth would be permitted to call a floor broker to request the broker come and pick up an order from the booth. Telephone call between Rick Rudolf, Counsel, Phlx, and Sonia Patton, Staff Attorney, Commission (December 18, 2000)
Proposed Phlx Rule 606(e)(5) would provide that floor broker clerks and stock execution clerks are subject to the same terms and conditions on telephone use as floor brokers.
Proposed Phlx Rule 606(e)(6) states that the general access in-house telephones located outside of the trading post areas may be used by any member, clerk or floor broker to communicate with persons located on the options floor or within the Exchange complex.
Proposed Phlx Rule 606(e)(7) would require members to maintain all cellular or cordless telephone records for at least one year, and provides the Exchange the right to inspect and/or examine these records.
Finally, proposed Phlx Rule 606(e)(8) states that the Exchange assumes no liability to members or member organizations due to conflicts between telephones in use on the options floor or due to electronic interference problems resulting from the use of telephones on the trading floor.
Proposed OFPA F-31 contains the same provisions as proposed Rule Phlx 606(e) in order to facilitate on-floor reference to the Exchange's regulations regarding on-floor communications devices.
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. In particular, the Commission finds that the proposed rule change meets the requirements of section 6(b)(5) of the Act, which states that, among other things, the rules of an exchange must be designed to facilitate securities transactions and to remove impediments to and perfect the mechanism of a free and open market, and to protect investors and the public interest. Specifically, the Commission finds that the requirements of the proposed rule governing the use of telephones on the options floor and the proposed restrictions on each category of user are reasonable and consistent with the maintenance of fair and orderly markets.
In approving this rule change, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
15 U.S.C. 78f(b)(5).
Proposed Phlx Rule 606(e)(3) contains restrictions on telephone use by specialists and ROTs. The rule permits specialists and ROTs to use their own cellular or cordless phones to place calls to any person at any location. However, ROTs located off of the trading floor may not place an order by calling a floor broker, or a specialist, located in the trading crowd. Any telephonic order entered from off of the trading floor must be placed with the member firm booth. Because specialists and ROTs generally do not deal directly with public customers, the Commission does not believe that allowing specialists and ROTs to communicate with persons located off of the trading floor raises the same regulatory concerns discussed below regarding floor brokers. As a result, the Commission finds that it is consistent with the Act to allow specialists and ROTs to use cellular and cordless phones to call locations off of the trading floor. In addition, the Commission believes that it is reasonable and consistent with the Act to require orders entered off of the trading floor to be placed with a member firm booth.
Proposed Phlx Rule 606(e)(4) permits floor brokers to use cellular and cordless phones, but only to communicate with persons located on the options floor. The rule also requires all orders phoned to floor brokers to be received initially at the floor broker's booth and states that floor brokers may not receive telephonic orders while in the trading crowd, except from their booth. The Commission believes that the Exchange's prohibition on the use of telephones by floor brokers to call locations off of the floor or to receive orders from off of the floor is justified by legitimate regulatory concerns. Specifically, the Phlx must ensure compliance with rules requiring that members who accept orders directly from public customers are qualified to do so. Accordingly, this prohibition helps to provide adequate surveillance over this activity be requiring all orders to be taken at the member firm booth and by restricting outside phone calls. In addition, preventing floor brokers from directly accessing market information that might only be available on the floor of the exchange trading the securities underlying the options trading on the Phlx, helps to alleviate concerns about frontrunning and other forms of market manipulation. The proposal also helps to prevent persons located off of the trading floor from having virtually direct access to the trading crowd and receiving certain time and place advantages over other customers. Moreover, the Commission believes that requiring orders to be initially received at the floor broker's booth, where it is recorded before being forwarded to a floor broker in the crowd, should help to ensure that there is a record of each telephonic order if a trading problem or dispute arises.
Proposed Phlx rule 606(e)(5) provides that floor broker clerks and stock execution clerks are subject to the same terms and conditions on telephone use as floor brokers. In addition, the Exchange's Options Committee reserves the right to prohibit clerks from using cellular or cordless phones on the floor if necessary due to electronic interference or capacity problems. For the reasons discussed above regarding telephone use by floor brokers, the Commission finds that the proposed restrictions on clerks are reasonable and consistent with the Act.
Moreover, the Commission finds that the registration requirements set forth in proposed Phlx Rule 606(e)(1) and the record retention requirements set forth in proposed Phlx Rule 606(e)(7) are reasonable, consistent with the Act, and should assist the Exchange in monitoring for compliance with the proposed rule change. The Commission also finds that the limits on capacity and functionality set forth in proposed Phlx Rule 606(e)(2) should help to ensure that phones used on the options floor do not cause interference with each other or with Exchange systems.
Finally, the Commission believes that the proposed amendments to the Exchange's minor rule violation plan are reasonable and provide fair procedures for appropriately disciplining members and member organizations for minor rule violations that warrant some type of punitive measure, but for which a full disciplinary hearing would be an inappropriate waste or resources because of the minor nature of the violation. The Commission believes that the proposed change to the existing fine schedule is appropriate and should serve to discourage violations of the Exchange's telephone policy.
The Commission supports the Exchange's efforts to codify policies on telephone use to give its membership adequate notice of what conduct is prohibited. while supporting the Exchange's efforts to monitor and regulate communications on its options floor, the Commission expects the Phlx to ensure that Phlx Rule 606(e) is not used to limit access to services offered by the Exchange and is not applied in a manner that is inconsistent with the Act. Specifically, the Commission expects that Phlx Rule 606(e) will not be interpreted in a manner that permits unfair discrimination between customers, issuers, brokers, or dealers or imposes any unnecessary or inappropriate burden on competition, or is otherwise used to limit member access to Exchange services.
IV. Conclusion
It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-PHLX-00-48), as amended, is approved.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-4751 Filed 2-26-01; 8:45 am]
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