Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Regarding Enhanced Specialist Parity Participations

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35141; File No. SR-Phlx-94-59]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Philadelphia Stock Exchange, Inc., Regarding Enhanced

Specialist Parity Participations

December 22, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November

18, 1994, the Philadelphia Stock Exchange, Inc. (``Phlx'' or

``Exchange'') filed with the Securities and Exchange Commission

(``Commission'') the proposed rule change as described in Items I, II,

and III below, which Items have been prepared by the Phlx. The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend

Exchange Rule 1014(g), respecting enhanced specialist participations,

which entitle equity and index option specialists, when on parity, to

receive an enhanced parity participation (or split) in select options

classes.\1\ The present proposal clarifies that the enhanced parity

split is applicable in situations where orders of any controlled

account\2\ are on parity with the specialist, and not just orders of

Registered Options Traders (``ROTS''). The proposal also serves to

replace the specialist's ``two-for-one'' enhanced parity split in

situations where there are only one or two controlled accounts on

parity with the specialist. Pursuant to this proposal, where there is

only one controlled account on parity with a specialist, the specialist

would receive a 60% split and the controlled accounts on parity with a

specialist, the specialist would receive a 40% split, while each

controlled account would receive 30% of the contracts.

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\1\The Commission notes that the Exchange also has a proposal

pending with the Commission that would provide an enhanced parity

participation for the 3D foreign currency option (``FCO'')

specialist. See Securities Exchange Act Release No. 34814 (October

7, 1994), 59 FR 52337 (October 17, 1994) (notice for File No. SR-

Phlx-94-42). The present proposal will not affect the proposal

regarding the 3D FCO specialist.

\2\A controlled account is defined as ``any account controlled

by or under common control with a member broker-dealer.'' See Phlx

Rule 1014(g). Customer accounts are all accounts other than

controlled accounts and specialist accounts. The Phlx represents

that the rule will continue to prohibit the application of any such

enhancement in instances which would lessen the pro rata

participation of customer orders on parity.

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Further, Floor Procedure Advice (``Advice'') B-6 (Priority of

Options Orders for Equity Options and Index Options by Account

Type),\3\ is proposed to be amended to add the enhanced participation

provisions, both existing and proposed, into Section C. Lastly, Rule

1014(g) is proposed to be renumbered, numbering the first paragraph as

(g)(1), the general parity/priority provision for equity and index

options, and the enhanced split provision currently in paragraph (g)(i)

as (g)(ii); Commentary .17 is proposed to be deleted and renumbered as

paragraph (g)(iii).\4\ The text of the proposed rule change is

available at the Office of the Secretary, the Phlx, and at the

Commission.

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\3\Advice B-6 is administered pursuant to Phlx Rule 970 and the

Exchange's minor rule violation enforcement and reporting plan

(``minor rule plan''); however, proposed Section C does not contain

a fine schedule and would be included in the Floor Procedure Advice

Handbook for informational purposes only. Thus, the Exchange

believes, no amendment to the minor rule plan is required.

\4\A minor corresponding amendment to Rule 509 (Enhanced

Specialist Participation Review) is also proposed to change the

reference from Rule 1014(g)(i) to Rule 1014(g)(ii).

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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 Phlx 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 Phlx 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 the

statutory Basis for, the Proposed Rule Change

By way of background, Phlx Rule 1014(g)(i), in conjunction with

Rules 119 and 120, governs priority and parity in the execution of

orders on the Phlx's equity and index options floor. When bids/offers

are deemed simultaneous, such bid/offers are at ``parity,'' and subject

to division among eligible participants in accordance with Exchange

rules and procedures. The Commission recently approved two provisions

to afford a specialist on parity with an enhanced participation in

parity trades (``enhanced split'').\5\

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\5\See Securities Exchange Act Release Nos. 34109 (May 25,

1994), 59 FR 28570 (June 2, 1994) (providing an enhanced parity

split for new specialist units trading newly listed equity option

classes) (``Exchange Act Release No. 34109''), and 34606 (August 26,

1994), 59 FR 45741 (September 2, 1994) (providing an enhanced parity

split applying to specialists, other than new specialist units, for

certain assigned equity option classes) (``Exchange Act Release No.

34606''). These provision were subsequently expanded to also include

index option specialists. See Securities Exchange Act Release No.

35028 (November 30, 1994), 59 FR 63151 (December 7, 1994).

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One provision applies to ``new'' specialist units trading new

option classes, and affords the specialist with a 40% split of parity

trades for up to one year following the listing of each new class;

except, where there is only one other ROT on parity, in which case, the

specialist then receives a 50% split (``new unit/new option enhanced

split'').\6\ The provision ensures, however, that no customer order on

parity will be restricted to a smaller participation than any other

crowd participant, including the specialist. The new unit/new option

enhanced split is reflected in Commentary .17 to Rule 1014.

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\6\See Exchange Act Release No. 34109, supra note 5.

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The second provision established an enhanced split for specialists,

other than new specialists, on a one-year pilot basis, in certain

option classes, whereby the specialist would be counted as two crowd

participants in parity situations (``two-for-one enhanced split'').\7\

Similar to the new unit/new option split, no customer order on parity

will be restricted to smaller participation than any other crowd

participant, including the specialist. The two-for-one enhanced split

only applies to orders for more than five contracts. Additionally, it

applies to all option classes listed after adoption of the provision

and to 50% of each specialist unit's pre-existing listed issues.\8\

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\7\See Exchange Act Release No. 34606, supra note 5.

\8\Specifically, each specialist unit's issues are divided into

quartiles based on the most recent quarterly contract volume; the

specialist unit may choose one-half of the issues in each quartile,

as long as the total number of issues does not exceed 50% of the

unit's issues.

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At this time, the Exchange proposes to amend the two-for-one split

in situations where there are, in addition to the specialist, less than

three controlled accounts on parity with the specialist. The term

``controlled account'' includes accounts controlled by or under common

control with a member broker-dealers.\9\ Thus, the proposal clarifies

that all controlled account orders are subject to the enhanced split,

not just ROT orders. The proposal retains the requirement that the

enhanced split only applies to orders for more than five contracts.\10\

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\9\See supra note 2.

\10\Telephone conversation between Michele Weisbaum, Associate

General Counsel, Phlx, and Brad Ritter, Senior Counsel, Office of

Market Supervision, Division of Market Regulation, Commission, on

December 12, 1994.

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The current language of Rule 1014(g)(i) and Commentary .17 thereto

discuss the treatment of customer, ROT, and specialist orders in

applying the enhance split. The purpose of this change is to clarify

that ``firm'' orders are distinguishable from customer orders with

respect to the enhanced split calculation. The Exchange represents that

customer orders on parity will continue to be ensured their pro rata

split in parity situations.

In addition to defining the circumstances under which a specialist

enhancement may be applied, the current proposal also serves to

replace, in certain situations, the two-for-one provision with a

percentage distribution. Those situations are where there are orders

for more than five contracts and where only one or two controlled

accounts are on parity with the specialist, such that: Where there is

one controlled account on parity with the specialist, the specialist

would receive 60% and the controlled account would receive 40% of the

contracts; and where there are two controlled accounts on parity, each

controlled account would receive 30% and the specialist would receive

40% of the contracts. In qualified situations where there are three or

more controlled accounts on parity with the specialist, the existing

two-for-one split would continue to apply such that the specialist

would be counted as two crowd participants.

The Exchange believes that in situations where there are less than

three controlled accounts on parity with the specialist, the two-for-

one split becomes overly burdensome for those controlled accounts. For

example, applying a two-for-one split of a 100 lot buy order in a

trading crowd consisting of one ROT and the specialist, would result in

the specialist selling 66 contracts and the ROT selling 34 contracts.

Pursuant to the split proposed herein, the specialist would sell 60

contracts and the ROT would sell 40 contracts in the above example.

Where there are two ROTs and the specialist on parity, the current

split would entitle the specialist to sell 50 contracts and each ROT

would sell 25 contracts. The proposed split would entitle the

specialist to sell 40 contracts, while each ROT would sell 30

contracts. These results demonstrate that while the specialist would

continue to receive an ``enhanced'' split, such split would be reduced

in small crowds where the impact on ROTs is more pronounced.

Third, the existing provisions of the two-for-one split in Rule

1014(g)(i) and the new unit/new option split currently in Commentary

.17 are proposed to be codified into Advice B-6; additionally, the

proposed changes regarding small trading crowds and firm orders are

also proposed to be codified into Advice B-6. The purpose of adding

these provisions into Section C of Advice B-6 is to include all

significant parity/priority provisions in the Exchange's Floor

Procedure Advice Handbook for ease of reference on the trading floor.

Similarly, the proposed renumbering of Rule 1014(g), including moving

Commentary .17 to paragraph (g)(iii) and renumbering paragraphs (i) and

(ii), is intended to improve the organization of this Rule.

The Exchange believes that the foregoing rule change proposal is

consistent with Section 6 of the Act, in general, and with Section

6(b)(5), in particular, in that it is designed to promote just and

equitable principles of trade and to protect investors and the public

interest by reducing the enhanced split where there are less than three

controlled accounts, in addition to the specialist, on parity, which

should, in the Exchange's opinion, promote liquidity by encouraging ROT

participation in small trading crowds where an enhanced split applies.

In addition, clarifying the role of firm orders in applying the

enhanced split should also promote just and equitable principles of

trade by expressly delineating firm participation in such parity

situations. Lastly, codifying these provisions into Advice B-6 and

renumbering Rule 1014(g) is intended to simplify the organization of

the Exchange's parity/priority provisions.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The Phlx does not believe that the proposed rule change will impose

any inappropriate burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants or Others

No written comments were solicited or received 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 self-regulatory organization 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. 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

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, 450 Fifth Street, N.W.,

Washington, DC. 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-94-59 and should be

submitted by January 20, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\11\

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\11\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-32153 Filed 12-29-94; 8:45 am]

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