Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The Phlx proposes to amend Phlx Rule 1064, “Crossing, Facilitation and Solicited Orders” by: (1) Amending Phlx Rule 1064(c) to permit a member or member organization representing an order (“originating order”) to solicit another member, member organization, or non-member broker-dealer outside the trading crowd to participate in a transaction with the originating order provided that certain specified procedures are followed; and (2) adopting new Phlx Rule 1064(d) to prohibit a member or person associated with a member from using non-public information regarding crossing, facilitation, and solicited orders for the member's benefit by trading in the underlying stock or in related instruments prior to exposing the order to the trading crowd. The Phlx is also proposing corresponding changes to Options Floor Procedure Advice (“OFPA”) B–11(c) and (d) and a conforming amendment to OFPA C–7.
The text of the proposed rule change is available at the Phlx and at the Commission.
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 Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
The purpose of the proposed rule change is to set forth specific procedures and guidelines to be followed respecting solicited orders, and to prohibit the use of non-public information received during the crossing, facilitation, and solicitation processes.
a.
Proposed Phlx Rule 1064(c)(ii) and OFPA B–11(c)(ii) further set forth the procedures to be followed when an Exchange member solicits another member, member organization, or non-member broker-dealer outside the trading crowd. The rule would require the member representing the originating order, upon entering the trading crowd to execute the transaction, to: (a) Announce to the trading crowd the same terms of the originating order that were disclosed to the solicited party; (b) bid at the price he/she is prepared to buy from the solicited party or offer at the price he/she is prepared to sell to the solicited party; and (c) give the trading crowd a reasonable opportunity to accept the bid or offer. If a member in the trading crowd decides to match or improve the terms of the transaction, the proposed rule would grant such member in the trading crowd priority over the solicited party.
In order to ensure full disclosure of such orders, proposed Phlx Rule 1064(c)(iii) and OFPA B–11(c)(iii) would require that the word “Solicited” be written clearly and legibly on the order ticket of the solicited order.
The purpose of proposed Phlx Rule 1064(c)(ii) and OFPA B–11(c)(ii) is to allow an Exchange member representing an options order to solicit a third party outside the trading crowd. The member, however, would still have the obligation to represent the originating order to the trading crowd prior to execution.
The purpose of the proposed provision requiring an Exchange member representing a solicited order to announce the terms of the order to the trading crowd prior to executing that order is to ensure that the members of the trading crowd have a reasonable opportunity to participate in the transaction by improving or matching the proposed price.
In addition, this provision would benefit the customer whose order is represented by the soliciting member by allowing for the possible improvement of the ultimate price at which such an order is executed.
The Exchange believes that granting members in the trading crowd priority over the solicited party should ensure that crowd members that wish to participate in such a transaction are given a reasonable opportunity to do so. The Exchange believes that full disclosure to the trading crowd of the terms of orders that comprise solicited transactions allows the trading crowd to give full consideration to, and the opportunity for improvement of, such terms.
b.
In order to allow crowd participants to know what constitutes a “related instrument” in reference to an index option, the proposed rule and OFPA clarify that an order to buy or sell a related instrument means, in reference to an index option, an order to buy or sell securities comprising 10% or more of the component securities in the index or an order to buy or sell a futures contract on an economically equivalent index.
The Phlx also proposes new Commentary .01 to Rule 1064 and OFPA B–11, stating that a violation of this rule may be considered conduct inconsistent with just and equitable principles of trade.
c.
Phlx is proposing an amendment to OFPA C–7 to provide that, except as otherwise provided in OFPA B–11(c) and Phlx Rule 1064(c), once an option order has been received on the floor, it must be represented to the trading crowd before it may be represented away from the crowd. This would provide Floor Brokers with the ability to solicit third parties outside the trading crowd before representing the order in the trading crowd.
The purpose of this amendment is to maintain consistency in the Phlx's rules and OFPAs concerning orders represented away from the trading crowd.
The Phlx believes that the proposed rule change, as amended, is consistent with Section 6 of the Act,
Phlx does not believe that the proposed rule change, as amended, will impose any inappropriate burden on competition.
No written comments were solicited or received.
Because the foregoing proposed rule change does not significantly affect the protection of investors or the public interest and does not impose any significant burden on competition and because the Phlx provided the Commission with written notice of its intent to file the proposed rule change at least five business days prior to the filing date, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act
A proposed rule change filed under Rule 19b–4(f)(6) normally does not become operative prior to 30 days after the date of filing.
At any time within 60 days of August 7, 2001, 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 purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549–0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change, as amended, that are filed with the Commission, and all written communications relating to the proposed rule change, as amended, 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 Room. Copies of such filing will also be available for inspection and copying at
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.