[Federal Register Volume 61, Number 26 (Wednesday, February 7, 1996)] [Notices] [Pages 4694-4695] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 96-2542] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-36784; File No. SR-Phlx-95-79] Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Philadelphia Stock Exchange, Inc., Relating to the Bid Test Exemption January 29, 1996. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on January 2, 1996, 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 self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. \1\ 15 U.S.C. 78s(b)(1) (1988). --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Phlx proposes to amend its Rule 1072, Reporting Requirements Applicable to Short Sales in NASD/NM Securities, to permit affiliated Registered Option Traders (``ROTs'') to trade for each other's account pursuant to the market maker exemption contained therein. Rule 1072 establishes specific criteria exempting Phlx specialists and ROTs from the NASD's ``bid test'' applicable to Nasdaq/National Market (``NM'') securities. The NASD bid test, with certain exception, prohibits short sales at or below the current inside bid when that bid is below the previous inside bid.\2\ Specifically, the Phlx proposes to extend its market maker exemption to include short sales by affiliated ROTs as ``by or for a qualified options market maker'' consistent with Rule 1072(c)(2). The proposed language in Rule 1072(c)(2)(iii)(A) would thus permit ROTs of the same member organization to trade pursuant to the exemption, even when the ROT trading the account has not designated that NM issue. \2\ NASD Rules of Fair Practices, Art. III, Section 48. --------------------------------------------------------------------------- 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 self-regulatory organization 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 self-regulatory organization 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 In 1994, the NASD adopted a bid test rule applicable to NM securities traded through Nasdaq prohibiting short sales of NM securities at or below the current inside bid when that bid is below the previous inside bid.\3\ An exemption from this rule exists for option market makers hedging options positions with the related underlying securities, and the qualifying short sales are referred to as ``exempt hedge transactions.'' Pursuant to this market maker exemption, the Phlx adopted Rule 1072 establishing specific criteria for a short sale to qualify as an ``exempt hedge transaction'' in ``designated'' NM issues.\4\ Generally, option specialists may rely on the exemption for short sales in NM securities underlying their specialist equity options, and index options if at least 10% of the value of the index is comprised of NM securities. In addition, ROTs must be assigned in that option to rely on the exemption and may only use the exemption in 20 designated NM issues. \3\ Securities Exchange Act Release No. 34277 (June 6, 1994), 59 FR 34885 (granting temporary approval). \4\ Securities Exchange Act Release No. 34632 (September 2, 1994), 59 FR 46999. The other options exchanges adopted rules similar to Phlx Rule 1072. See Chicago Board Options Exchange (``CBOE'') Rule 15.10, New York Stock Exchange (``NYSE'') Rule 759A, American Stock Exchange (``Amex'') Rule 957, and Pacific Stock Exchange (``PSE'') Rule 4.19. Id. --------------------------------------------------------------------------- The Phlx now proposes to permit affiliated ROTs to trade one another's accounts pursuant to Rule 1072. Specifically, the amendment would allow an ROT to effect bid test exempt short sales in a Nasdaq/NM security which that ROT has not designated as qualifying for the exemption, provided that the security is a designated Nasdaq/NM security of another ROT of the same member organization, and further provided that such other ROT is not also present or represented by a Floor Broker in the same trading crowd at the time of the bid test exempt sale. The Exchange notes that this amendment is similar to a CBOE proposal to permit nominees of a market maker organization to qualify for the exemption.\5\ \5\ Securities Exchange Act Release No. 35281 (January 26, 1995), 60 FR 6575. --------------------------------------------------------------------------- The Phlx believes that the proposed amendment should facilitate ROT activity by allowing member organizations to manage better their market making activities. Managing these obligations and monitoring positions is especially critical when a ROT is absent from the trading floor. The Exchange also believes that the proposed provision is consistent with the intent of the market maker exemption to the short sale rule, in that the exemption continues to be limited to those Nasdaq/NM securities which are [[Page 4695]] used to hedge option transactions in the primary classes in which the member organization makes markets. For these reasons, the Exchange believes that its proposal is consistent with Section 6 of the Act in general, and in particular with Section 6(b)(5) in that it is designed to promote just and equitable principals of trade, and remove impediments to and perfect the mechanism of a free and open market while preventing fraudulent and manipulative acts and practices. (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 Written comments on the proposed rule change were neither solicited nor received. 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 above-mentioned self-regulatory organization. All submissions should refer to File No. SR-Phlx-95-79 and should be submitted by February 28, 1996. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\6\ \6\ 17 CFR 200.30-3(a)(12)(1994). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 96-2542 Filed 2-6-96; 8:45 am] BILLING CODE 8010-01-M